Stocks had a mixed close yesterday in the wake of some hotter than expected inflation figures. Bond yields continue to tick higher, and the yield curve continues to flatten – economists are scratching their heads.
Heartbroken. Is inflation gone yet? Nope, not at all, and the Fed, according to the futures markets is going to have a busy summer. Of course, we all want to see inflation vanquished from our daily lives. Not just at the cash register but also in our investing lives. That darn Fed just won’t stop raising rates and messing with the stock market with negativity until inflation is well on its way back down to +2%. It has made some progress, and even the Head-Fed has admitted as much, but inflation is still too high. That is not news, but yesterday’s Consumer Price Index / CPI release generated a bit of news when it showed that inflation was a bit hotter than economists were expecting in January. The Bureau of Labor Statistics reported that the CPI grew by +6.4% since last January and economists were expecting the number to be +6.2%. On the bright side, the figure was lower than December’s +6.5% print. So, inflation is slowing, but maybe not as much as economists were expecting… and we were all hoping.
The reason for the bigger than expected jump was due to Shelter which rose by +7.9%, its biggest component Rent of Primary Residence rose by +8.6%, which was higher than the +8.3% in December. So, rents are rising… at an increasing rate. Here’s a look at Shelter costs over the past 5 years.
Pretty scary, eh? The Bureau of Labor Statistics applies weights to each category which is supposed to represent a basket of how we spend our money. Shelter has a weight of 34.413%, which is why that chart up above is so noteworthy. We are all familiar with rising Food costs which were up by a much higher +11.3% since last January. Food inflation is, indeed, high, but it has moderated somewhat since early autumn, and it is only weighted by 13.531% in the CPI. So now you should be wondering if we are in some hot water with this inflation stuff… that chart up above should have caused you to raise an eyebrow. The Fed has raised interest rates from 0% to 4.75% in less than a year and more hikes are on the way. Looking at that chart, it doesn’t appear to have had any effect on housing prices. There is some hidden good news in all this. First off, rent or mortgage payments are the last thing cash-strapped consumers attempt to cut… or simply not pay. When it comes to rent, leases are typically negotiated annually, so it takes time for lower demand to show up in rents. Though they are closely correlated, housing is known to lag interest rates, so it will take some patience. That was the same message offered by Chairman Powell in his post-FOMC presser, it just didn’t get as much press coverage. For now, yesterday’s CPI print served as another reminder to the markets… not to fight the Fed. It will let us know when it is time to relax. It always does. That time is not just yet.
WHAT’S SHAKIN’
Devon Energy Corp (DVN) shares are lower by -6.96% in the premarket after it announced that it missed EPS and Revenue estimates by -5.80% and -2.46% respectively. The company’s full year guidance showed Capital Expenditures would be higher than analysts were expecting. In the past month 50% of analysts changed their price targets 2 up, 12 down, and 14 unchanged. Dividend yield: 5.56%. Potential average analyst upside: +18.0%.
Analog Devices Inc (ADI) shares are higher by +6.02% in the premarket after the company announced that it beat EPS and Revenue targets by +5.84% and +3.21% respectively. The company’s EPS guidance for the current quarter was also higher than analysts’ estimates. Dividend yield: 1.88%. Potential average analyst upside: +6.8%.
The Kraft-Heinz Co (KHC) shares are lower by -2.51% in the premarket after it announced that it beat EPS and Revenue targets. However, it offered full year guidance that was below what analysts were expecting. Dividend yield: 4.01%. Potential average analyst upside: +9.3%.
ALSO, this morning: Biogen (BIIB) and Owens Corning (OC) beat on both EPS and Sales while Lithia Motors (LAD), Generac (GNRC), and Martin Marietta Materials (MLM) missed the mark.
YESTERDAY’S MARKETS
Stocks had a mixed close yesterday after traders were left stunned with a higher-than-expected inflation print. The S&P500 Index slipped by -0.03%, the Dow Jones Industrial Average declined by -0.46%, the Nasdaq Composite Index rose by +0.57%, and the Russell 2000 Index pulled back by -0.06%. Bonds declined and 10-year Treasury Note yields gained +4 basis points to 3.74%. Cryptos added +4.39% and Bitcoin climbed by +2.87%.
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