Stocks broke their winning streak yesterday in response to sharply rising bond yields. No, inflation has not gone away yet, even though you are tired of talking about it.
Can you feel it? I am going to do my level best to make this note as simple as possible. Yesterday, the Consumer Price Index / CPI came in slightly stronger than economists were expecting, but still lower than the prior month’s reading. Initially, stocks shrugged off the news, but 10-year Treasury Note yields ratcheted higher and stock traders ultimately succumbed to the pressure, causing stocks to slump. In reality, the report was not that terrible as the so-called core numbers, which the Fed relies on, came in as expected. I would posit a strong argument that yesterday’s decline in treasuries was enhanced by sellers looking to take advantage of bonds’ recent run-up in the wake of the terrorist attacks in Israel. Regardless, let’s dive into inflation… briefly… I am trying. Just take a quick look at the following chart of consumer inflation and keep reading.
On this CPI chart you can see the peak last year and its decline thereafter. What should be clear on this chart is how the blue bars (food) caused challenges in late 2021 and 2022 but have since receded. Similarly, the purple bars (commodities) bloated in 2021/2022, but have since receded as well. What remains are the gold bars (services) which expanded in 2021 and have not seemed to give up any ground since. That, my friends, is the real problem. Energy (red bars) has indeed been a driver, but, as you can see, it actually dis-inflated earlier this year but has since normalized, dragging on progress: yes, but hardly the main culprit.
I downloaded the full release from the Bureau of Labor Statistics and did a simple sort of all line items and here are some of the interesting items that showed up. Topping the list of inflation were Frozen Non carbonated Juices & Drinks, Motor Vehicle Insurance, Admission to Sporting Events, Motor Vehicle Maintenance and Repair, White Bread, Veterinarian Services, and Shelter. Those all grew annually at +21.3%, +18.9,+14.9%, +10.2%, +7.8%, +7.5%, and +7.2%, respectively. Of those 7 items listed, I can find 3, possibly 4 that are basic requirements. You can certainly do without expensive frozen juices and sporting events, and if you are still buying white bread… well, that’s on you . You want to know about the biggest declines since last year? Of course, you do, because you are an optimist, like me. Health Insurance, Utility (Piped) Gas Service, Eggs, Televisions, and Car and Truck Rental declined by -37.3%, -19.9%, -14.5%, -10.3%, and -8.6%. Ok, that should be good news because all those items are necessities.
Now, it is important to note a few key things here. First, when coming up with the ultimate CPI figure, not all of these items are equally weighted. Though you may disagree, the Government thinks that shelter is more important than, say televisions. For example, shelter is weighted by 34% and food 13.3%, while Televisions only get a weighting of 0.13%. Therefore, if you are a Fed governor, you are concerned that shelter continues to top the list of inflation, and if you, like me, have kids living in New York City, you too are concerned with that number.
I know that all these charts and figures are confusing and somewhat frustrating, but it is important to walk away with the key themes. Those are that inflation is declining slowly but not where it needs to be yet. Shelter, a heavily weighted item, is still a chart-topper in inflation. Similarly, auto-related expenses remain on the top of the list for inflation, while thankfully, some food items, health insurance, and utility gas have dis-inflated over the past year. See, that was not too bad. Now you can have a nice Martini… but you should know that Alcoholic Beverages and Olives/Pickles/Relishes each gained +4.2% in the past year, but that would be a bargain compared to what you would pay for the same drink at a bar, as Distilled Spirits Away From Home grew by +7.8%.Maybe stick to water… it’s better for you anyway.
WHAT’S SHAKIN’ THIS MORNIN’
Wells Fargo & Co (WFC) shares are higher by +1.86% in the premarket after the company announced that it beat on EPS and Revenues by +10.93% and +3.48%. Net interest income also topped analysts’ estimates. In the past month 25% of analysts changed their price targets 2 up, 5 down, 19 unchanged, and 1 dropped. Dividend yield: 3.52%. Potential average analyst target upside: +25.7%.
JPMorgan Chase (JPM) shared are higher by +0.64% on high volume in the premarket after it announced that it beat on EPS and Revenues. The company raised its full-year forecast on net interest income and CIB markets. CEO Dimon remarked that consumers remain healthy, but they are spending down their excess cash buffers. Dividend yield: 3.52%. Potential average analyst target upside: +25.7%.
YESTERDAY’S MARKETS
NEXT UP