Before The Bell
With earnings season winding down, the focus of Wall Street was expected to shift to the economy, and that certainly was the case the last 24 hours. After two nondescript sessions to start the week, the action picked up yesterday following the release of consumer pricing data, and we expect the increase in trading volume to continue today as investors digest the companion report from the Labor Department on producer (wholesale) prices, which was released this morning.
At 8:30 A.M. EDT, we learned that the Producer Price Index rose 1.0% in July, and showed a 7.8% rise over the last 12 months. The producer pricing data came in hotter than expected, but the market seemed to take the PPI report in stride, with the equity futures none too far removed from the neutral line. A closer look showed that a big part of the increase was due to transportation (particularly airline prices), which pushed services prices higher. There also appeared to be some moderation in producer prices on the goods side. On the consumer-pricing side, July used car prices rose just 0.2% month-on-month, giving credence to the Federal Reserve’s stance that the recent inflation will likely prove transitory.
The pricing data, to nobody’s surprise, prompted some sector rotation yesterday and we expect more of the same during today’s session. The cyclical, economically sensitive stocks were in demand, with the higher Treasury yields following the pricing data prompting some rotation out of the high-growth groups, including technology, and into the cyclical areas. The industrial and materials stocks also got a boost from the bipartisan infrastructure deal getting enough votes in the Senate on Tuesday night. The bill heads to the House of Representatives for review. Of note the stocks of building materials companies, like Martin Marietta (MLM) and Eagle Materials (EXP), and heavy equipment makers, which have done well over the last year on the sharp U.S. recovery, took another step forward on the infrastructure news from Capitol Hill.
The Dow Jones Industrial Average and S&P 500 Index, which hit fresh all-time intraday highs yesterday, have been helped by the strong second-quarter earnings season (the overwhelming majority of the S&P 500 companies either met or exceeded, in many cases by significant amounts, expectations) and supportive data from the business beat. Last week’s positive reaction on Wall Street to strong July employment (nonfarm payrolls increased by 943,000) and unemployment (the rate fell from 5.9% to 5.4%, the lowest level since before the pandemic) figures, which were further supported by today’s report showing a 12,000 drop in initial weekly unemployment claims, to 375,000, has given a boost to equities. This is offsetting some emerging concerns about the coronavirus’ Delta variant strain and whether its spread may jeopardize some of the recent progress made on both the health and economic fronts.
With the inflation talk on the minds of investors this summer, it is worth noting that some of the consumer staples stocks have been absent from the recent gains on Wall Street. The noncyclical stocks, including most of the food processors, have suffered from concerns about the impact of higher operating (i.e., ingredients, shipping, packaging, and fuel) costs on their companies’ businesses. This pressure may well intensify in the coming months, especially later in the year when competition for shipping services increases during the holiday shopping season. On point …
The Cass Freight Index for July (released earlier today) showed that volumes of goods being shipped by truck, car and rail in North America returned to pre-pandemic levels, but the cost of shipping (+15.6% year over year) remained elevated. For food companies that require a lot of shipping to move products, many of which are of the lower-margin variety, the likely elevated supply-chain costs are going to put added pressure on margins. For example, it is a lot easier for a company like NIKE (NKE) to absorb the elevated shipping costs for its high-priced sneakers than it is for Kellogg (K) on a low-margined box of cereal.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
