Delta flies to record heights on robust demand for travel

Stoc­ks gained yesterday after a cooler-than-expected inflation report gave hope that the world may be getting back to normal… whatever normal even is. Real average hourly earnings are up by +1.2% from a year ago which is good for your pocketbook but bad for the ongoing inflation battle.

Party like its 2021! Sorry, I am going to start you off with a chart. Take a glance and keep reading.

This is one of my favorite charts from Bloomberg which shows Consumer Price Index / CPI and its high-level components. I like it because it helps the viewer appreciate just where inflation is coming from, and it provides an excellent frame of reference when comparing inflation to where it was in the past. Let’s start with the headline number of +3.0% which was yesterday’s print. WOW, +3.0% seems sooooo close to the +2.0% which everyone… mainly the Fed, considers to be healthy inflation. Also, considering that at this time last year, the CPI was at its +9% peak, +3.0% seems like a dream. Really what this all means is that the Fed’s efforts have been effective, but we are not quite back to normal.

The Fed actually prefers to look at the so-called Core Inflation which excludes food and energy prices. These two aggregates are typically more volatile, so, in order to get a smooth read on inflation, the Fed likes to exclude these items. Who am I to judge the most powerful bankers in the world… perhaps even the known-inhabited universe, but volatile or not, consumers still need to buy food and energy for, you know, basic subsistence. That said it is sure nice to see that energy prices have actually dis-inflated from a year ago and that food inflation has narrowed somewhat.

Getting back to the Fed and what it might think about yesterday’s number. Policy makers would view the +4.8% core number as being progress but still too far from their +2.0%. They would view Services inflation at +3.5% still far too high for a sector which would typically run at +1.5% - +1.8%. The Fed would dig into the number and see basic-life-requirement, Shelter, at +7.8% higher than last year as being more than double of what it was prior to the pandemic, and far too high for comfort, though it is slightly lower… slightly lower than what appears to be its +8.2% peak in March, earlier this year. One wonders if the Fed’s own action of interest hikes, a key component of ALL REAL ESTATE, impacting shelter inflation, and if it can even recede with mortgages just below a nearly 25-year high. Similarly, now nearly defunct LIBOR which is being replaced by SOFR is also at an almost 25-year high. Commercial real estate loans lean on those rates heavily, and they are high. In other words, it’s expensive to finance a home yourself and it is expensive for would-be landlords to finance rentals. Just saying. Also in the services category is Transportation Services. Thankfully, that group, though still high at +8.2%, is significantly lower than its apparent peak of nearly +15% from late last year. That category includes the notorious Leased Car costs, also high because of high interest rates, and Motor Vehicle Repair which is still +19.8% higher than it was a year ago… for reasons that I cannot explain. Similarly, Motor Vehicle Insurance, is higher by +16.9%, which is also a conundrum, if not a real-world challenge for drivers.

All that said, will this progress and work-in-progress keep the Fed from mashing down on the “HIKE” button? It is hard to say with certainty. Fed members will be very conscious of its well-documented failures in the late 1970s and early 1980s during which it claimed premature victory and had to seesaw rates several times during that period. Oh yeah, and there were also 2 resulting recessions. According to Fed Funds futures, there is still an 88% probability that the Central Bank will hike by +25 basis points later this month. Later this morning we will see the Producer Price Index / PPI which represents prices paid by producers (as its name implies). Those are expected to have eased as well, which can be another positive sign that inflation may be heading in the right direction… though prices are still not where they need to be to cause a major sea-change in policy.

EARLY MORNING MARKET MOVERS

Delta Air Lines Inc (DAL) shares are higher by +4.36% in the premarket after it announced that it beat EPS and Revenue targets by +11.42% and +1.18% respectively. The company says that travel demand is “robust,” and it raised its full-year guidance. Dividend yield: 0.83%. Potential average analyst target upside: +16.9%.

PepsiCo Inc (PEP) shares are higher by +2.38% in the premarket after the company announced that it beat on EPS and Sales estimates by +6.54% and +2.82% respectively. PepsiCo raised its full-year organic revenue guidance which was above analyst expectations. Dividend yield: 2.67%. Potential average analyst target upside: +9.7%.

YESTERDAY’S MARKET ACTION

Stocks rallied yesterday in response to a cooler than expected CPI release. The S&P500 rose by +0.74%, the Dow Jones Industrial Average climbed by +0.25%, the Nasdaq Composite Index jumped by +1.15%, and the Russell 2000 Index advanced by +1.05%. Bonds climbed and 10-year Treasury Note Yields slipped by -11 basis points to 3.85%. Cryptos slipped by -0.76% and Bitcoin declined by -0.74%. The S&P ESG Index added +0.76%.

NEXT UP

• Producer Price Index / PPI (June) is expected to come in at +0.4% year over year, lower than last month's read of +1.1%. If this number is met or lower, that is a really good sign that inflation is trending lower. Watch this!
• Initial Jobless Claims (July 8) is expected to come in at 250k, slightly higher than last week’s 248k. Remember the Fed wants this to go up, so bigger is better.
• Today’s Fed speakers: Daly and Waller.