Stocks rallied yesterday in response to easing treasury yields. Global unrest has driven Treasuries, as a safe haven, higher, pushing yields down.
Is it me, or… Ok, we are now nearing the core. Conjecture all you like. Read as many tealeaves as you like. You can even seek wisdom from a Rorschach ink splash. This whole show is about inflation, the Fed, and interest rates. Sure, there are all sorts of other things that are swirling around, some absolutely abhorrent, but the fate of your portfolio, at least in the near term, is in the hands of inflation. The two prominent economic series releases on inflation are the Bureau of Labor Statistics’ PPI/CPI, and the Bureau of Economic Analysis’ PCE Deflator. Most of the world watches CPI while economists and the Fed like to watch the PCE Deflator. While both have their own special nuances, WHICH I HAVE DESCRIBED MANY TIMES IN THE PAST, it doesn’t really matter which one you look at, if you are searching for a trend. As it turns out, we will get inflation readings from last month tomorrow in the CPI release. PCE comes later this month, so let’s focus on the here and almost-now.
There are all sorts of things that drive inflation. The easiest to understand driver is called demand pull inflation, which is essentially caused by a high level of consumption and demand which pushes prices higher. We all get that… AND we get that the Fed is trying to cause us to stop doing it, right? But wait. Prices don’t just go up by themselves. Somebody has to make the decision to raise a price, send an email, call a distributor, and create an invoice. In turn, a retailer must receive that invoice, send an email, and enter a HIGHER price into a system. All this before you pick that item up off the shelf and place it into your cart. Stop and think about what you just read. You are only the LAST stop of that chain of events which caused prices to rise. You see, it is firms that raise prices. That is called supply push inflation.
To be clear, producers and retailers don’t want to raise prices out of fear of losing customers. However, if the firm’s costs are going up and profit margins shrink, they are often left with no choice. We all know that the stop-start-stop-stop-start-start-start-START of the pandemic threw the global supply chain into an epic meltdown causing producer prices to skyrocket. This certainly gave suppliers an incentive to raise prices to maintain their margins. Many of them even said how reluctant they were to raise prices but were left with no choice . To get to my point, we all know that suppliers were faced with rising costs, which was a big driver of consumer inflation. Today, yes today, we will get a snapshot of Producer Prices from September. This release is considered a leading inflation indicator, and you know why if you have been reading with both eyes up until now. We don’t have to delve too deeply into it, so just step back and look at this chart of Produce Price Index / PPI and then follow me to the conclusion.
Can you see it? Producer prices skyrocketed in 2021 reaching a peak in Q1 of 2022 and then fell almost as fast as they rose to level out this past summer. And to what extent did they level out? Pretty much to where they were in 2019, before the pandemic. Are you thinking what I hope you are thinking? Someone is making a lot of money at the expense of consumers. I won’t bore you with another chart this morning, because I have, in the past shown you charts of how gross margins continued to grow throughout the pandemic. At the top of this discussion, I told you how suppliers were faced with rising costs forcing them to raise prices to consumers, so now that they are clearly near normal, why have they not given us consumers relief… and THE FED ITS LONG OVERDUE summer vacation? Well, unfortunately, that is the other side of the equation. As long as consumers are willing to pay these prices, then firms, at least rational ones, will keep them high and continue to raise them. This is where the Fed comes in, hoping to goad consumers into backing off by making THEIR (the consumers’ costs) go higher. The bottom line is that suppliers are clearly not faced with the same challenges as they were back in 2021 and 2022, but they continue to keep prices high and, on the rise, because consumers are accepting it. Will that continue? We will find that out tomorrow when we get Consumer Price Index / CPI. Stay tuned.
WHAT’S RISING AND sinking IN THE PREMARKET
DaVita Inc (DVA) shares are lower by -15.97% in the premarket in response to a report by Novo Nordisk that it was stopping a trial on Ozempic’s prevention of renal failure because the drug proved to be effective. Good news for folks with diabetes and kidney disease, and bad for folks who provide dialysis. DaVita joins snack and beverage companies whose market caps lost lots of weight in past weeks due to the popularity of Ozempic and its competing products.Potential average analyst target upside: +23.1%.
Eli Lilly & Co (LLY) shares are higher by +2.73% on the same Novo Nordisk news that caused DaVita to decline (). Lilly has a competing diabetes/weight loss medication Mounjaro. Dividend yield: 0.78%. Potential average analyst target upside: +0.4%.
YESTERDAY’S MARKETS
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