Another Favorable Inflation Result Propels Stocks: July 13, 2023 

This morning’s Producer Price Index is a sequel to yesterday’s Consumer Price Index showing that inflation is continuing to weaken, which is sustaining an already strong equity rally. To expand the theme of favorable economic news into a trinity and provide additional support to investor sentiment, this morning’s unemployment claims data imply that the Federal Reserve can potentially continue to tighten monetary policy without significantly weakening the labor market.

This morning’s Bureau of Labor Statistics PPI showed that prices for final demand increased only 0.1% year-over-year (y/y) and 0.1% month-over-month (m/m) in June. The y/y figure was the smallest increase since 2020 while the m/m result was a contrast to the revised 0.4% decline in May. Both June results were better than expected with the analyst consensus pointing to 0.4% y/y and 0.2% m/m numbers. Throughout the current monetary tightening cycle, core inflation, which excludes food and energy, has been particularly stubborn. However, in June, the core PPI increased 0.1%, better than the 0.2% expected.

For the headline number, the increase was attributable to services climbing 0.2%, matching May’s increase. Within the services category, deposit services prices climbed 5.4%. Other categories with price gains included food and alcohol retailing, traveler accommodation services, insurance, hospital inpatient care, and airline passenger services. Transportation and warehousing prices declined 2.1%, meanwhile. Prices for goods were flat m/m, as lower food costs offset higher energy expenses. 

While inflation is moderating, labor market strength is persisting, with initial unemployment claims falling to 237,000 during last week’s reporting period which ended on July 8. Initial claims came in lower than the consensus expectation, which was awaiting a number closer to 250,000. Last week’s figure achieved progress from the previous period, in which 249,000 initial unemployment claims were filed. Continuing claims for the week ended July 1 rose, however, with 1.729 million claims exceeding analyst estimates projecting 1.723 million. Continuing claims rose from 1.718 million during the previous reporting period.

On the earnings front, Delta Airlines predicts that passenger volumes will continue rocketing higher on the back of a resilient consumer. The company reported this morning and upgraded its guidance, explaining that it believes that already strong demand for international travel and business will continue growing in coming months. After announcing plans in May to hire 4,000 flight attendants and other employees to handle an anticipated surge in summer traveling, Delta produced adjusted second-quarter earnings per share that climbed 86% y/y.

PepsiCo was less optimistic, meanwhile, explaining that inflation has caused consumers to behave more cautiously. The company said sales volume not including prices dropped 3% for foods and 1% for beverages, in part because the company raised its prices. PepsiCo CEO Ramon Laguarta says inflation has caused every segment of consumers to make adjustments and sales have partially shifted to dollar stores and discount warehouse clubs. 

In similar fashion as yesterday, markets are reacting positively with major equity indices at their highest levels in over a year and bond yields moving significantly lower. The S&P 500 Index is up 0.6% to its highest level since April of last year and attempting to conquer 4,500, reaching an intraday high of 4,500.45. Technology has led today’s push, with the Nasdaq Composite Index celebrating lower rates and up 1% to its highest level since last April as well. Participation is mixed unlike yesterday, however, with most sectors higher but real estate, utilities, consumer staples and industrials lower. Bond yields are declining across the curve, with the 2- and 10-year maturities down 7 and 4 basis points (bps) to 4.67% and 3.82%. Lower yields have pushed the Dollar Index below an important support level of 100 this morning but it has pared some losses since and is now down 52 bps to 100.1. Crude oil is benefitting from the animal spirits propelled by dwindling recession risk and lower rates with WTI up 1.2% to $76.90 to its highest level since April of this year. Prices were also supported by a shutdown at El Feel oil field in Libya’s Murquz Basin which produces 70,000 barrels-per-day.

As earnings seasons progresses, I’m expecting to see more mixed messages concerning consumer demand, with some companies experiencing strong sales volumes while others depict a story of affordability pressures weighing on revenues and margins. While this week’s economic data has supported higher odds of a soft landing, it’ll be interesting to see how the consumer evolves over the next few months. With inflationary trends softening and some companies reporting tough choices being made amidst constrained budgets, earnings and economic data are going to provide further insight to the degree in which consumer spending is weighing on inflation. Consumers and labor markets remaining strong amidst increased efficiencies at corporates while inflation drifts lower is the ideal scenario that the latest data depict. Retail sales on July 18 will be an interesting report that will confirm or deny recent trends, with expectations high at 0.5% m/m growth.

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