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Mag7 Falters on CPI Deflation: July 11, 2024

Mag7 Falters on CPI Deflation: July 11, 2024

Posted July 11, 2024 at 11:00 am
Jose Torres
IBKR Macroeconomics

Bond yields are plunging today as rate cut expectations soar following this morning’s CPI release, which depicted the first month of deflation since July 2022. Market participants have dialed up the odds of the Fed dishing out its first reduction of the cycle to 85% in September. Furthermore, investors are expecting one to two more 25-bp fed fund trims before yearend. Meanwhile, the reaction in equities is shocking, as investors clamor for small caps while ditching the popular tech trade.

Wallets Give up Less at Filling Stations

Consumer prices fell in June—the first time in 23 months—thanks to weaker energy costs and discounting across several categories. This morning’s Consumer Price Index (CPI) reflected a 0.1% month-over-month (m/m) decrease and a 3.0% year-over-year (y/y) increase, much lighter than expectations of 0.1% and 3.1% upticks, respectively, and May’s 0% m/m and 3.3% y/y results. The core CPI, which excludes food and energy due to their volatile characteristics, also decelerated but remained positive, growing 0.1% m/m and 3.3% y/y, slower than median estimates of 0.2% and 3.4%, which would’ve been unchanged from the prior period.


Last month’s deflation was led by gasoline, which experienced a 3.7% price drop. Other decliners and the rate of their deflation were as follows:

  • Used automobiles, 1.5%
  • Transportation services, 0.5%
  • New cars, 0.2%
  • Energy services (electricity and heating), 0.1%

Meanwhile, other categories saw charges rise modestly, with dining establishments leading, posting a 0.4% gain. Other components and their increases included the following:

  • Medical care services and commodities, 0.2%
  • Shelter, 0.2%
  • Food at markets, 0.1%

Shelter, which comprises the largest portion of CPI, decelerated meaningfully from 0.4% in May and was responsible for the downside beat.

Labor Market Easing Pauses

The labor market bucked a recent loosening trend with unemployment claims declining during the past two weeks. Initial claims dropped to 222,000 during the seven-day period ended July 6, beneath the median projection of 236,000 and the previous period’s 239,000. Continuing claims fell to 1.852 million for the week ended June 29, lower than the anticipated 1.860 million and the preceding week’s 1.856 million. While the current economic cycle is certainly pointing to decelerating employment developments, the four-week moving averages shifted in bifurcated fashion. The four-week moving average for initial claims changed from 238,750 to 233,500 while continuing claims grew from 1.831 million to 1.840 million during their respective periods.

Unemployment Claims

Households Continue to Travel but Shop for Grocery Bargains

Consumer spending fell short of expectations for a handful of companies that reported this morning, but Delta Air Lines was an exception with record-high revenue for the recent quarter. In the industrial sector, WD-40 Company produced strong sales growth across its global markets. Those are a few takeaways from the following earnings reports:

  • PepsiCo beat second-quarter earnings estimates, but a decline in North American sales volume caused revenue to miss expectations. The company also said it expects full-year revenue to climb approximately 4% compared to a previous estimate for growth to exceed that rate. While international transactions grew, North American results were plagued by budget-conscious consumers cutting back on purchases, especially potato chips, and switching to lower-cost, private-label snacks. Volume unit sales on a y/y basis contracted 4% for the Frito-Lay unit and slightly less for the Pepsi beverage division despite improving quarter over quarter. Quaker Foods volume also weakened due to a recall from potential salmonella contamination. The company’s share price dropped approximately 5% in premarket trading.
  • Delta Air Lines bucked the challenge of weakening consumer spending during the second quarter as households continued splurging on travel and entertainment following the Covid-19 pandemic. The company’s shares nevertheless declined approximately 9% in early trading due to the company’s guidance of 4% current-quarter revenue-growth missing the analyst consensus expectation of 5.8%. Earnings guidance also fell short of expectations. In a CNBC interview, CEO Ed Bastian said business travel is continuing to increase and that lower fare discounting supported results. Delta’s earnings per share met expectations but revenue fell short of the analyst consensus forecast despite setting an all-time high record for the company and climbing 5.4% y/y.
  • Conagra Brands, which offers products under monikers such as Slim Jim, Hunts, Reddi-wip and Birds Eye, said lower consumption caused its sales unit volume to weaken 1.8%. Strategic investments during the second quarter also contributed to a less favorable price/mix. These factors caused revenue to miss expectations, with net sales declining 2.3%. The company also provided a disappointing profit outlook despite its second-quarter earnings exceeding the analyst consensus forecast. Its shares dropped approximately 3.5% this morning.
  • WD-40 reported revenue and earnings that beat analyst consensus estimates for its fiscal third quarter, causing its share price to jump approximately 12.5% in premarket trading. The company’s net revenues climbed 9% y/y. Sales led in the company’s Asia Pacific region, climbing 14%, while the Europe, India, Middle East and Africa territory generated a slightly lower increase. The Americas experienced a 6% gain. WD-40 maintained its previous guidance.

Magnificent Seven Fall Out of Favor

Markets are generally risk-off this session with investors trimming all of the magnificent seven while favoring other securities, namely small-caps, real estate, utilities, industrials and Treasurys. Leading major US equity benchmarks are the Russell 2000 and Dow Jones Industrials, which are gaining 3.3% and 0.3%. Meanwhile, the year-to-date winners, the Nasdaq Composite and S&P 500 indices, are down 1.7% and 0.8%. Sector breadth is positive despite the market darlings getting obliterated; seven out of eleven sectors are gaining on the session. Rates are tanking with the 2- and 10-year Treasury maturities changing hands at 4.49% and 4.17%, 13 and 12 basis points (bps) lower on the session. Softer borrowing costs, firmer Fed easing expectations and dimming economic prospects are weighing on the greenback, with the Dollar Index down 56 bps as the US currency loses ground relative to all of its major counterparts except for the yuan. It’s depreciating versus the euro, pound sterling, yen, and Aussie and Canadian dollars. Major commodities ex-copper are moving higher on a loftier demand outlook and risk-off positioning, with lumber, silver, gold and crude oil higher by 8.3%, 2.3%, 2% and 0.2%. Copper is lower by 1.6%. 

Pressure Mounts on Corporate Earnings

Today’s trading action and earnings results may be sparking a shifting tide in markets. The initial reaction to the CPI was firmly bullish until the formal opening took place at 9:30 am ET and the selling pressure began. Investors are concerned that deflation will pressure the top-line and compress margins, leading to a reversal in the recent rise in earnings expectations from $250 to $259. Against the backdrop, this year’s sharp lift in stock valuations will face a significant recalibration if profit growth isn’t in the nosebleeds. At this juncture, it appears that income projections are unreasonable and need to get cut. At these altitudes, though, will investors cheer rate reductions in light of deteriorating earnings prospects? I don’t think so.  

Visit Traders’ Academy to Learn More About the Consumer Price Index and Other Economic Indicators

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