Amazon pleases while Apple sneezes

Stocks declined yesterday largely in response to a continued rise in mid and longer-term treasury yields. Longer-maturity note yields hit November 2022 levels yesterday in advance of a bloated supply coming to the market while the Fitch downgrade remained in the craws of traders.

In relation to inflation. Is inflation a thing of the past? We hope so, and the market seems to be placing its bet on that recently, but is the market correct? There is an old Wall Street saying that “the market is always right.” It is always right when it comes to your investments. In that sense, the saying applies to the topic of my yesterday's note about how the market always has the final say. But in the case of how well the market predicts the future, well, let’s just say it does not have a perfect record. Now that we got that out of the way, we know that the market may not necessarily be correct in its assumption that this period of inflation (known as a regime in market-talk) is over. Well, recent inflation reports seem to be pointing in that direction as they have clearly all trended down since peaking in 2022.

So, then, the big question that we should be asking is whether inflation will continue its downward trend, and even more importantly, will it pick back up? Have you seen crude oil prices lately? Don’t worry if you haven’t, I will just tell you that they are quite a bit higher than they were a few weeks ago. Or you could just look at the attached chartbook, which I send you EVERY DAY! You will find the answer on chart number 10. Clearly, crude is not as expensive as it was last year, but it is nonetheless creeping higher in response to Saudi supply cuts, and OPEC+ is meeting in Vienna today to consider broader cuts. Oh, gasoline prices have been creeping up as well. Indeed, average gas prices per gallon in the US have climbed by some +7% in the past month alone. DATAPOINT No. 1.

Just yesterday, the Institute for Supply Chain Management came out with its monthly Services PMI (purchasing managers index). One of the metric’s components is the Prices Paid Index. That number peaked in December of 2021 and has had a relatively steady decline UNTIL yesterday, when it posted an increase. Now, that is not enough to run into your storm cellar and lock the doors, but it is worth noting, as the services sector as a whole continues to be the primary contributor to inflation these days. DATAPOINT No. 2.

I will give you one more datapoint. Today, we will get the monthly employment numbers from the Bureau of Labor Statistics. Most folks will be watching the New Nonfarm Payrolls and Unemployment Rate closely, as they should. The Fed has said time and again that it would like to see the burgeoning labor market weaken a bit to ensure that inflation will continue to decline. The reason that the Fed would wish for such a terrible thing to happen has to do with labor cost. When the labor market is tight, employers are forced to pay higher wages. Those higher costs are ultimately borne by consumers, as suppliers raise their prices to maintain margins. That is classic inflation, as the Fed sees it. So, if there are more people out of jobs, the increased supply of workers will cause labor costs to come down, thus taking the pressure off of inflation. Whether you believe that or not is not important, because the Fed… you know, the guys and gals who control interest rates and YOUR GROWTH STOCKS, does think it is important. If you agree with that, and I hope you do, you should know that the Fed is certainly going to be looking at the Nonfarm Payrolls and Unemployment Rate numbers this morning, but what they are really, REALLY going to be looking at is the Average Hourly Earnings component of the release, because that is what directly contributes to inflation. That is expected to have eased back from +4.4% to +4.2%. If the number comes in as expected, the continued decline would be welcomed, but it should be noted that it is still quite a bit higher than it was prior to the pandemic where it bounced between +2% and +3%. I will end with a chart of Average Hourly Earnings Growth so you can see, firsthand, its elevated, volatile course in the past few years. DATAPOINT No. 3… coming up.

PERMARKET MOVERS

Fortinet Inc (FTNT) shares are lower by -19.09% in the premarket after it announced a weak quarter and lowered its current and full-year revenue guidance. Though guidance was within analysts’ expectations, the weak print was a disappointment to traders which have run the stock up quite a bit year to date, as the warning fueled feared an overall slowdown in cybersecurity sales. Potential average analyst upside target potential: +1.2%.

Apple Inc (AAPL) shares are lower by -1.97% after it announced that it beat EPS and Sales targets in Q2. The company did relay solid growth of its services revenues, but it was overshadowed by slowing growth in sales of iPhones, and a disappointment in sales of Mac computers and iPads. Dividend yield: 0.50%. Potential average analyst upside target potential: +4.3%.

Amazon.com (AMZN) shares are higher by +8.84% in the premarket after it announced mixed results for Q2. The company announced that cost cutting measures were paying off in its retail business and that its cloud computing business (AWS) not only beat estimates, but it was expected to grow in the second half. The unexpected surprise caused some analysts to raise price targets. You may recall that Microsoft set a muted tone on cloud computing with its earnings announcement in late August. Microsoft’s Azure is considered a direct competitor to Amazon’s AWS offering. Potential average analyst upside target potential: +28.3%.

YESTERDAY’S MARKETS

NEXT UP

• Change in Nonfarm Payrolls (July) is expected to be +200k, slightly lower than June’s 209k print.
• Unemployment Rate (July) may come in unchanged at 3.6%.
• Next week: a continuation of earnings season along with Consumer Price Index / CPI, Producer Price Index / PPI, and University of Michigan Sentiment. Check in on Monday for calendars and details.