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Producer Prices, Michigan Consumer Sentiment
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Producer Prices, Michigan Consumer Sentiment

Are investors guilty of magical thinking? The reaction to yesterday’s retail sales appears to indicate as much…
Transcript

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Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets in the day ahead. Today is Friday, Feb. 16, 2024. The Bottom Line segment of today’s podcast starts at (5:15) for listeners who want to skip ahead.

State of Play

Stocks rallied yesterday, shrugging off softer-than-anticipated retail sales. After the close Applied Materials (AMAT 0.00%↑) and Coinbase (COIN 0.00%↑) reported positive earnings and those stock are surgin higher in the pre-market. Less positive were Toast (TOST 0.00%↑) and DraftKings (DKNG 0.00%↑). As we look at our board of indicators at 0630, everything is a bit all over the place:

  • Stock index futures are moving higher, led by tech. The Nasdaq is up 0.6%. S&P 500 futures are up 0.2%;

  • Commodities are mixed. The big move is in copper, up 1%. But WTI crude oil is down ~1% to trade around $77/barrel;

  • Bonds are seeing a little bit of selling, with the 2-year yield up 4 basis points to 4.61% whilst the 10-year is up 3bps to 4.27% (yields move inversely to prices);

  • Cryptos are weirdly flat after the Coinbase news, with Bitcoin unchanged at $52,300.

Today’s Known Events

Some interesting economic data today. First of all on the inflation front, producer prices are out at 0830. These can be seen as a leading indicator for consumer prices under the premise that producers pass higher costs off to consumers.

Economists who were survey expect an increase of 0.1% month-over-month to headline PPI, an increase from the -0.1% seen last month. Core PPI, which excludes food and energy, is also expected to rise by 0.1% MoM after no change a month ago.

Annualized headline PPI is nevertheless expected to drop, from 1% to 0.6%. That sounds quite pedestrian indeed. Core PPI would be a bit higher, at 1.6% year-over-year, compared to 1.8% last month.

The University of Michigan publishes its consumer sentiment survey at 1000. This is the flash reading, the first of two of these, and therefore more significant. Economists expect a reading of 80.0, up from 79.0 last month. The Contrarian still doesn’t understand what this number means but it will be interesting to see just because yesterday’s retail sales data was so soft.

On the topic of the consumer — and slowing economy more generally — our podcast guest has some very interesting (and not optimistic) views on this subject. This episode was recorded yesterday afternoon and is available to you premium subscribers at this time exclusively. So give it a listen:

The Bottom Line©️

The stock market clearly took yesterday’s retail miss as a positive sign, presumably because it raises the possibility of Fed rate cuts. The only problem with that line of thinking is that it conveniently ignores the economic reality that growth is slowing — if not grinding to a halt — which is ultimately bad for corporate earnings.

So there are possibly two examples of magical thinking going on here: 1) that the Fed will ride in and cut rates just because of one soft retail sales report, and 2) that this will be good for earnings.

On the first, we’ve been playing the ‘Fed pivot’ game for some time, so far with very clear (and disappointing) results. Yeah if economic growth does slow, and inflation drops more, then the Fed will cut rates. But when might that be? Inflation is still higher than where the Fed likes it, as we saw earlier in the week. Maybe today’s PPI will reverse that narrative? Maybe, but it still won’t change the fact that CPI is still too damn high.

On the second, history has showed us that by the time the Fed rides in to cut rates it’s usually too late to rescue the bull market. See the years 2020, 2008, 2000. The one time in recent memory that it didn’t happen, in 2018, the market was far less frothy than it is now.

Could there be more upside, especially for tech? Sure. Could it be significant? It could if you buy the argument that the last stage of the bull market is where these stocks put in most of their gains. See 1999. But for every 1999 we had a 2007 or 2019 (or 2022) when things just kind of ground to a halt without that last feverish leg every coming to pass. There’s a chance we’ve already witnessed it this time around. Just look at the astronomical gains for the ‘mag 5’ (magnificent 7 less Tesla and Apple).

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The daily podcast discusses the major market activity and economic data release schedule for the day ahead, with a contrarian bent. Also includes regular podcast episodes a day (or more) early and without ads or announcements.