Stocks had a mixed close on Friday as traders buckled up for earnings season. Producer Prices underscored the continued pullback in inflation.
Just a matter of time. Last Friday brought some interesting news on the inflation front. Month over month headline Producer Price Index / PPI showed deflation for the month. Remember, disinflation is a slow down of inflation, meaning that prices are still going up but at a slower pace. A distant cousin, deflation, is when prices are actually falling. As you might guess, the latter is rarer than the former. Rare or not, we will take either enroute back to normal. Now that we are mincing words, do you know the difference between Producer prices and Consumer prices?
Consumer prices seems like an obvious place to start. The name sort of gives it away. Consumer prices are what you and I – consumers – pay when we lay down a wad of cash on the counter or swipe a credit card… or tap our phones. CPI is a gauge of that, and it is the most closely watched, because at the end of the day, it is consumer health which most directly affects the economy. I won’t get into core versus headline, but just note the CPI is what most folks watch as a gauge of inflation. I also won’t get into why the Fed likes to watch the PCE Deflator as an inflation gauge. Though each has its own nuanced approach to measuring inflation, they both do a good enough job at telling us where things are for prices, as well as where things might be headed for interest rates.
Moving on to Producer prices, that one gets a bit trickier. I will make it simple for you. Producer prices are generally the cost of goods and services as they leave the factory. I know that services are not produced in a factory, so let’s just call that the cost of goods and services before they are mashed together and marked up to be sold at retail… to you and me. The PPI tracks raw materials, intermediate goods, and finished goods. When it comes to services, those can be things like transportation costs, warehousing costs, healthcare costs, etc. All that said, the Producer Price Index / PPI is considered a leading indicator of Consumer Price Index / CPI.
Why? Because rational companies raise prices to consumers as their costs go up. Obviously, right? But do rational companies also lower prices when their costs go down. Please refrain from using expletives, this is a PG-rated market note. I will keep it clean and say eventually, yes. As costs go down and margins expand, businesses have more room to offer discounts, and even lower prices to retain market share, etc. At some point, consumers will simply not accept high inflation, and we have witnessed that in the housing market and the auto industry as sales have suffered in the wake of high inflation. Home builders and auto manufacturers will, at some point be forced to refrain from crazy price growth, and with cost inflation easing, they will have more room and are most likely to follow suit. I know that I am flip-flopping between actual prices and price changes, but I am trying to keep it simple. The fact is that PPI is indeed a good indicator of where CPI may be headed. Wait, can’t we just look at a chart which includes both? I thought you would never ask. Check it out and follow me to the quick conclusion.
On this chart, it should be clear that CPI follows PPI. You can see how producer prices initially slowed in 2020 and how consumer prices followed. Of course, what happened in 2021 and 2022 is what concerns us the most. We can see how PPI jumped and ultimately how CPI followed. PPI clearly peaked in March 2022 and has been steadily slowing. Consumer price growth ultimately followed suit, starting its declines in March of 2023, a year later. What should also be clear on this chart is the massive amount of white space currently between the CPI and PPI. Someone is benefiting from that gap, and as you might guess, it is not the consumer. That being said, if it follows the 12-month lag we witnessed from March 2022 through March 2023, AND if PPI continues to decline and even stay at these current levels, we can project that consumer inflation may return to normal by the end of the year… or at least close to it. Juts look at the left-hand side of the chart to see what “normal” inflation looked like before the pandemic. Hopefully companies will get the memo.
WHAT’S INFLATING OR DEFLATING IN THE STOCK MARKET THIS MORNING
The Goldman Sach Group Inc (GS) shares are higher by +1.68% in the premarket after the company announced that it beat EPS and Revenues by +32.52% and +4.39% respectively. Hidden in the announcement is that it missed on FICC sales and trading. Though it is consistent with rival Morgan Stanley (MS) which had mixed results and is trading higher by +1.47% in the premarket. Though they are rivals and the same sub-industry group, Morgan Stanley has a larger presence in wealth management, while Goldman Sachs is more of a traditional investment bank… at the moment. Dividend yield: 2.91%. Potential average analyst target upside: +6.9%.
Advanced Micro Devices Inc (AMD) shares are higher by +1.26% in the premarket after Barclays raised its price target to $200 and Susquehanna raised its price target to $170. In the last month 13 analysts have raised their targets, while none have lowered them. AMD is set to announce its Q4 earnings at the end of the month. Potential average analyst target upside: -1.4%. WHY IS THIS NEGATIVE? Because the stock is currently trading above the median of analyst price targets. While this may be viewed as the stock being expensive, it does not mean that it will cease to climb.
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