Hot CPI Stalls Equity Bulls: Oct. 12, 2023

Markets are buckling this morning as September’s Consumer Price Index reflects persistent inflationary pressures. Labor intensive services remained problematic, while Unemployment Claims, which were released at the same time, reflect a tight labor market with a low level of layoffs. Much has changed since yesterday’s optimism regarding monetary policy, with market players now assigning coinflip odds to one more hike from the Federal Reserve by year-end.

CPI Comes in Hot

Consumer prices rose 0.4% in September, hotter than the consensus estimate of 0.3% but slower than August’s 0.6% pace. Core prices which exclude volatile food and energy components and are considered a better guide of the longer-term trajectory of inflation rose 0.3%, in-line with projections and unchanged from the previous month. Overall prices rose 3.7% year-over-year (y/y), higher than the expected 3.6% and unchanged from the previous period. Core prices rose 4.1% y/y, exactly as anticipated and slower than August’s 4.3%.

Price pressures were led by fuel oils, gasoline, electricity, transportation services, shelter and food at dining establishments with month-over-month gains of 8.5%, 2.1%, 1.3%, 0.7%, 0.6% and 0.4%. The new automobile, medical care services and food at grocery store segments saw prices increase at slower speeds. Used automobiles and trucks, heating services, apparel and medical care commodities did provide relief, however, with prices declining 2.5%, 1.9%, 0.8% and 0.3%, respectively.

The Labor Market Keeps Growing

On the labor market front, initial unemployment claims came in at 209,000 for the week ended Oct 7. The figure arrived a whisker below the 210,000 projection and unchanged from the prior week. Continuing claims did rise modestly to 1.702 million from 1.672 million for the week ended September 30, the third consecutive weekly increase and implying that it’s taking laid off workers a little bit longer to replace their jobs elsewhere. The median forecast expected a slower increase to 1.68 million.

The UAW Surprise

In other labor market news, the United Auto Workers (UAW) initiated a surprise strike at Ford’s SUV and pickup truck factory in Louisville, Kentucky last night. The location employs 8,700 UAW members and is the first time during these disputes, which began on September 15, that a strike occurred without a previously announced deadline. UAW President Shawn Fain implied that his workers deserve a fair compensation agreement and a failure to reach one will result in further work stoppages. Ford states that they have negotiated in good faith and have made terrific counteroffers to the UAW members. The stoppage at the plant, which manufactures some of the most profitable vehicles for Ford like the F-250 through F-550 super duty trucks and Expedition and Navigator SUVs, negatively affects about a dozen other Ford facilities and suppliers that employ more than 100,000 people. Yesterday’s expansion increases the tally of striking UAW members to 33,700, or roughly a quarter of all members.

House Speaker Scalise?

Meanwhile in Washington, the House of Representatives inches closer to having a Speaker. The Republican conference nominated Representative Steve Scalise from Louisiana’s first congressional district with 113 out of 212 votes as a few members of the GOP refused to vote. Reports suggest that Scalise is scrambling around the chamber to secure more Republican support, because he is likely to fall short of the 217 vote requirement. With the Republicans holding a narrow majority in the House comprised of 221 members, Scalise needs almost all of the Reps in his party to vote for him as he navigates an uncertain path. As Scalise’s Speaker allowance only affords four members of his party to not vote for him, the day and time of the vote is unclear but may occur as early as tomorrow.

Potential Iranian Sanctions

Over in the Middle East, President Biden warns Iran to be careful as he considers oil sanctions in response to Tehran’s support of Hamas’s attack on Israel. The sanctions would harm the nation’s revenues while complicating an already tight supply story for the commodity. An escalation in tensions will likely push up the price of oil, which would be politically damaging as a presidential election approaches in roughly 13 months.

Services and Goods Demand Diverge

On the earnings front, loftier jet fuel and labor costs did lead to Delta Airlines cutting its free cash flow estimate for the year to $2 billion from $3 billion a few months ago. Still, the airliner beat profit estimates of $1.94 per share for the third quarter, with actual earnings per share (EPS) coming in at $2.06 or $1.11 billion. The company reported solid domestic demand, outstanding international demand and strong holiday bookings as CEO Ed Bastian expressed confidence raising prices without sacrificing bookings if operating costs continue climbing.

Walgreens expressed higher levels of inventory losses, as shoplifting trends plague the retail industry. The company missed estimates due to deteriorating demand for its Covid vaccines and tests and softer consumer spending overall. While the retail pharmacy chain turns its focus to cost cutting, its fiscal fourth quarter EPS of $0.67 and 2024 guidance between $3.20 and $3.50 fell short of Wall Street expectations calling for $0.69 and $3.70. Meanwhile, consumers balked at loftier menu prices and delivery charges at fast food pizza provider, Domino’s. The company reported a revenue fall of 3.9% to $1.03 billion while same-store U.S. sales fell 0.6% during its quarter ended September 10. Guidance was a bit lighter than expectations on softer demand amidst higher input prices.

Yields Surge and Equities Buckle

Markets are weaker today with stocks generally lower and bond yields significantly higher. The Nasdaq Composite is the only major Index gaining in today’s session, it’s up 0.4% while the small-cap Russell 2000, Dow Jones Industrial and S&P 500 indices are down 1.5%, 0.3% and 0.1%. Sectoral breadth is awful, suggesting that the recent bull run may have run its course. All sectors all lower except for technology and energy which are up 0.8% and 0.4%. Bond yields and the dollar are surging, with investors reexamining their Fed tightening expectations. Yields on the 2- and 10-year Treasury maturities are up 9 basis points (bps) each to 5.08% and 4.65%. The Dollar Index is up 62 bps to 106.38 as the greenback gains against the euro, pound sterling, franc, yen, yuan and Canadian and Aussie dollars. WTI crude oil is up 41 cents or 0.5% to $83.65 per barrel as traders weigh geopolitical risks and possible Iranian sanctions against this morning’s U.S. Energy Information Administration report pointing to rising U.S. inventories.

October Inflation Looking Better

Today’s CPI points to price pressures that continue to warrant restrictive monetary policy. The resulting jumps in bond yields across the curve are effectively stalling equity bulls who depend on Fed dovishness for two primary reasons. Reason one is that monetary policy accommodation will propel company revenues by taking pressure off of consumer spending and overall interest expenses. Reason two is that lower rates will make equity valuation metrics look much more attractive relative to fixed income alternatives. The great news for the bulls, however, is that next month’s headline CPI is tracking at 0.2% on lower energy costs. The bad news, on the other hand, is that the core figure is still running at a 0.3% clip on a tight labor market and persistent services spending.

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