Nike is looking more fit

Stocks got a bit of relief yesterday, rallying on oversold conditions. Gross Domestic Product was not revised higher, as expected, taking a bit of pressure off the Fed.

Costly. Ok, why has the rally in stocks stalled and caused all sorts of gastric disorders of the portfolio? The short answer is: Treasury Note yields. The less-short answer is: a Hawkish Fed. The not-so-long-but-all-too-familiar answer is: INFLATION. Inflation now has a new variant which should be called long-inflation, and economists are struggling to figure out how to treat it. In absence of any real answers, economists-turned-central bankers have turned to tried and true methods. Page 1 in the methods book reads: “burn it down.” Stop and think about it for a few seconds. Ready for page 2? It reads: “if page 1 is ineffective, repeat.” Guess what page 3 reads? I am sure you got the message. But there is good news. The last page in the book reads something like this: “when it is clear that the economy is on its knees, douse it with a wet towel… and maybe soften it up a bit.” The burning question on everyone’s mind is “what page are we on?” Are we nearing the end of the methods book or are we closer to the beginning. Well, I think that it is fair to say that we are past the midpoint based on inflation’s being lower than it was in June of last year. However, we are still not where the Fed would like us to be, as you can see clearly on the following chart depicting PCE Deflator. Have a look and keep reading.

This is what the Fed watches most closely to track its progress through the above-described book, and today we will get the latest snapshot. PCE stands for Personal Consumption Expenditures and the deflator is another method of measuring inflation, and it happens to be the one that the Fed watches most closely. You may be more familiar with the Consumer Price Index / CPI. That is also a good measure of inflation but there are some slight nuances that separate the two which I will share with you this morning.

Foremost, the CPI is calculated using a basket of goods which are considered important to consumers. The Bureau of Labor Statistics then collects data from urban households to determine if they are spending more or less on that basket. If you read that carefully, you probably already picked up on some of the challenges to the number’s efficacy. I live in the New York area, and if you do too, you are probably chuckling right now because you know that urban New York prices are like almost none other in the world, so how can they, or any urban environment for that matter, be a good reference for suburbanites let alone rural inhabitants. Further, you should be wondering, “what if those polled households are not savvy shoppers and simply all shop at Whole Foods?” Do you have any idea what it costs to get your dog groomed in New York? How about getting yourself groomed in New York?

Now let’s get to the PCE Deflator. That number is compiled by The Bureau of Economic Analysis (BEA) which polls a broader range of areas including urban and rural. Further it is principally based on surveys of what businesses are charging for goods and services. That alone makes the number a bit more accurate for someone making policy decisions that affect the entire country. Wouldn’t you agree? Well, the Fed certainly does. Now, the core PCE excludes food and energy costs and that is the one that the Fed watches most closely. It is represented by the blue in the chart above. You will notice that, compared to the blue line, the white line in the chart rose to higher heights last year then fell, precipitously, to lower lows this summer. That abrupt rise and fall was largely attributed to energy prices. In case you haven’t been reading my reports lately , energy prices have been on the climb, so we should not be surprised if headline (meaning not-core) closes the gap to core inflation a bit. However, even if you just look at core inflation (the blue line), you can see that, though it is somewhat higher, it is still trending down smoothly. That is a good indicator that those “methods” mentioned above are, indeed working. This morning we will get more information on how close we may be to the end of that methods book. I don’t know about you, but I am ready for the wet towel.

WHAT’S BURNING IN THE PREMARKET

Nike Inc (NKE) shares are higher by +9.49% after it announced a +26% EPS beat in the last quarter. The company further announced that its recent inventory surplus has eased, and the company maintained its guidance. Dividend yield: 1.51%. Potential average analyst target upside: +36.5%.

Ball Corp (BALL) shares are higher by +2.55% in the premarket after Jeffries upgraded the stock to a BUY rating citing improving cash flows for the soda can maker. In the past 30 days, 25% of analysts have modified their targets: 1 up, 3 down, 11 unchanged, and 1 dropped coverage. Dividend yield: 1.66%. Potential average analyst target upside: +24.4%.

YESTERDAY’S MARKETS

NEXT UP

• Personal Income (August) is expected to have climbed by +0.4% after gaining +0.2% in July.
• Personal Spending (August) may have increased by +0.5% after growing by +0.8% in the prior period. The Fed would like this to be on the lower side .
• PCE Deflator (August) is expected to have gained by +0.5%, slightly faster than July’s +0.2% gain.
• MNI Chicago PMI (Sept) may have slipped to 47.6 from 48.8.
• New York Fed President John Williams will speak today.
• Next week: we will get PMIs, Factory Orders, Durable Goods Orders, JOLTS Job Openings, and the monthly employment numbers (another Fed favorite). Check back in on Monday for calendars and details.