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Good morning.
U.S. futures are following Europe and Asia higher this morning as inflation worries fade further. Of course, I said something similar yesterday at this time, and you saw how that ended up.
The much-watched 10-year Treasury note is now at 1.57%, down 10 basis points in the past week. That could put pressure on financials today, but give a nice bump to tech.
In the crypto end of the market, it’s a blur of green.
Let’s see what else is moving the markets.
Markets update
Asia
- The major Asia indexes are higher in afternoon trading with the Hang Seng up 0.9%.
- COVID in Asia is spreading at a worrying clip. Malaysia‘s daily case load just surpassed that of India, on a per-capita basis.
- Meanwhile, in Hong Kong, vaccine uptake is so low that health officials are worrying what to do with their stash of unused jabs, many of which expire in August.
Europe
- European stocks ticked higher out of the gates with the Stoxx Europe 600 up 0.3% in the opening minutes. If it maintains these gains, it would be a new record.
- The outlook for Europe’s labor market looks iffy. An Accenture survey of business leaders says a full recovery to pre-pandemic employment levels probably won’t come until 2023.
- Optimism is growing on this side of the Atlantic that a Biden-sponsored minimum global corporate tax rate of roughly 15% will eventually get cinched by G7 trading partners.
U.S.
- U.S. futures are gaining. That’s after all three major averages sunk in afternoon trading on Tuesday, finishing in the red.
- One of yesterday’s big gainers was Moderna. It closed 3% higher after reporting its COVID vaccine is highly effective in teens above the age of 12. $MRNA is up 62% YTD.
- The other accelerant in the market is U.S. house prices, which are up 13% in the past year, the highest rate since the peak of the housing bubble in 2005.
Elsewhere
- Gold bugs, here’s a cigar for timing the markets right. The shiny yellow stuff is having one heck of a quarter, trading above $1,900/ounce.
- The dollar is down.
- Crude is up with Brent trading above $68/barrel.
- Bitcoin is up nearly 4% in the past 24 hours, breaking through the $40,000 price barrier.
***
“Inflation” inflation
If you’d caught any number of earnings calls in recent weeks, you no doubt heard the I-word. A lot.
According to BofA Securities, CEOs and CFOs of S&P 500 companies mentioned “inflation” a lot more than they did a year ago—it’s been a more than eight-fold increase, they calculate.
That makes sense. Few, if any, of us were talking about inflation in Q1 2020.
But even in absolute terms, the recent inflation chatter really stands out, surpassing levels we last saw in the lead up to the 2017 Trump tax cuts.
We really haven’t had any meaningful inflation in years so it’s worth including a reminder here that not all inflation is bad. In periods of growth, prices tend to rise. That’s good inflation. But even “good inflation” has a less desirable side.
Quickly rising prices erode our purchasing power, and, over time, that becomes a drag on certain kinds of stocks, namely growth stocks (think, tech) and consumer discretionary. And, as the price trend line spikes up, value stocks too get hit as the dividends they pay out look increasingly puny to investors. Value stocks tend to recover somewhat quickly though in a sustained, high-price environment. Schroders has a good analysis of the inflation out-performers and laggards.
In any case, BofA says the inflation talk we’ve heard over the past quarter is mostly about “good inflation.”
There’s also “bad inflation.” You no doubt have heard this term mentioned. Bad inflation is often spoken about in terms of the effects that come from shocks to, say, the supply chain or the labor market. Companies sometimes cannot pass these costs on to customers and so those price rises eat into the bottom line. That’s bad.
Just as “good inflation” contains some bad aspects, “bad inflation” has some good aspects. Take wages. A surge in wages means consumers have greater buying power. That’s good news for retailers, for one. And, BofA notes, “higher wages could certainly accelerate capex investment.” That makes sense. If wages are priced more competitively, companies will be looking to invest to make their operations more efficient to offset rising labor costs. In general, companies have done a dismal job of reinvesting in operations over the past decade. One reason: wages are pretty crummy, and so CEOs figure it’s better to spend their cash on share-buybacks and increasing dividend payouts.
Back to Q1 earnings calls…inflation was certainly in the air, but it was drowned out by something much more significant: knockout results.
Just look at these earnings:
And these beats:
Inflation may be coming, but the overall outlook of Corporate America looks really bright. Effective CEOs will figure out a way to deliver strong results in an inflationary climate. After all, they should have seen it coming.
***
Postscript
Help! Are there any zoologists out there?
At the end of dinner last night, the girls challenged my wife and I to a game of Nomi/Cose/Animali/Città, which, yep, translates to Name Place Animal Thing.
To the unfamiliar, here’s how it works: you choose a letter and everyone scrambles to write down a name, a thing, an animal and a city that starts with that letter.
So, A might be: Anthony, apple, aardvark, Atlanta. The objective is to choose a non-obvious name/animal/thing/city so you get full points for your entry. If two of you ended up writing down “Anthony,” you both get half-points—five points, rather than 10.
It’s best to play this game over a glass of wine, I find.
I was a bit brain-fried after a long day yesterday. And, the girls insisted on playing in Italian. So, I was at a double disadvantage to the rest of the field. But I broke into an early lead thanks to a few winning entries that I was pretty proud of, including: Goffredo and Faenza (I once wrote a story about a processing plant in this city in Emilia Romagna).
But by M, I was falling behind. By P, things were getting pretty tense, and there were some shouts of protest.
My P animal was pachiderma (pachyderm). My wife argued that’s not a specific animal, and that it should be disqualified. It’s a class of animal, I countered, which makes it an animal. My kids went with pantera and pinguino, which earned them full points.
My entry got nil points. I lost the argument, the round, and the game.
This morning, over coffee, I tried to re-litigate the pachiderma drama, to no avail. It has to be a type of animal, the females around the breakfast table held firm. Those are the rules.
I’m not sure if this is an Italian thing, but this ruling just does not sit right with me. In my book, pachyderm gets full points. Can anybody—preferably, a biologist or Name Place Animal Thing expert— back me up on this?
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.
Today's reads
A "loser's game." Legendary investment guru Charles Ellis has yet another edition to his classic 1985 book, Winning the Loser's Game. He again digs into the pros and cons of active investing, and has plenty more data to show that passive, index investing wins out most of the time.
Big showdown in Big Oil. All eyes will be on the Exxon Mobil AGM today. Activist investors aren't happy with CEO Darren Woods' net-zero strategy—or glaring lack thereof—and are pushing for more climate hawks to join the board, the Wall Street Journal reports.
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Market candy
$372,400
That's the median price for a new home sold in April, which, according to the Wall Street Journal, is running 20.1% above the year-prior rate, "the strongest annual gain since 1988." Some of that rise can be explained by the wackiness of annualized data coming out of a pandemic. But a whole lot more of that is down to the pace of this red-hot real estate market.
