Stocks traded higher yesterday after an inflation indicator came in below expectations. Rate hike expectations barely budged in response to the good news, but tech stocks broke a losing streak.
Green shoots. You know who sets prices? Why, the producers of goods and services, of course. Now, they cannot just wildly adjust prices on a whim. The laws of supply and demand play a role in maintaining some sort of order, especially when it comes to commodities and other readily available substitutes. Let’s assume that most companies are responsible and base their price moves on their costs, maybe just adding a little extra to keep shareholders happy. This is, after all, capitalism. Last year and in 2021 costs skyrocketed for producers. Initially it was costs of raw commodities, then it was costs of components (chips and subassemblies), there were also sharp rises in transportation costs (shipping and trucking), finally it came down to labor costs. On that last one, companies are competing to fill job vacancies causing them to have to raise wages. A sign of this is the continued low unemployment rate. So, if some of these pressures on producers ease, they will lower prices, and ultimately we, the consumers, will get a break, right? Of course, it’s more complicated in practice, but, for the most part, lower producer prices should ultimately work their way into prices at retail. That is why the Producer Price Index / PPI is considered a leading indicator of Consumer Price Index / PPI.
Yesterday, the Bureau of Labor Statistics released its PPI for March which showed that producer prices fell by -0.5% for the month, when economists were expecting prices to be unchanged. On an annual basis, PPI rose by only +2.7%, also lower than economists were expecting. On the surface, that is very good news in the war on inflation. Check out this chart of PPI to get an idea of where we are compared to… where we were.
That’s right, PPI is where it was in 2018… way before all this talk about inflation. Of course, producer prices declined in the year prior to the pandemic, which caused other problems at the time, but that is a discussion for a different note. What is important to recognize here is that the trend is very encouraging. Just a year ago, producer prices were growing at an almost +12% rate, and now they are at +2.75, just a bit above the Fed’s +2% inflation target. So, does that mean that the Fed will stop hiking rates? Well, not exactly, because when we break down the numbers, we see that Services Less Trade, Transportation, and Warehousing (fancy for… services ) rose by +6.4%, which is higher than it was for the entire year of 2022. The positive, if you could call it that, is that it was lower than last month’s print of +7.0%. There is a positive for stocks as well. If the overall inflation of producers’ input costs is slowing, companies should have higher profits. That is consistent with some of the early earnings looks we have seen in which sales are missing but EPS is beating. Earnings season officially starts this morning, so there will be plenty to see regarding these developments. Stay tuned, stay focused… stay positive.
WHAT’S SHAKIN’ THIS MORNIN’
JPMorgan Chase & Co (JPM) shares are higher by +6.02% in the premarket after the company announced that it beat EPS and Revenue estimates by +21.35% and +6.82% respectively. The company raised its full year Net Interest Margin guidance, increased its reserves, and raised slightly its probability of a “moderate” recession. Dividend yield: 3.10%. Potential average analyst target upside: +17.0%.
Boeing Co (BA) shares are lower by -5.98% in the premarket after it announced that it would pause delivery of some of its 737 Max jets due to a faulty subassembly. The subassembly is produced by Spirit AeroSystems Holdings (SPR) which informed Boeing of the problem yesterday. Shares of Spirit are down by -14.19% in the premarket. Boeing is set to deliver its Q2 results later this month. Potential average analyst target upside: +9.3%.
ALSO, this mornin’: United Health Group (UNH), BlackRock (BLK), and Wells Fargo (WFC) all beat on EPS and Sales, while PNC Financial (PNC) missed on Revenues.
YESTERDAY’S MARKETS
Stocks rallied yesterday on lower-than-expected producer prices. The S&P500 gained +1.33%, the Dow Jones Industrial Average climbed by +1.14%, the Nasdaq Composite Index jumped by +1.99%, and the Russell 2000 Index advanced by +1.30%. Bonds declined and the 10-year Treasury Note yields gained +5 basis points to 3.44%. Cryptos advanced by +3.89% and Ethereum jumped by +5.24%.
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