CPI does not disappoint – PPI today, PEP and DAL beat

And the march higher continued….stocks rallied after the most recent CPI report suggested that inflation is cooling…..all of the numbers coming in below expectations……CPI m/m was up 0.2% (vs. the 0.3% rate that was expected) – but it was UP over last month’s 0.1% read……Ex food and energy m/m coming in at +0.2% (vs. the expected 0.3%) and it was still lower than last months +0.4%.   CPI y/y made an even more dramatic move – coming in at +3% below the expected +3.1% and 1 full percentage point below last month’s +4% read while Ex food and energy y/y came in at 4.8% - below the 5% expectation and below last month’s 5.3% read….So, you can’t argue – the trend IS lower…..and investors, traders and algo’s loved it….. US futures were higher in the pre-mkt yesterday and shot higher once the opening bell rang….as the media and investors celebrated the FED’s success.

By the time the closing bell rang though, stocks had retreated off the early morning highs as the trader types locked in some short term profits and longer term investors continued to move money around – taking money out of the Transports  - which ended the day down 25 pts, plowing it into the broader S&P +33 pts or 0.8%, the Nasdaq + 158 pts or 1.15% and the Russell (SMID’s) + 20 pts or 1%.  The Dow industrials, while up 80 pts or 0.25%, came off its morning high of +300 pts.  Now to be clear – the Transports did end the day slightly lower – BUT recall that they were only up 1%  ytd coming into June – they gained 17% over the past 5 weeks – making it the best performer of the indexes for that time period – so it makes sense that some investors/traders lock in some profits in that sector and re-allocate. 

Today brings us the latest PPI report – leaving many to ask what that will tell us about the state of the economy at the producer level…. will we see another ‘cool’ report?  My gut says yes….and if we do – it will give the FED even more cover to hike rates in July and then stop……and that is what is driving the market higher…..The consensus is now one more hike and BAM…..rather than a July hike and a September hike….Now, I am still in the camp that JJ will leave the door wide open saying that they remain ‘data dependent’ giving him room to hike in September IF the data trend should suddenly change in  the August and September inflation reads – ahead of the next FOMC meeting.  Now if the August data continues to trend lower – then I’ll concede my call for a September hike…. I’m just not ready yet…. I remain ‘data dependent’ too!

This morning we will hear from PEP, DAL, PGR FAST & CAG – A range of reports spanning a number of different industries…. Beverages, Transports, Insurance, Industrial supplies, and Packaged Foods.

PEP reported at 7 am and guess what?  They BEAT on both lines!  WOW! They have pricing POWER (it’s called inflation – they raise the price and put less chips and more AIR in the bag) …… EPS of $2.09 vs $1.96.  Revenues of $22.3 bil vs. the estimate of $21.7 bil.   And the RAISED their sales and earnings estimates going forward…. the stock is quoted up $4 or 2.3%.  It is basically flat on the year and pays a 2.75% divvy – I would expect to see investors take this higher…. It’s big, boring yet stable and is one of those underperformers…. but it does offer some diversification away from the 7 mega tech names. 

DAL also reports and BEATS on both the top and bottom lines - $2.68 vs. the $2.40 estimate – If you’re surprised – you haven’t bought a ticket on DAL recently….Prices are thru the roof, but the planes are full (b/c they have ALL cut the number of flights and that raises rev/seat mile while helping to cut costs)…..and that means - Revenues better than expected, operating margins of 17.1%.  Q3 guidance is higher than current analysts estimate…and full year 2023 guidance – yup – that’s up too! – It is now the $6 – $7 range vs. the prior $5 - $6 range.   The stock is quoted up $2 or 4% and is up 46% ytd.

Tomorrow kicks off the big banks……It is going to be very important to see how these companies do but more important to hear about what these companies think going forward……….Understanding that earnings estimates have been slashed and burned over the past 3 months as analysts reconsider their initial estimates slashing them by nearly 20% over the prior estimates…but we know this….it’s been happening all month – investors have been paying attention and they have been taking the sector higher.

The XLF is up 10% since June 1st leaving that ETF flat on the year…. So, the question now is – Have they been CUT enough or could these companies ‘miss’ the lowered estimates?   My guess is that the banks will not miss the bottom line estimates…..we might see some weakness on the top line, but I am not worried about the bottom line….And nor am I worried about the next 4 – 6 months….But I would not be surprised to see a ‘sell the news’ reaction as trader types lock in profits on JPM & WFC both up 11% in 5 weeks, or BAC +8% in 5 weeks.  I own both JPM & BAC and would be a buyer on the pullback…. If they run – I’m good.

I am not in the camp that this earning season will be a disaster at all.

Money also went into treasuries as investors assume the FED is about to halt hikes…. Prices rose, sending yields lower.  The 2 yr. is now yielding 4.6% down from 4.8%, the 10 yr. has backed off to 3.8% down from just over 4% only 3 days ago.  The 3- & 6-month bills haven’t really moved and are still yielding near 5.4% on an annualized basis.

The dollar index got slammed – dropping below 101… a level that I thought would hold…but after yesterday’s better-than-expected CPI report trader types sold the dollar ‘en masse’ and this morning it is trading at 100.29 – a level it has not seen since April 2022.  If today’s PPI report is also ‘cooler’ I would expect the dollar to get hit again. 

Oil is UP again - think weaker dollar index – Overnight it pierced its long term trendline at $75.55 and this morning it is trading at $75.87!    This is all about production cuts, strong demand, and the weaker dollar – Period.  And the Saudi’s are loving the price action…. they are due to cut again in August (along with the Russians) as they look to keep oil at plus $80 barrel going into the fall/winter.

Gold – another commodity that has also been under pressure as investors try to decipher the FED’s next move has now found stability in the $1900/$1975 trading range.  This morning it is trading at $1965/oz – this is up 3% for 2 weeks ago – all as the dollar index weakens…. Yesterday I said that ‘A further decline in the dollar will help Gold go higher…’ and that is exactly what you are seeing…. It is now kissing both the 50 and 100 dma trendlines at $1975…. if it pierces that – then look for it to run to the $2050 range.

And US futures are up again…… Dow futures +54 pts, the S&P’s +13, the Nasdaq +160, and the Russell is +7.  You can feel the excitement….as investors await today’s PPI report and the ‘better than expected’ earnings that we are starting to see…. It’s all very exciting….and if you stayed in the game, built a diversified, large cap portfolio then you’re good. If you are just getting in – take your time, don’t go all in, feather in your investments – do not chase the ‘hot names’ right now…. Start with the more defensive sectors.

Stocks in Europe are higher…. markets across the board are up between 0.5% - 0.7% as investors there continue to pile into stocks…. The European markets are up double digits ytd – only the UK is the underperformer – flat on the year.   

The S&P ended the day at 4472 – up 33 pts.  Yes, it’s about the good macro data reports and it’s about future FED policy….and now it’s going to be about earnings and future guidance.  The path of least resistance appears to be up as the momentum drives the action….  They are going to try and take out the April high of 4488…..hoping to send the algo’s into a frenzy….that will cause them to initiate more buy orders sending stocks even higher….in what I think is a bit of a disconnect with reality…which is why I keep saying – have a plan, and stick to it.  Do not chase the names that are already stretched, put new money into those sectors that have underperformed and may be boring but have strong fundamentals.

Branzino filets – in a lemon, butter, caper, white wine sauce

This is simple….and so good.

For this you need the Branzino filets…. lemon, butter, capers, and white wine (the Pinot Grigio).

Preheat your oven to 400 degrees.

Season the filets with s&p…. squeeze fresh lemon juice over the filets. 

In a sauté pan - Melt the butter, add a splash of white wine and the capers.  Next – using a large spoon – spoon the sauce over the filets – making sure you include the capers. 

Place in the oven and cook for 5 – 8 mins….  The filets are thin, and they will cook fast…. Do not go far.

Serve this with your favorite green veggie and a simple bib lettuce dressed in lemon and olive oil seasoned with s&p and dried oregano.