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Inflation hawks, today is a big day. All eyes will be on today’s CPI number, due out at 8:30 a.m. ET.
Economists are saying we could see the biggest consumer inflation reading in a decade, with prices jumping year-on-year by as much as 3.6%. Reminder: when you emerge from a pandemic, annualized data looks pretty scary on first read. That said, inflation fears are legit, as you’ve seen from the markets turmoil in recent days.
On cue, U.S. futures are weak this morning. I dig into what the CPI numbers could mean for your portfolio in today’s essay.
Before that, let’s see what else is moving the markets.
- The major Asia indexes are mixed in afternoon trading with Japan’s Nikkei, the worst of the bunch, down 1.4%.
- The big drag in Tokyo was Nissan, which saw shares tumble by more than 10% at one point after posting a bigger than expected year-end loss.
- 2020 was a banner year for wind, solar and bioenergy. The spike in renewables demand was the biggest year-on-year surge since 1999, the International Energy Agency reported yesterday.
- European stocks yesterday had their worst day of the year. The picture looks a bit better today with European bourses modestly higher out of the gates, with the Stoxx Europe 600 up 0.2% at the open, before climbing. Basic resources and financials are lifting stocks.
- Speaking of which… shares in Commerzbank rocketed up nearly 7% at the open after the troubled German lender posted a bottom-line beat and gave analysts a bullish full-year outlook.
- U.S. futures point to another choppy open this morning. That’s after the Dow on Tuesday posted its biggest one-day drop since February.
- Tesla shares are edging lower again in pre-market this morning after April sales slipped in the vital China market. Just as worrying for TSLA bulls: Warren Buffett-backed EV-maker BYD is fast gaining market share there, the latest data reads.
- Panic buying, fuel shortages, skyrocketing prices at the pump and hot tempers—that was the scene on day five of the Colonial Pipeline shutdown.
- Gold is flat, trading above $1,830/ounce.
- The dollar is up.
- Crude is higher with Brent trading above $69/barrel.
- Bitcoin is up more than 2% in the past 24 hours, trading above $57,000.
The great inflation debate
The markets are pretty jittery ahead of today’s CPI reading. That’s understandable. A prolonged spike in inflation would put pressure on the Federal Reserve to shift its stance on interest rates, and that spells bad news for growth stocks. This is the dark cloud hanging over the Nasdaq these days.
That said, here’s what to keep in mind ahead of today’s data dump:
Most everyone agrees we can dismiss today’s headline CPI number—expected at 3.6%—as an anomaly. Yes, prices are rising, but comparing the data to April 2020, when the global economy was paralyzed, is largely meaningless. At roughly 2%, the core inflation number, too, will be eye-watering, but not the best measure of rising prices.
What we’ll need instead is a few months of CPI data to get any sense of what surging commodities prices and pricier oil—so, the headline number; not core inflation—mean for the consumer, and how that might influence Fed policy, and, ultimately, your portfolio.
Zooming out, here’s what these top markets watchers are saying about CPI and the markets:
Negative oil, revisited
Markets seem determined to live in the past. Consumer price inflation in every economy is telling us about the oil price a year ago. This is not a concern, but markets want to worry about something. Inflation is a wide ranging set of price increases—because that signals something is wrong in the wider economy, requiring policy remedies. Most prices in most economies are rising today.— Paul Donovan, UBS, chief economist.
No matter today’s reading, brace yourself for higher rates
Whether it was the extremely weak jobs report, or the pipeline hack over the weekend, investors need to be prepared for changes in the interest rate environment. All things being equal, lower interest rates are better for most technology companies, and higher interest rates are better for more cyclical companies such as are found in the Energy, Materials and Financials sectors. — Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
How to play the FAAMG trade
Rising interest rates represent a potential headwind to FAAMG returns in coming months. Our rates strategists forecast 10-year US Treasury yields will rise by 34 bp to 1.90% by the end of 2021. All five FAAMG stocks have above-average duration compared with the Russell 1000, meaning they are especially sensitive to moves in long-term interest rates. As yields rose sharply from November through March, FAAMG underperformed the S&P 500 by 7 pp (+21% vs. +14%). A similar period of rising rates in 2H 2021 would likely hamper FAAMG returns.—David J. Kostin, chief U.S. equity strategist at Goldman Sachs.
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Quote of the day
We’re really not a company that looks much at the short-term fluctuations in either direction... Our performance should convince investors.
That was BMW’s finance chief Nicolas Peter, talking to a clutch of auto reporters at the end of March. Since then, shares have been on a tear, up 17.3% YTD whilst Tesla's is down more than 8%. Fortune's Christiaan Hetzner explains what's behind the German auto giant's recent success. On the calendar today: BMW holds its AGM today, so expect more headlines from the auto giant.
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