Wall Street Breakfast: Engaging The Core (CPI)

Engaging the core (CPI)

Inflation is the focus for Wall Street and the global markets, with only an extremely tame rise in consumer prices likely to give Fed members cause to rethink rate trajectory. Core CPI is expected to revisit the peak it saw back when the Fed started its tightening cycle with what now looks like an almost quaint quarter-point hike. Now fed funds futures are pricing in an 80% chance of another 75-basis-point rise in November to bring rates up to 3.75%-4%.

A hot CPI report on the heels of a strong gain in September payrolls would cement the hawkish Fed path through to the decision early next month. For the numbers, economists expect headline CPI to rise 8.1% Y/Y in September, easing from the 8.3% pace in August. Meanwhile, core CPI, which strips out volatile food and energy prices, is expected to climb 6.5% Y/Y, faster than the 6.3% increase in the prior month. That would match the peak seen in March.

The economists expect the core number to outpace the headline number because the core CPI includes things like the cost of rent or services, such as health care, that are “stickier.” Once they go up, they’re not likely to go down.

Unwanted visitors: Bankrate Senior Economic Analyst Mark Hamrick expects Y/Y CPI growth to stay elevated through the rest of the year. “There has been relief from high gasoline prices which tend to aggravate consumers the most, but elevated food and shelter prices appear to be sticking around for a while as unwanted visitors,” he said.

September’s CPI is expected to increase 0.2% M/M, up from 0.1% in August. The consensus for core CPI is 0.4% M/M, down from 0.6% in the previous month. “The Fed will be looking at the month-over-month percent change in core CPI,” José Torres, senior economist at Interactive Brokers, told Seeking Alpha. “Sticky and price-resistant categories where once price increases are registered, price decreases are hard to come by. Food away from home, shelter, transportation services and medical services will be top of mind.”

Wildcards for this month include vehicle prices and airfares, according to Pantheon Macro. Wednesday’s Producer Price Index may give investors a clue of what to expect for the CPI, said Tuan Nguyen, an economist at RSM US, who analyzes high-frequency economic data “In two of the past three reports, a higher-than-expected CPI number was registered after producer prices came in above expectations,” Nguyen said.

Bears ready to rally? Interactive Brokers’ Torres expects that any indication that prices are easing will lead to increased stock-investing. “The market is oversold and the burden of proof has shifted to the bears,” he said. “Any moderate to positive news on the CPI front, even in-line results, a deceleration in services, rents, or good prices, can produce the next bear market rally.”

Meanwhile, SA contributor Logan Kane looks to a Cleveland Fed econometric model, which expects core CPI to rise 0.51% M/M in September and 0.53% in October. “If these projections are right, these numbers are bad and worse than the market expects, showing that the Fed is nowhere near stopping inflation and that a hard landing is the only way down,” Logan wrote Wednesday. (1 comment)

The strong dollar did it

The U.S. dollar (USDOLLAR) (UUP) will continue to see strength through at least the medium term, according to Citi. And while that may favor U.S. large-cap stocks on the global stage, it will also have an impact on earnings.

With roughly 30% of revenues for U.S. companies generated overseas, according to Goldman Sachs, the “strong dollar” may replace “supply chain issues” as the go-to excuse for missing consensus estimates. “A stronger USD has been historically correlated with a lower frequency of sales beats,” Goldman equity strategist David Kostin wrote in a note. (19 comments)

Hey, YALL

Wall Street has received a new thematic exchange traded fund that works to fight against the growing ESG trend.: the God Bless America ETF (YALL). YALL is an anti-ESG exchange traded fund that attempts to screen out companies that are listed as “activists.” The ETF has been launched by Toroso Investments and is sub-advised by Curran Financial Partners.

According to the fund’s perspective: “The Sub-Adviser eliminates companies that, in the Sub-Adviser’s assessment, have emphasized politically left and/or liberal political activism and social agendas at the expense of maximizing shareholder returns.” (220 comments)

Fed minutes

Federal Reserve officials acknowledged that their rate hike path will weigh on economic activity in the coming months and years. They “generally anticipated that the U.S. economy would grow at a below-trend pace in this and the coming few years, with the labor market becoming less tight,” according to the Federal Open Market Committee’s minutes for its Sept. 20-21 meeting.

Reflecting the central bank’s decisively hawkish tone, the word “restrictive” appeared 13 times in the September minutes, as opposed to 0 times in the July meeting’s minutes. Inflation showed up 89 times in the most recent meeting’s account vs. 7 times at the previous meeting’s minutes. (29 comments)

Activision battle

Microsoft (MSFT) is complaining about the influence of videogame console rival Sony (SONY) on UK regulators, as the country’s competition watchdog publishes the full text of its decision to give a phase 2 probe to Microsoft’s proposed $69B acquisition of Call of Duty maker Activision Blizzard (ATVI).

That decision “incorrectly relies on self-serving statements by Sony which significantly exaggerate the importance of Call of Duty to it and neglect to account for Sony’s clear ability to competitively respond,” Microsoft said. (15 comments)

Another ‘70s throwback: wheat

U.S. wheat futures fell after the U.S. Department of Agriculture cut its 2022-23 outlook for U.S. wheat exports by 50M bushels to 775M bushels, which would be the lowest amount of domestic wheat exports since the 1971-1972 marketing year. The USDA cited “reduced supplies, slow pace of export sales, and continued uncompetitive U.S. export prices” for the lower export forecast. (5 comments)

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