Will Tesla spark a price war in EVs?

Stocks had a mixed close on Friday after a slight uptick in producer prices promoted renewed fears of inflation. Higher yields on Treasuries put more pressure on weakened growth stocks.

Think twice. Has the storm passed? If you were only an occasional consumer of financial news and you relied on your gut for answers, you might think that this whole “inflation thing” and potential for recession was all a big tempest in a teapot, or to put it even more colloquially, a big fat nothingburger. Have you been to a retail store lately? Have you been to a car dealership recently? No? Ok, I know that some of you have looked up your own home on Zillow to see what it might be worth. Perhaps you recently got a call from your financial advisor who opened the call with a “GOOD NEWS” greeting. Your portfolio is worth more than it was in January. You are probably thinking that things must be good.

You have heard that the Fed is “on pause” with its rate hiking bonanza. But then you are thinking, “I haven’t really felt the effects of those so-called painful rate hikes.” So, is the worst behind us? For rate hikes, it is too early to say if the Fed is actually done with the hiking, but it is not likely that Fed Funds will double from here. I am not saying that it is not possible, just not probable… based on what we know today. Futures seems to concur with just an 11% probability of a +25 basis-point rate hike next month, going up to 38% in November, and finally dropping to 28% in December. So, given that information, even another +25 basis-point bump seems less-likely than more.

Inflation has ticked lower in recent months, but it is still not where the Fed nor the rest of us would like it to be. Producer Prices inched higher last month which had some eyebrows up on Friday, but the closely watched University of Michigan Sentiment data series relayed that consumers were expecting lower inflation in 1 year and 5-10 years. Lower inflation expectations are exactly what the Fed wants to see, because it means that consumers are less likely to accept higher prices and will reduce demand to ultimately pressure sellers into moderating price hikes. So goes the theory at least.

Finally, last week, we learned banking regulators were about to tighten restrictions on banks in order to avoid another potentially more dangerous banking meltdown than the one from earlier this year. Those restrictions on banks are a clear form of monetary tightening which will only put more pressure on inflation. Banks will find it even more challenging to lend out money like prior to 2022… you know, the easy money days. By tightening regulations on banks, the Fed is not only doing its job, but also tightening financial conditions. Did the central bankers do this on purpose? You bet it did. Also, last week, Moody’s Investor Services, not a Government agency, lowered its ratings on a handful of banks, and warned another handful that they may be next. This too was a form of monetary tightening. You see, when a bank’s credit rating is lowered, it must pay more to borrow the money that it will ultimately re-lend… at presumably, a higher interest rate. The differential between what a bank must pay for money and what it loans money is its net interest margin. As you might imagine, the bigger that number is, the better for banks. Banks will therefore be pressured to charge higher interest to companies and consumers. Additionally, banks will make borrowing at any rate more difficult. If it were ethical, central bankers would surely give a visible nod to the folks at Moody’s as they pass each other on the subway platform.

Back to that retail store, the car dealership, Zillow, or even the airport. There seems to be no lack of demand or doomsday prepping. But don’t be fooled, monetary conditions are tight, and they are about to get even tighter. It is further worth noting that the Fed has not yet pivoted in its policy. We will learn more about what Fed members said behind closed doors at their July 26th FOMC meeting when we get minutes from that meeting later this week. We are likely to see that the hawks are still very much in control of the room. With markets still a bit frothy and volatility near lows, this is not a time for complacency… but then there is never a time for complacent investing. Stay focused, remain vigilant. This regime will pass, but it has not passed just yet.

EARLY MORNING MOVERS

Coterra Energy Inc (CTRA) shares are higher by +1.25% in the premarket after Piper Sandler upgraded the stock to OVERWEIGHT from NEUTRAL and raised its price target. Coterra announced an EPS beat a week ago. In the past 30 days, 56% of analysts have updated their target prices 10 up, 3 down, and 10 unchanged. Dividend yield: 2.85%. Potential average analyst target upside: +9.5%.

In the news, WHILE YOU SLEPT: Tesla (TSLA) announced that it would be cutting prices on cars sold in China and NVIDIA (NVDA) announced the launch of a new AI chip. The Tesla news has its stock down by -1.84% in the premarket, while NVIDIA is higher by a marginal +0.03%.

FRIDAY’S MARKETS

ON DECK

• No economic releases today but starting tomorrow things pick up with Retail Sales followed by regional Fed reports, housing numbers, Industrial Production, FOMC Meeting Minutes, and The Leading Economic Index. Big retailers will take center stage in earnings releases this week. Download the attached economic and earnings calendars for times and details.