Chart Advisor: Inflation Concerns Intensify

Wednesday, 10th November, 2021

1/ Stocks slide and bond yields climb 

2/ Consumer spending driving all sectors higher 

3/ Dash results inspire investors 

4/ The bottom line

1/ Stocks Slide and Bond Yields Climb

Major averages pulled back sharply after higher-than-expected inflation readings pushed bond yields higher. The consumer price index (CPI) jumped 6.2% from a year ago, the largest annual increase since 1990, exceeding the 5.9% economists predicted. Core CPI, which excludes volatile food and energy prices from its calculations, came in at 0.6%, higher than the predicted 0.4%. 

The numbers had a wide range of effects on the market. The 10-year Treasury bond yield (TNX) rose by roughly 10 basis points, putting pressure on high debt growth sectors such as technology stocks and small-caps.  

The chart below compares the recent performance of State Street’s S&P 500 Index (SPY) and Invesco’s Nasdaq 100 ETF (QQQ) with CBOE’s 30 Year Treasury Bond Yield (TYX) and Treasury Yield 5 Years (FVX). Chart watchers can recognize that while SPY and QQQ have been on an upward trend since October, TYX has been steadily declining, while FVX has been on the rise since August.  

The relative upward trend in FVX could be because investors are anticipating interest rate hikes in the near term as the Federal Reserve is pushed to act to combat rising inflation.  

2/ Consumer Spending Driving All Sectors Higher 

Although markets appear to be facing an uphill battle today, the overall upward trend in all sectors that started in September continues. The chart below compares the recent performance of SPY with each of State Street’s Sector ETFs. The normally stalwart Technology Sector (XLK), which, considering its heavy weighting, has been largely responsible for driving SPY upward.  

However, with recent rallies in the prices of oil, natural gas, and uranium—coupled with the passage of a large U.S. infrastructure bill—the Energy Sector (XLE) has led all sectors. Despite ongoing inflation concerns, Consumer Discretionary (XLY) stocks have outperformed, which could mean that consumers are not so off put by inflation that they aren’t willing to spend.  

This is in stark contrast to the performance of both Consumer Staples (XLP) and Utilities (XLU), sectors often considered stronger performers in inflationary environments. Industrials (XLI) and Materials (XLB) have underperformed the market, despite receiving recent boosts from the passage of the infrastructure spending bill.  

3/ Dash Results Inspire Investors 

Investors snapped up shares of DoorDash (DASH) following the company’s fiscal third-quarter earnings announcement. DASH reported $0.30 in earnings per share (EPS) to go with $1.28 billion in revenue, beating analysts’ expectations of $0.26 in EPS and $1.18 billion in revenue. The company also announced it is acquiring Wolt, a food delivery platform that’s expanded into groceries and retail, to accelerate the company’s international growth. DASH shares surged 11% today. 

Option traders appear to be positioned for DASH to continue to rise in the near term. Recent trading volumes featured nearly 67,000 call options compared to 36,000 puts. This contrasts with DASH’s pre-earnings setup, as the open interest featured over 88,000 puts compared to 75,000 calls.  

This could mean that prior to earnings, most option traders were placing bets for DASH shares to fall. However, following the earnings report, the sentiment toward the company has changed to bullish from bearish. The chart below illustrates how DASH shares have risen to an above average range, trading above the stock’s 20-day moving average. 

4/ The Bottom Line 

Inflation headlines sparked a round of selling from investors. Almost all sectors declined, but U.S. Treasury note yields were up, suggesting that investors expect the Fed to raise rates before too long.     

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Originally posted on 10th November, 2021