JPM Morgan steps up to rescue First Republic

Stocks ended the month on a high note, climbing into the close as investors cheered positive earnings results. Annual inflation is easing… despite a slight monthly gain.

A bad egg. Even if you are a Vegan, you have high cholesterol, or you simply don’t like the smell of, you probably know that the price of eggs has skyrocketed recently. Now, I don’t use terms like “skyrocketed” too often in a financial note… it’s just bad practice, but in the case of eggs, well, it is probably justified. According to last month's PCE Deflater, released last Friday, egg prices are +36% higher than they were a year ago! That’s a lot. Here is some cold comfort for you. That is far better than it was in January when the annual growth came in at +70.1%. Obviously, most of us can skip the eggs if we need to conserve, and even if we couldn’t live without that rich zabaglione, croque madame, or that hearty scramble, eggs are most likely a very small part of our monthly budget. What about those other things?

Looking at this chart which shows the year over year change in the PCE Deflator, you can see that we have made quite a bit of progress in these past several months. Though we are still a “ways away” (the Fed’s own words) from the Fed’s +2.0%, it looks like we are on the right path… graphically at least. To a better understanding of the current situation, we need to consult the month over month changes in prices. Based on the above chart, we would expect everything to be going down, but I am sure you suspect that is not the case. Moreover, while eggs are +36% higher than a year ago, they were -10.9% cheaper in March than they were in February. That is a trend heading in the right direction. Air Transportation was flat for the month despite being +11.8% higher than it was a year ago. We’ll take that as a mild positive. Housing is +8.3% higher than it was a year ago which is at a 10-year high. The Fed is concerned about that, because unlike eggs, rent is not so easy to skip. On a monthly basis, Housing prices grew by +0.5%, which is the lowest monthly change in the past 6 months, so perhaps, its growth is slowing. Something that is not going in the right direction is some non-durable goods. I’ll explain. We are currently in the midst of Q1 earnings season, and we recently heard from some larger consumer staples manufacturers who managed to beat analysts’ estimates. The commentaries read something like “we are pleased that demand for our products remained strong… despite price increases.” That is a case of good for them and not-so-much, us. Basically, companies like J&J and Proctor and Gamble raised their prices in Q1 and they are “pleased” that consumers didn’t riot. In fairness, there aren’t very many good substitutes for Tylenol and soft toilet paper. Knowing this, you may not be surprised to learn that Household Paper Products posted its largest monthly gain of the quarter +1.4% along with Personal Care Products, which added +0.9% for the month. Yes, and Non-Prescription Drugs posted its largest monthly gain (+1.5%) in the past 12 months.

What all this amounts to is that there are some areas in which inflation is improving while others remain stubborn, and still others seem to be getting worse. Unfortunately, that may not be good enough to cause the Fed to stop applying pressure with rate hikes. Futures put a 92% probability of a +25 basis-point rate hike on Wednesday, but they are still forecasting cuts later in the year. Unfortunately, while last week’s numbers looked ok on the surface, inflation’s stickiness looks as if it will continue to give the Fed reasons to fly like hawks, despite what is factored into the markets.

WHAT’S SHAKIN’ THIS MORNIN’

JPMorgan Chase & Co (JPM) shares are higher by +3.05% in the premarket after the bank announced that it won the bid to acquire the failed First Republic Bank. Under the terms of the agreement, the FDIC will provide favorable financing for the takeover. In the past month, 76% of analysts have changed their price targets, 14 up, 6 down, and 6 unchanged. Dividend yield: 2.89%. Potential average analyst target upside: +15.1%.

General Motors Co (GM) shares are higher by +2.60% after Morgan Stanley upgraded the stock to OVERWEIGHT and raised its price target. The company announced an earnings and revenue beat just last week. Dividend yield: 1.08%. Potential average analyst target upside: +44.3%.

FRIDAY’S MARKETS

Stocks rallied to close out the month on strong earnings. The S&P500 gained +0.83%, the Dow Jones Industrial Average climbed by +0.80%, the Nasdaq Composite Index rose by +0.69%, and the Russell 2000 Index jumped by +1.01%. Bonds gained and 10-year Treasury note yields declined by -9 basis points to 3.42%. Cryptos slipped by -1.12% and Bitcoin pulled back by -0.94%.

NEXT UP

• S&P Global US Manufacturing PMI (April) is expected to come in at 50.4 in line with the earlier, flash estimate.
• ISM Manufacturing (April) may have climbed to 46.8 from 46.3.
• The week ahead: more earnings, along with JOLTS Job Openings, Factory Orders, Durable Goods Orders, the monthly employment report, and the FOMC meeting/rate decision. Check out the attached earnings and economic calendars for times and details.
• After the closing bell earnings: Stryker, ZoomInfo, Avis Budget, Vornado Realty Trust, Transocean, Vertex Pharmaceuticals, VICI Properties, and MGM Resorts.