Good morning contrarians! It is Thursday, Aug. 11.
Stocks staged a major rally yesterday after inflation came in softer than anticipated. The Nasdaq was up almost 3% on the day with the S&P 500 gaining more than 2%. After the close, positive earnings from Disney (DIS 0.00%↑) helped cement the positive mood. Disney shares are up 8% overnight.
State of Play
As of 0630, it looks like risk is still on:
Stock futures are up a tiny bit, with the S&P pointing to gains of 0.2%;
Cryptos are rallying, with bitcoin up 6% to trade around $24,400;
Commodities are gaining a little, with WTI crude up 1% to trade around $93/barrel and copper up a little less than 1%;
Bonds are seeing a few bids at the short end of the curve, with the yield on the 2-year down 4 basis points to 3.17% (yields move inversely to prices). The 10-year is flat at 2.76% with the yield curve a little less inverted than yesterday.
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Producer Prices
Yesterday we had the Consumer Price Index for consumer inflation. Now it’s the turn of producers with the Producer Price Index, or PPI, out at 0830. This is in many ways a more forward-looking reading because producers pass prices on to consumers, but the market usually doesn’t appear to care very much.
The PPI is expected to increase 0.2% month-over-month, which is down significantly from the 1.1% seen last month. The core figure, which excludes food and energy, is expected to increase 0.4% MoM, the same as the last reading. The year-over-year expectations are for 10.4% (headline) and 7.6% (core). We’ve reached the stage where month-over-month is the more important reading. We know the YoY is going to be elevated but if inflation is going down on a monthly basis, then that is undoubtedly a good thing.
Jobless Claims
It’s Thursday so we get initial jobless claims also at 0830. This number is expected to print at 263,000, up from the 260,000 seen last week. These claims have been increasing steadily, but are still low. And as we saw from the non-farm payrolls last week, the labor market is still very healthy (worth pointing out that the NFP is the more trailing indicator however).
Earnings
Earnings season is winding down, but we do have a few companies left to report. Before the open at 0930 we’re due to hear from Dillard’s (DDS 0.00%↑), Cardinal Health (CAH 0.00%↑), Kelly Services (KELYA 0.00%↑), Six Flags (SIX 0.00%↑), Canada Goose (GOOS 0.00%↑), Warby Parker (WRBY 0.00%↑), Utz Brands (UTZ 0.00%↑), and Hanesbrands (HBI 0.00%↑). After the close at 1600 it’s Rivian Automotive (RIVN 0.00%↑).
The Bottom Line©
It’s very unlikely that the PPI report will rain on the CPI parade. CPI is just much more widely watched. There is very rarely a violent reaction to the PPI. Maybe this time will be different, but you get the sense that a lot of fear has left the market. Fear can (and likely will) return in force, but that just doesn’t feel very imminent right now.
Maybe a sense of complacency has taken over? These are still massive rate hikes the economy has to digest, with more on the way. It’s hard to see how the Fed can engineer a soft landing here. Yet that is exactly what the market is pricing in with all these rallies.
Time to de-risk the portfolio a bit? Or push the chips to the center of the table and let it ride, hoping to catch the wave? The contrarian move is clear: take risk off. But just because it’s contrarian doesn’t mean it’s correct.
Producer Prices Follow CPI Party