Demand for toilet paper remains strong

Stocks dropped in yesterday’s session on renewed fears of recession after a number of economic numbers missed their marks. Signs of slowing inflation were not good enough to overcome old fears.

Wednesday Scaries. Good news! Inflation seems to be easing a bit, at least according to the latest Producer Price Index (PPI) release. The PPI tracks prices faced by producers. You know the guys and gals that makes the stuff AND PRICE the stuff we buy. It is considered by some as a classic leading indicator of inflation. If the costs of producing get cheaper then, in theory, producers will have more latitude to lower the prices they charge to consumers and retailers. Yesterday’s release showed that producer prices ended 2022 +6.2% higher than at the end of 2021. That is only good news because economists were expecting it to be higher… and even more importantly, that same number was as high as +11.7% early last year! Therefore, yesterday’s print was a positive sign that things are going in the right direction, though they are far from the 2% or so where they should be. This current spate of inflation was caused by a perfect storm of sorts. It was not just hot consumer demand that drove it, but it was also supply snags caused by the ups and downs of the pandemic. The PPI is a positive sign that perhaps the supply side of the equation may be on a path back down to it long run median. That leaves the demand side… you and me and our appetite for consumption.

Despite higher consumer prices, higher interest rates, increasing calls for recession, and abysmal stock market performance, consumers continued strong demand for most of last year. This not only kept inflation high, but it also helped companies continue to land record earnings. Check out the following chart of Retail Sales, out just yesterday, for some insights, then keep reading.

Don’t read too deeply into this chart. Focus on the green colored line. That is the moving average of the monthly increase in retail sales. The scale doesn’t make it easy to spot because of the wild monthly swings that occurred starting with the onset of the pandemic through mid-2021, but if you look closely, you can see that the green line is significantly higher than it was in the years prior to the pandemic. So, on-average, retail sales have been growing faster than normal… EVEN THROUGH LAST YEAR. That is good for retailers and producers, but not so good for inflation. You may have also noticed that the last 2 months both registered pullbacks that were slightly bigger than normal (the white colored line). That is a sure sign that retailers faced challenges in the final 2 months of 2022. That can be viewed as another leading indicator of the demand side of inflation, and it is pointing to an easing. We will certainly hear more from retailers in the coming weeks’ earnings releases, and it is not likely to be a positive story. Stepping back from that, consumption, if you recall, represents 2/3 of GDP in the US, so you know what happens when consumption slows. That’s right, recession. Good news for inflation, but bad news for retailers… and the economy.

That Retail Sales figure, released yesterday morning, came in lower than economists’ estimates and to make matters worse, the prior month was revised downward. That release spooked the markets while traders were still trying to make sense of the lower-than-expected PPI release (which was positive). Recession fears were awoken then, ultimately, amplified with the release of Industrial Production numbers, which came in well below estimates and also had a prior-month downward-revision. Of course, there were Fed speakers who attempted to continue to throw gas on the flames of fear, but traders were running for the hills yesterday and the Fed was only one part of the reason. The selling was broad-based with declines even in defensive sectors. Bond yields dropped, indicating that investors were running to safe havens. It was a classic risk-off, fear-based session, and the reason: recession.

WHAT’S SHAKIN’

Discover Financial Services (DFS) shares are lower by -7.37% in the premarket after the company announced that it beat estimates on both EPS and Revenues in the 4^th quarter. The reason for the selling is that the company warned investors that write-off rates could double in 2023. Dividend yield: 2.34%. Potential average analyst target upside: +17.6%.

The Proctor & Gamble Co (PG) shares are lower by -2.52% in the premarket after it missed EPS estimates by -0.37% on a Revenue beat of +0.15%. The company raised its low-end growth estimate for the year, but the range was still below the median analyst estimates. Dividend yield: 2.49%. Potential average analyst target upside: +3.6%.

YESTERDAY’S MARKETS

Stocks swooned yesterday with increased selling pressure throughout the session as investors sold on recession fears. The S&P500 fell by -1.56%, the Dow Jones Industrial Average declined by -1.81%, the Nasdaq Composite Index traded lower by -1.24%, and the Russell 2000 Index dropped by -1.52%. Bonds rose and 10-year Treasury Note yields fell by -17 basis points to 3.36% (yeah, that’s a big move). Cryptos dropped by -4.44% and Bitcoin slipped by -2.52%.

NEXT UP

• Housing Starts (Dec) are expected to have fallen by -4.8% after slipping by -0.5% in November.
• Building Permits (Dec) may have risen by +1.0% after falling by a revised -10.6% in the prior month.
• Initial Jobless Claims (Jan 14) are expected to come in at 214k, slightly higher than last week’s 205k claims.
• Today’s Fed speakers: Collins, Brainard, and Williams. The latter 2 speakers are powerful voices on the FOMC, so pay attention.
• Earnings after the closing bell: Netflix and PPG Industries.