Inflation may be slowing, but too slowly

Stocks had a mixed close yesterday, in absence of data, ahead of today’s big number. The standard deviation of opinions on the Feds next moves is widening – that means opinions are getting more extreme in all directions .

What needs to be done. It is inflation numbers day! Obviously, any official release on the state of US inflation will be closely watched by investors… and the parade-busting Fed. There is a general sense in the market that inflation is getting back to normal, but too slowly to open the best Champagne in the cellar. The Consumer Price Index / CPI is due out at 08:30 Wall Street Time and it is expected to remain level, year-over-year, from last month, and still higher than the Fed’s well-publicized target. Most economists, however, like to look at the month-over-month change in CPI to get better granularity, and a deeper sense of what is driving the yearly gains. Ahead of that, I thought that I would give you some context on the number. Of course, it starts with a chart. I tried to make this one as simple as possible. Take a look and continue for an explanation.

This chart shows monthly inflation (CPI) figures from prior to the pandemic through current. The red-dashed line is an approximate average of monthly inflation in the period prior to the pandemic, the green-dashed line is an approximate average of monthly inflation from late 2020 through the summer of 2022, and the blue-dashed line is an approximate average of monthly inflation in the period since. You can clearly see the rise from the red-dashed line to the green-dashed line. That, my friends, is what caused the Fed to take up arms against your stock portfolio. But there is some good news. The Fed has made progress, which can be clearly seen by observing the blue-dashed line below the green-dashed line. HOWEVER, and I know that you already know this, we are still not quite back to the red-dashed line yet.

I drew that red-dashed line to give you context. It is not, in fact, the mathematical average of those points, but you get the picture. It just so happens that the red-dashed line snapped in at +0.1%. And it just so happens that economists are expecting today’s month-over-month CPI to come in at +0.1%. If we look back to 2020, we can see that monthly inflation only fell below the line twice and almost touched it once. If the number comes in as expected, that would surely be progress, but if you know anything about averages, you know that it would take some prints below the red-dashed line to get the average back to that point. If you want to know what that looks like, graphically… just look back at the left-hand side of the chart… from before the pandemic… when inflation was… considered normal. The bottom line is that if today’s numbers come in as expected it would certainly represent progress, but it is a clear sign that we are still not there yet. Wait, isn’t that what the Fed has been saying? Ok, while this may not warrant that expensive Champagne yet, perhaps some beer served in a champagne coupe glass would be more apropos. Keep the good stuff on ice for now.

WHAT’S BUBBLING OVER IN THE PREMARKET

The Mosaic Co (MOS) shares are higher by +2.14% after the company was upgraded to OVERWEIGHT from Barclays. The company announced an EPS miss last week. Including this latest update, 23.8% of analysts that cover the stock rate it the equivalent of a BUY, with 71.45% of analysts rating it a HOLD, and the balance (4.8%), a SELL. Dividend yield: 2.31%. Potential average analyst target upside: +16.3%.

The Home Depot (HD) shares are higher by +1.01% in the premarket after the company announced that it beat EPS and Revenue estimates by +1.29% and +0.3% respectively. The company also trimmed full-year sales guidance. In the past 30 days, 35% of analysts have lowered their target prices, 1 up, 11 down, and 22 unchanged. Dividend yield: 2.90%. Potential average analyst target upside: +16.1%.

YESTERDAY’S MARKETS

NEXT UP

• Consumer Price Index / CPI (October) is expected to have climbed by +0.1% for the month after ascending by +0.4% in September.
• Fed speakers today: Williams, Jefferson, Barkin, Barr, Mester, and Goolsbee.