Big banks climb over low bars

Stocks rallied on another sign that inflation is easing from last year’s blistering heights. The Fed is still hungry for rate hikes and the markets are expecting it… so?

Oh, what a night. Rather, oh, what a couple of sessions. I know that you are all tired of hearing about inflation and would much rather have me give you a stock tip that will edge you closer to getting that super yacht to upset your ex or your brother-in-law… but alas I am here to keep you in the know so that you can make smart decisions about your future… sorry ☹. Let’s talk about the future for a minute. Rather, the nearer future. There is a lot of noise in the markets these days and stakes are high after last year’s miserable market performance. Above all the noise is inflation. It is THE cause for all the stress on your retirement savings and your monthly budget. The Fed flat out missed inflation’s debut in 2021 and because of it had to resort to carpet bombing the markets for the entirety of 2022 to make up for the faux pas. Now, out of the smoke-filled pile of rubble that was once your perfect plan portfolio, a ray of sunlight shines through the dust cloud. Inflation is easing! It is not gone yet, so you have to watch your step, but it appears safe enough to emerge from the storm cellar and have a look around.

Yesterday’s Producer Price Index / PPI came in cooler than expected at +0.1% for the year. Last time the PPI was this low was in 2020! That was when no one even heard or thought of inflation. Oh, and so-called core PPI came in at a softer than expected +2.4%. That is just +0.4% higher than the Fed’s target. PPI is considered a leading indicator of consumer prices, because, after all, it is producers that have the most impact on the prices that you and I pay at the store. If producers’ costs are going down, it is logical to assume that at some point they will lower prices to gain market share. Though this is generally true, there is a lag, because, why not price gouge while you can… capitalism . In any case, it is a positive sign that things are getting better ✅. So, what’s next?

It is hard to say exactly, but there are some likely scenarios. Let’s start with interest rates. The Fed is likely to at least raise interest rates by another +25 basis points. Why? Well, first because it said so and markets have continued to rally and, in fact, have factored in a >90% chance of it based on overnight swaps. Also, because despite all the talk about a potential recession, recent economic numbers suggest that the economy is rolling along. Namely, the labor market, which is strong and remains the Fed’s forever obsession. Assuming that inflation stays on this path, this next hike could be the last for a while. Futures aren’t predicting any cuts until spring of next year. This good news is positive for stocks, though many of your favorite ones have already had a nice run-up with the recent AI craze, so gravity will be a factor… not to mention earnings season… which starts this morning. The recent news is also positive for bonds which suffered uncharacteristic pain last year and still remain quite volatile. They will remain volatile until a real Fed pivot, however the downside is getting shallower. That brings us the US Dollar which weakened late last year but has been in tight trading range since January. The recent positive inflation data has caused the Dollar to weaken as investors expect interest rates to remain subdued in the US. You may not be a currency trader, but you are likely concerned about crude oil or gold (you may own ETFs, energy, or mining companies). Both of those commodities trade predominantly in US Dollars, so a weaker Dollar makes them cheaper for foreign buyers who must convert currencies to make a purchase. This may result in increased demand for them, which may help prop up prices. Now, don’t go out and buy an oil tanker full of sour crude or some cheap, questionable futures contract for Urals Crude Oil from your handyman’s brother. There are a lot of other factors that impact the price of crude oil, namely supply and demand. Supply has been shrinking somewhat as Saudi Arabia has unilaterally cut its production to keep prices propped up. In contrast, demand may be weaker as China (a big consumer of crude) struggles a bit with growth. Finally, AT SOME POINT, the US will have to replenish its shrunken strategic oil reserves, and when it does, it will certainly impact crude prices.

Now, I want to make it clear that I am bringing up these potentialities because it is appropriate to watch and see if and how they play out. There is nothing certain in the markets other than that they are likely to provide lots of pain to balance out any euphoria you may have. Inflation has proven in the past to be a formidable opponent. Just when you think it is over, it can return with a vengeance, like it did in the late ‘70s and early ‘80s. The Fed, itself, is still the best indicator of where rates… and your favorite stocks will be in a year from now. Don’t fight the Fed and be sure to keep a weather eye on everything else.

STOCKS TO WATCH BEFORE THE OPEN

UnitedHealth Group Inc (UNH) shares are higher by +3.43% in the premarket after it announced that it beat EPS and Revenues by +3.15% and +2.17% respectively. The company warned last month that healthcare costs are rising and may impact profitability. We know this to be true because it was clear in Wednesday’s Consumer Price Index / CPI. Despite this the company managed to beat its EPS targets. Dividend Yield: 1.68%. Potential average analyst target upside: +26.8%.

Wells Fargo & Co (WFC) shares are higher by +3.29% in the premarket after it announced EPS and Revenue beats. Of note is the companies beat of expected Net Interest Income. The company also boosted its full year NII to 14% from 10%. Dividend Yield: 2.74%. Potential average analyst target upside: +13.9%.

ALSO, This morning: JPMorgan Chase and BlackRock beat while State Street missed on Sales.

YESTERDAY’S MARKETS

Stocks and bonds rallied yesterday after PPI came in at 2020 levels, below expectations. The S&P500 gained +0.85%, the Dow Jones Industrial Average advanced by +0.14%, the Nasdaq Composite Index rallied by +1.58%, and the Russell 2000 Index jumped by +0.91%. Bonds gained and 10-Year Treasury Note yields fell by -9 basis points to 3.76%. Cryptos rose by +8.31% and Bitcoin added +3.41%. The D&P ESG Index traded higher by +1.00%.

NEXT UP

• University of Michigan Sentiment (July) may have risen to 65.5 from 64.4.
• Next week: a stream of earnings along with Retail Sales, regional Fed reports, and housing numbers. Check in on Monday for calendars and details.