Stock Bulls Remain Optimistic As Data Indicates a Slowdown in Manufacturing Inflation

Stock bulls remain extremely cautious but a bit more optimistic as data indicates a slowdown in manufacturing inflation. The Producer Price Index rose +11% year-over-year in April, higher than expected but a meaningful pullback from March’s +11.5%. Producer prices lead consumer prices, so the report is a good sign overall, though investors, as well as the Fed, will need to see a couple more months of declines before declaring that inflation is indeed cooling.

Inflation

Economists also warn that goods inflation may be coming down because consumer demand is shifting more to services, meaning high prices could simply be moving from one part of the economy to another. The latest data shows services prices are rising at the fastest rate in three decades with airfare leading the way. Even if inflation has peaked, the question now is, how long will it remain elevated?

Federal Reserve Chair Jerome Powell cautioned yesterday that he can’t guarantee the central bank can deliver a so-called “soft landing” for the economy, pointing to the tight labor market and ongoing supply chain dislocations. Powell also stressed that other “huge events” are playing important roles right now, including Russia’s war in Ukraine, that are beyond the Fed’s control. Powell made the comments after being confirmed by the Senate for a second 4-year term.

The central bank’s target inflation rate is still a “flexible +2%” but several officials have indicated that the new normal might be more in the +2.5% to +3% range. One of the main gauges (but not the only one) the Fed uses to determine the rate of inflation is the Core PCE Prices Index, which for March was running at +5.2%. The April read is due out on May 27, which is a couple weeks ahead of the Fed’s next meeting on June 14-15.

Data to watch

Consumer data recently has been sending mixed signals that are hard to interpret. Sentiment has been mostly falling since the start of the year but consumer spending has not shown any signs of pullback.

Next week, investors get an update on how spending is holding up via April Retail Sales on Tuesday. A slew of fresh housing data next week will provide a deeper look at how substantially higher mortgage rates might be impacting the market. The NAHB Housing Market Index for May is out on Tuesday, followed by April Housing Starts on Wednesday, and April Existing Home Sales on Thursday.

Several key earnings are on the calendar next week as well, including Home Depot and Walmart on Tuesday; Cisco, Lowe’s, Target, and TJX Companies on Wednesday; Applied Materials, Palo Alto Networks, and Ross Stores on Thursday; and Deere & Co. on Friday.

What Fuels The Stock Market Now?

An outstanding earnings season and signs that economic activity are picking back up are clashing with unrelenting inflation, difficulty finding more labor, and continued supply chain logjams.

Inflation

Most insiders believe inflation has further to climb, though the consensus right now is calling for a peak around the beginning of Q2 next year. With big shopping holidays in the U.S. coming up, followed closely by Chinese New Year at the beginning of February 2022, shipping and transportation logjams aren’t expected to find much relief in the near-term.

Meaning inflation pressures will likely continue. How far inflation will climb as the severe supply chain dislocations drag on is a huge unknown. Some Wall street investors are concerned that the Fed might feel compelled to end its asset purchases and hike rates much sooner than expected if monthly inflation keeps accelerating.

What might be even more worrisome is the fear that some of these price increases could be more permanent in nature, so how much overall inflation will pull back in the long run is starting to become a bigger talking point.

Demand and supply chain

Supply chain insiders warn that many companies are front-loading inventories in an effort to avoid running out of critical materials, which could bite in the long run if demand suddenly drops off. A lot of manufacturers have also increased production capacity for products that currently face shortages. The risk is that once back orders are filled and demand retreats, stockpiling and excess production could result in an oversupply situation in some areas, along with much lower profits and total revenues.

Another worry right now is that demand starts to retreats due to the current inflationary environment especially with everyday items like food and gasoline costing substantially more. That has investors anxious to see the latest Consumer Sentiment read being released today which is expected to edge higher vs. last month.

Investors are closing tracking the inflation expectation gauges in the report as typically the higher those climb, the more consumers tend to pull back on spending.

Data to watch next week

Looking towards next week, the economic data flow picks up with key releases including Empire State Manufacturing on Monday; Retail Sales, Import/Export Prices, Industrial Production, Business Inventories, and the NAHB Housing Market Index on Tuesday; Housing Starts and Building Permits on Wednesday; and the Philadelphia Fed Index on Thursday.

On the earnings front, Q3 reporting is just about wrapped up with companies in the S&P 500 index reporting revenue growth of more than +17%, the second highest on record behind only Q2 2021’s growth of over +25%, according to FactSet. Earnings themselves are on track to exceed +40%. AstraZeneca is today’s earnings highlight. Earnings next week include several big retailers which will provide some more clues as to how consumer demand is trending as well as updates on supply chain struggles. Investors are also keen to hear how holiday hiring is going.

Key earnings reports next week will include Advanced Auto Parts, Lucid, Tyson, and Warner Music on Monday; Home Depot and Walmart on Tuesday; Bath & Body Works, Cisco, Lowe’s, NVIDIA, Target, TJX, and Victoria’s Secret on Wednesday; Alibaba, Applied Materials, Intuit, Kohl’s, Macy’s, Palo Alto Networks, Ross Stores, and Williams Sonoma on Thursday; and The Buckle and Foot Locker on Friday.

Checking in on the geopolitical front, the U.S. is warning that Russia may be planning a full-scale invasion of Ukraine. U.S. officials say they’ve briefed their EU counterparts about concerns over a possible military operation, citing a buildup of Russian troops along the Ukraine border. Tensions are boiling still in Belarus and Russia is fanning the flames on that front as well.

SP500 commentary

ES ##-## (Daily) 2021_11_14 (1_49_54 AM)

The bearish accumulation divergence played very well last week. Moreover, the Advance Decline Line is weaker than the price is. It is also a negative factor in the short term. Potentially SP500 started the formation of the bull flag. Finding support at lower levels would be a great buying point with a target of 4800.

The major economic indicators are still bullish despite rising inflation. 4500 level is a psychological level bears will target if 4600 fails. Current levels can be considered only for intraday trading. At the same time, lower levels are needed to get a good risk/reward ratio for swing traders.

For a look at all of today’s economic events, check out our economic calendar.

Three Retailers Trading At All-Time Highs

Wall Street analysts expect a strong 2020 holiday season despite the pandemic, with e-commerce sales continuing their torrid growth pace. Many brick and mortar retailers should outperform as well because well-constructed online sales portal will add to modest in-store purchases. However, storefronts without a strong internet presence are likely to flounder, with the growing infection rate keeping many customers out of virus-ridden closed ventilation systems.

Let’s look at three hybrid retailers hitting all-time highs as we get closer to the holidays and year’s end. These are big cap companies that have adapted well to the age of the Internet, with an expanding customer base utilizing curbside pick-up and package delivery as well as physical shopping trips. Of course, this is the ‘new normal’, with retailers that waited too long to open or expand online sales, like America’s struggling mall anchors, having a tough time paying the bills.

Walmart

Dow component Walmart Inc. (WMT) waited until 2016 to get in the e-commerce game, buying Jet.com for a hefty premium. They’ve now combined that operation into a robust site that’s emerged as the primary competitor to Amazon.com Inc. (AMZN). The company has also launched a membership program to rival Prime, setting the stage for an epoch retail battle. In the meantime, the stock is trading just five points below November’s all-time high while holding onto a 26% year-to-date return.

Target

Target Corp. (TGT) has emerged as 2020’s top retail performer, taking market share from equal-sized and smaller rivals during the first quarter’s pandemic decline. The company blew away Q3 2020 estimates in November, picking up additional market share through strong execution. Same day and drive-up sales exploded during the quarter, growing 200% and 500% year-over-year, respectively. As the company noted, customers have shifted spending from travel into the goods they sell, raising odds for continued strong growth in 2021.

TJX

TJX Companies Inc. (TJX) sells home basics, apparel, and home fashions through T.J. Maxx, Marshalls, Homesense, and Sierra stores. This ‘off-price’ operation provides a less robust online sales portal than Walmart or Target and has no curbside pick-up. However, it executes so well that investors keep buying the stock, which is trading less than one point under an all-time high. Even so, this issue will carry greater downside risk through the winter months due to the surging pandemic.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.