Banks anticipate challenges ahead

Stocks rallied yesterday after the CPI release showed that inflation slowed in the final month of 2022. Inflation, however, still remains 3 times higher than the Fed’s target.

Everything has a cost. The much-awaited inflation numbers came out and it certainly didn’t disappoint, neither did it send any signals that inflation is on its way out. The headline Consumer Price Index / CPI came in at +6.5% after printing +7.1% the month before. It pulled back by -0.1% for the month putting all the numbers exactly where economists were expecting them to be. So, no big surprises and the numbers point to a slight moderation of still-far-too-high inflation. Progress must be applauded, however. After all, inflation was around +9% last summer. Markets rallied on the news, but unfortunately the question of whether or not the positive moves in stocks will continue will be up to the Federal Reserve. So far, mum’s the word from Fed officials who have been sticking to the party line that Fed Funds will have to be at least +50 basis points higher from where it is today with no plans to cut rates any time soon. Fair enough, inflation is still far too high and quite a bit higher than the Fed’s target. There are still many more FOMC member speaking engagements leading up to the next policy meeting on 2/1 and Fed watchers will be listening carefully for any signs of a pivot in light of yesterday's number. We will also get another read of inflation later this month in the PCE Deflator, which is the Fed’s favorite gauge of prices. We will just have to classify yesterday’s number as “progress, with a long way to go.” That said, let’s take a closer look at yesterday’s release and see if we can learn anything more.

We can start by looking at a high-level chart of monthly inflation gains from the past several years. By looking at the following chart, we can note just how large, in scale, the monthly increases were from early 2021 through mid-2022. It should be clear, by looking at this very chart, why the Fed got so agitated. Also notable, however, should be the decline of the monthly figures in the second half of last year. Proof that some of the supply chain problems of the pandemic era are easing and that the harsh Fed policy is working on the demand side of the equation. The chart breaks down CPI into categories which provides even more color on what is happening. One can see that the “goods” and “energy” (green and orange bars) categories were big inflation drivers in 2021 through mid-2022 after which they both notably receded. However, “services” (blue bars) grew and continue to grow steadily. This persistent growth is what continues to concern the Fed. A big part of services inflation is driven by wages, and a tight labor market continues to apply pressure on the sector. Investors… and the Fed are hoping that upcoming layoffs will ease that pressure a bit going forward. While a slightly slower pace of monthly hiring occurred in December, the labor market is still quite strong. Check out the chart and keep reading.

If you go to the grocery store or if you are a regular reader, you know that food costs have skyrocketed in the past 2 years. That was a big concern of economists. The good news on that front, is that food inflation appears to be moderating. What remains concerning are services and shelter costs which continue to trend higher. You can see that more clearly on the following chart. So, progress in some areas is a good thing, but it should be clear that we still have a long way to go before inflation returns to normal. That should be clear on the above chart if you compare the left side of the chart (prior to the pandemic) to the right.

WHAT’S SHAKIN’

Delta Air Lines Inc (DAL) shares are lower by -4.04%% in the premarket. The company announced that it beat EPS and Revenue targets but offered forward guidance for the current quarter that was below analysts’ expectations. The company attributes lower profits to increased labor costs. Potential average analyst target upside: +26.7%.

Wells Fargo & Co (WFC) shares are lower by -3.81% in the premarket after it announced that it missed Revenue targets by -1.47%. Though the company exceeded EPS estimates, it reported greater-than-expected expenses in the 4^th quarter. The company also projected an increase in defaults in consumer loans. This admission will likely cause selling pressure across the banking sector. Dividend yield: 2.80%. Potential average analyst target upside: +24.3%.

Also, this morning: UnitedHealth Group (UNH), BlackRock (BLK), Bank of New York Mellon (BK), Bank of America (BAC), JPMorgan Chase (JPM), and First Republic Bank (FRC) all beat on EPS and Revenues.

YESTERDAY’S MARKETS

Stocks climbed yesterday after CPI came in right on expectations. The S&P500 climbed by +0.34%, the Dow Jones Industrial Average rose by +0.64%, the Nasdaq Composite traded higher by +0.64%, and the Russell 2000 Index advanced by +1.74%. Bonds gained and 10-year Treasury Note yields were lower by -9 basis points to 3.44%. Cryptos jumped by +6.70% and Bitcoin added +7.23%.

NEXT UP

• University of Michigan Sentiment (January) may have increased to 60.7 from 59.7.
• Next week: Markets are closed on Monday for Martin Luther King Jr day. Starting Tuesday, lots of earnings along with Retail Sales, Producer Price Index / PPI, housing numbers, and the Fed Beige Book. Check back on Tuesday for calendars and details.