The attention of Wall Street is clearly on the U.S. inflation situation this morning. This is because at 8:30 A.M. (EDT), the Labor Department reported September consumer price figures. The Consumer Price Index (CPI) rose 0.4% and 3.7% on a month-to-month and one-year basis, respectively. The core CPI, which excludes the more volatile food and energy components, increased 0.3% and 4.1%, respectively. The data showed some modest easing in core consumer prices, but the pace of overall disinflation in the consumer sector is still not where the Federal Reserve needs it to be. We also learned that initial unemployment claims for the week ending October 7th totaled 209,000, which was flat versus the previous week’s tally and still indicative of a tight labor market. Treasury market yields rose on the CPI report and the equity futures, which were higher heading into the release, gave back a lot of the earlier gains.
The CPI report comes on the heels of the Labor Department’s companion September report on producer (wholesale) prices. The Producer Price Index rose 0.5% and 2.2%, respectively, on a sequential and 12-month basis. When stripping out the food and energy components, the core PPI climbed 0.3% and 2.7%. Overall, producer prices came in stronger than expected, but the market took the report in stride, we think because most of the headline gain was driven by energy costs and the figures on a 12-month basis are still not too far away from the Fed’s target growth rate of 2.0%. A slightly less hawkish tone on monetary policy from Federal Reserve officials in the minutes from the latest Federal Open Market Committee (FOMC) meeting and worries about the conflict in the Middle East also pushed Treasury yields lower yesterday (they move inversely to the price) and that gave a boost to stocks. In recent weeks, the price action in the equity market has been driven by movements in the Treasury market.
As noted, the Federal Reserve released the minutes from its latest September FOMC meeting at 2:00 P.M. (EDT) yesterday. Those minutes showed that the central bank will remain data dependent when formulating near-term monetary policy, but will “proceed carefully” in deciding whether to further raise the benchmark short-term interest rate. The minutes did not change the narrative that Fed officials think that the federal funds rate will need to stay higher for a longer period to effectively fight inflation, but the more cautious view was generally seen as evidence that the lead bank isn’t necessarily inclined to raise rates in the near future. There was already a sense among investors that the bond market is doing the work for the central bank.
The inflation reports come ahead of the start of third-quarter earnings season, which unofficially commences tomorrow morning with the latest quarterly results from JPMorgan Chase (JPM). That report will be highly scrutinized for a number of reasons, most notably for an update on the how the U.S. banking system is performing. The commentary from CEO Jamie Dimon will also be watched for indications about how credit conditions are trending and the overall health of the U.S. economy. In addition to JPMorgan Chase, the next few trading days will bring financial results from most of the nation’s biggest banks. Market watchers will also be closely monitoring the results from the regional banks, given the plight of some of its fellow now defunct lenders earlier this year.
In general, Wall Street will likely need to see solid quarterly results and some positive forward-looking commentary to justify the current valuations for the S&P 500 companies in this higher interest-rate environment. Our sense is that Corporate America will surprise to the upside over the next few weeks based on the assumption that the gross domestic product (GDP) expanded at a strong pace during the third quarter. From an investment standpoint, we think the stocks of the high-quality companies should be given the most attention, especially the multinationals. With the recent strength of the U.S. dollar, profits from foreign operations when translated back into greenbacks will get a nice boost. This should help support profit margins and allow those entities to surpass consensus revenue and earnings-per-share forecasts.
Speaking of the corporate world, yesterday brought another strong reaction to more news regarding the recent proliferation of weight loss drugs and their potential far-ranging uses. An early trial of Novo Nordisk’s (NVO) Ozempic showed surprising effectiveness against kidney failure prevention. That report drove shares of Novo Nordisk and Eli Lily (LLY), another developer of weight loss/diabetes drugs, higher yesterday and slammed the shares of the dialysis providers, including the stock of DaVita (DVA). All in all, it was a very bearish session for a number of the stocks in the medical services and devices industries. Demand for Ozempic and Novo Nordisk's other diabetes drug, Wegovy, was already booming in popularity as weight-loss treatments and that was pressuring shares of some of the food and beverage producers. – William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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