By Zero Eight Thirty this morning on the East Coast, this morning note may be obsolete. That's when the next "huge" macroeconomic data-point that will impact the financial marketplace by virtue of potentially impacting the trajectory of US monetary policy splashes down.
We focus now on June CPI.
Of course, the Federal Reserve Bank and especially those currently sitting on the FOMC, or the "committee", focus on PCE inflation, which is an entirely different metric used for measuring consumer inflation. Everyone else, and I mean everyone, speaks of the CPI when they speak of inflation.
Consensus for this morning's June CPI release is for year over year growth of 8.8% and/or month over month growth of 1.1% at the headline. (Growth of 1.1% would be 13.2% annualized, but let's not even think about that.) June will become peak inflation for this cycle as May printed at 8.6% in the wake of April's 8.3% and March's 8.5%. Retail prices for gasoline have contracted in recent weeks.
As the household and business surveys that comprise the CPI are done earlier in the month, lower than peak prices for gasoline are not expected to be reflected in this series until July. Hence, the idea that June will present as the new series peak.
Core inflation, according to the CPI, has been cooling for months (This is not something often spoken of perhaps because it is indeed improving) and that trend is expected to continue. For June, consensus for the core is for year over year growth of 5.8%, which would be down from May's 6.0%, April's 6.2% and March's 6.5%. Readers will recall that going back to last year, this column had projected March 2022 as the month that the US economy would experience peak core inflation. There is an excellent chance that we will have been correct on that call once all is said and done. For the month over month core print this morning, consensus view is for 0.6% growth, which would be in-line with May.
Of course, as mentioned above, the Fed's focus is and always has been on PCE inflation, not CPI. PCE headline inflation printed at year over year growth of 6.3% for consecutive months in April and May, down a bit from the March peak of 6.6% for that series. Core PCE inflation peaked in February at y/y growth of 5.3%, and has ticked lower every month since until finally hitting the tape at growth of 4.7% in May.
The Fed targets core inflation of 2.0%, and is often scoffed at, as inflation has gotten so far out in front of the central bank. Fed officials are seen as out of touch when they speak on strategies meant to take on inflation while putting the US economy on recession's doorstep. Well, there is a big difference in trying to get inflation of 8.6% or 8.8% (headline CPI) under control and getting the inflation that the Fed is talking about (Core PCE of 4.7%) under control.
That said, the Atlanta Fed's GDPNow model will not make use of this CPI number. That model is still running at -1.2% (q/q, SAAR) for Q2 and you will not hear from Atlanta until this Friday when we see July data for Retail Sales, Industrial Production, and Capacity Utilization.
It's a Fake
The S&P 500 and Nasdaq Composite both took a nose dive off of the high board on Tuesday about 75 minutes prior to the closing bell. In fact, the entire equity marketplace did. Making the rounds across trading desks up and down Wall Street (the industry, not the actual street in NYC) was a forgery of today's CPI release designed to look like a leak from the Bureau of Labor Statistics. The fake had been circulating since lunchtime but had really started to gain traction in the afternoon. In the forgery, headline inflation was to supposedly hit the tape at 10.2% with core inflation at 8.4%, both far above and out of the range of consensus expectations for today's release.
This is where algorithms, while not creating a problem... certainly can pour fuel on a fire. Algorithms that impact price discovery operate at high speeds (microsecond execution because milliseconds are far too slow) while constantly scanning the internet and media for action provoking keywords. Here, someone used a fake release disguised as a leak from a government agency to move markets. Markets did indeed move only to start recovering some of the ground lost with about 20 minutes to go.
That would be because the BLS actually had to address the situation and tweet out that they were aware that a fake CPI release was circulating, and that the actual CPI had not been compromised. Of course, a much, much hotter than expected inflation print would put additional heat on the FOMC to get more aggressive, and that's what someone was counting on. Hopefully, "they" will be able to figure out who was responsible and make an example of whomever that was.
The regular session on Tuesday, turned for the worse in response to that faux CPI release and the data reflects that. All 11 S&P sector SPDR ETFs closed in the red for the day, led lower by Energy (XLE) and Technology (XLK) as the S&P 500 gave up 0.92% and the Nasdaq Composite surrendered 0.95%. The US dollar again gained some strength versus its reserve currency peers, while WTI Crude (-8%) fell through a trapdoor.
Losers beat winners at the NYSE by a rough 9 to 7, while advancing volume for NYSE-listed names grabbed a 39.3% share of aggregate NYSE trade. Despite the headline performance, winners beat losers at the Nasdaq Market Site by 5 to 4, as advancing volume took a 50.9% share of composite trade for those names.
Trading remained very thin on Tuesday as it has been since June. Day over day, aggregate trading volume expanded for NYSE listings from Monday, but at paltry levels, while trading volume actually contracted on Tuesday for Nasdaq listings. Basically, professional managers have largely sat on their hands for more than a week now, and continued to do so yesterday, despite that fake CPI release.
Forget Amazon (AMZN) Prime Day. Okay, don't forget it. Try to take advantage of third party sellers that have either too much or somewhat stale inventories on their hands. That said, it appears that Amazon (as reported at Business Insider) has taken on the role of collaborator with the Fred Hutchinson Cancer Center in Seattle in a Phase 1 trial examining a neo-antigen peptide vaccine for stage IIIC-IV melanoma or hormone receptor positive Her2-negative breast cancer that has metastasized or is refractory to other treatments.
A cancer vaccine and Amazon? Is there anything that Amazon won't try to do? Invested or not, I think we can all root for them on this venture.
Oh no, there goes Tokyo
Go go Godzilla, yeah
- Roeser, Bloom (Blue Oyster Cult), 1977It was hard not to watch. Former Sarge fave ServiceNow ( NOW) took a 12.74% beating for the day after CEO Bill McDermott (who is also a Sarge fave) appeared on CNBC's Mad Money with Jim Cramer on Monday night and spoke on the issues facing his firm and the cloud software industry at large. He spoke on rising interest rates, elevated energy costs, and the war in Europe.
McDermott also talked up the productivity benefits of what his firm does best, which is providing workflow software to business clientele, as well as also providing software for human resources, customer service management and even cyber security. Unfortunately, McDermott also mentioned the above issues as well as currency exchange headwinds and elongated sales cycles, especially across Europe.
That was all investors need to reduce exposure to a name that while down 34% for the year so far, and off 12% just yesterday... still trades at 58 times forward looking earnings. Valuation had been my reason for exiting this name months ago.
That said, I wet the beak last night after-hours. I am long the name at $428.90 for a trade.
As laid out in my piece for Real Money on Tuesday afternoon, I completed my post-earnings exit from PepsiCo (PEP) at an average price of $170.92, and have started to move into Coca-Cola (KO) . I am about 30% of the way into my intended position size there at an average price of $62.96.
Both stocks are capable of taking up one slot allocated toward the Staples in my Pitchforked approach to surviving this market. Both trade at 25 times 12 months forward looking earnings, both pay a similar (dividend) yield, though Coke's is slightly better.
The final straw for me was in Pepsi's balance sheet and guidance. PepsiCo expects to pay $6.2B in dividends this year and buy back $1.5B in stock. While that sounds great, the firm's balance sheet is weak (current ratio of 0.84) and the debt load is too high. In fact, the firm's net cash position does not even cover the firm's short-term debt-load, never mind the long-term debt load which is many times the short-term number.
In contrast, as of the April quarter, Coca-Cola ran with a net cash position more than twice the size of that firm's short-term borrowings and long-term debt recognized as current combined. Coca-Cola also ran with a current ratio of 1.18 at that time. Simply a far superior balance sheet than what PepsiCo has. For me, in this environment, that matters.
... For the large money center banks will start reporting tomorrow, and this quarter is going to get ugly. Banking as an industry is expected to show year over year earnings contraction of at least 25% for the second quarter. Consumer finance, capital markets, investment banking... they're all going to leave a dent.
The most consequential impact to profitability for the group however, will likely be the significantly increased provisions for loan losses as the US economy speeds into or close to sustained contraction in economic activity. These provisions are treated as an expense on the income statements, and simply detract from bottom line performance.
The banks all benefited from releasing this "stowed away" cash for a number of quarters and that did beef up profitability. That pendulum, however, swings both ways. The Financials are expected to be the quarter's worst performing sector of the 11 for the second quarter in terms of earnings "growth", while finishing in tenth of 11 as far as revenue growth is concerned.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 5.74%.
07:00 - MBA Mortgage Applications (Weekly): Last -5.4%.
08:30 - CPI (Jun): Expecting 8.8% y/y, Last 8.6% y/y.
08:30 - Core CPI (Jun): Expecting 5.8% y/y, Last 6.0% y/y.
10:30 - Oil Inventories (Weekly): Last +8.235M.
10:30 - Gasoline Stocks (Weekly): Last -2.497M.
13:00 - Thirty Year Bond Auction: $19B.
14:00 - Federal Budget Statement (Jun): Last $-66B.
The Fed (All Times Eastern)
14:00 - Beige Book.