Target exceeds targets set by analysts

Stocks jumped yesterday in response to lower-than-expected inflation numbers. And you know what that means… um, do you?

Bye… for now. Imagine this scene. The kids or grandkids are fast asleep, and your spouse is hiding out, doing nothing, somewhere else in the house. You are tidying up and getting ready for bed, and then you see it in the corner of your eye. It is Halloween, and you see a big pile of candy on the table. Not that you are looking closely , you do notice one of your favorites sitting slightly ajar on top of the massive pile. You double take, and then you notice that there is more than one. You feign indifference, because “you don’t even like candy.” But then your brain takes over and you start to think, “would anyone even notice if I ate that one candy?” You grab it and quietly tear open the wrapper. You check to see if the coast is clear. It is, so you raise it to your mouth and take a bite… and… pure bliss rushes over your body. Why? Because the last time you tasted this candy, or anything like it was, well, last Halloween!

That is exactly the feeling experienced by stock AND bond investors yesterday morning at around 08:31 Wall Street Time, when the CPI inflation number came in softer-than-expected. There was a palpable tension built up leading to the number since stocks caught a bid earlier this month (“caught a bid” is insider Wall Street talk for trading higher). And just like that, the tension was lifted. So how does that lower inflation number translate into the markets going forward? To help you understand quickly, and with clarity, I have inserted two charts of Fed Funds futures implied interest rates charts, one from last month and one from this morning. Just quickly have a look and then keep reading for an explanation.

The first chart, from this morning, shows that futures traders expect no more rate hikes. In fact, the probability for rate cuts start to creep in starting in January, but with very low probability (~4%). By May of next year, that rate-cut probability goes to 53%, which, on Wall Street, is a good chance. You can see by the second chart, that exactly a month ago, futures traders were predicting at least another +25 basis-point hike with good probabilities of cuts not coming until September of next year. So, it is safe to say that “the market” has updated its view on the future path of rate hikes.

To be clear, it is important to recognize that these current expectations can change rapidly based on numbers yet to be released. Numbers like today’s Retail Sales and Producer Price Index number. Next week, we will get FOMC meeting minutes, which always has a chance to spoil a party. The week after will bring us another estimation of GDP and the all-hallowed-by-the-Fed PCE Deflator inflation indicator. What I am trying to say is that we are not yet out of the woods, but yesterday’s number is certainly noteworthy. Going back to that candy. I know that I caught you doing that! I also know that the second bite is not as good as the first one. I know this because I did it, myself, just a few weeks ago.

WHAT’S GOING ON IN THE MARKET THIS MORNING

Target Corp (TGT) shares are higher by +14.81% in the premarket after it announce that it exceeded EPS and Revenue…targets, by +42.73% and +0.52% respectively. The company expects the current quarter to be similar with guidance exceeding estimates, though in a wide range. In the last 30-days, 31% of analysts changed their price targets, 1 up, 10 down, and 24 unchanged. Forward PE of 12.9x is lower than the 21.1x of its peer group. Dividend yield: 3.97%. Potential average analyst target upside: +30.7%.

The TJX Cos Inc (TJX) shares are lower by -1.06% after the company announced that it beat EPS and Revenue estimates last quarter. The company also boosted its full-year comparable sales growth figures. Current quarter guidance came in slightly lower than analysts’ expectations, but the company attributes the miss to an accounting anomaly which has something to do with an extra week. The company reported increased retail traffic across all divisions. Dividend yield: 1.43%. Potential average analyst target upside: +7.2%.

YESTERDAY’S MARKETS

NEXT UP

• Retail Sales (Oct) is expected to have slipped by -0.3% after climbing by +0.7% in September. This will be closely watched.
• Producer Price Index / PPI (Oct) may have slowed to +1.9% from last month’s +2.2% read. The expected number is in the range figures that persisted prior to the pandemic and inflation. This could be an interesting leading indicator.
• Notable earnings after the closing bell: Cisco Systems and Palo Alto Networks.
• Don’t forget to have a look at my attached daily chartbook to see how the markets have changed recently. Remember, I hand craft these every day… so you don’t have to .