LI - Wall Street Lunch: August CPI Won't Phase The Fed

2023-09-13 12:01:00 ET

Summary

• August consumer price index aligns with forecasts, Core CPI rose +0.3%.
• American Airlines lowers Q3 guidance; S&P cuts rating on Advance Auto Parts.
• Money managers abandon aversion to U.S. stocks - BofA survey.

Listen below or on the go on Apple Podcasts and Spotify

Gas boosts headline CPI, core rate falls year-over-year . (0:15) Europe takes aim at China EVs . (3:14) Here comes the GameStop movie . (3:35)

This is an abridged transcript of the podcast.

Our top story so far today:

The market dodged an inflation surprise with the August consumer price index arriving right around forecasts.

That was the last big data point before the Fed meeting next week, and there was little to suggest it would prompt the FOMC to rethink their plan.

Inflation did ramp up last month, boosted by gas prices and housing. Headline CPI rose +0.6% on the month, boosting the annual pace to 3.7%. That’s up from 3.2% in July. The energy index rose +5.6% in the month, and the food index increased +0.2%.

Core CPI , the focus for traders, rose +0.3% during the month, a little more than anticipated. But it eased to +4.3% year-on-year from 4.7%.

Economist Justin Wolfers noted it was the third month in a row of low core readings.

"After the first, it was 'that's just one month," and the second was 'good news, but not yet a trend.' Now there's a trend. Over the past 3 months, core CPI has risen at an annual rate of 2.4%."

"Point is, if you take the most recent numbers seriously, core inflation is running at two point-something percent, which is pretty much back to normal low rates," he added.

After the report, the odds of the Fed holding steady next week rose to nearly 100% in the futures market. Odds of a hold in November edged up to 57%.

Pantheon Macro's Ian Shepherdson said he expects "the Fed to remain on hold, but to signal willingness to hike again depending on the data," adding that his forecasts for the data over the period before the November meeting suggests just a 25% chance of a quarter-point hike then.

ING agrees that the Fed is already done. But they say they will leave one more hike in their dot plot.

In trading, the stock and bond markets whipsawed around in the last hour of premarket trading. That’s often the case when a report doesn’t firmly surprise one way or the other.

For now, it looks like the narrative is risk-on, with equities up and the Nasdaq ( COMP.IND ) leading the S&P (SP500) and Dow (DJI). The indexes are up less than 0.5%, though.

Bonds are also taking the data as Fed-friendly. Treasury yields are off earlier highs. The 2-year yield (US2Y) is in familiar territory around 5% again. The 10-year (US10Y) is below 4.3%.

Among active stocks:

American Airlines ( AAL ) cut Q3 guidance , noting fuel prices have increased considerably since the initial guidance in July. AAL now expects to pay an average of $2.90 to $3.00 per gallon for jet fuel in Q3. Total revenue for the quarter is expected to be about flat compared to prior expectations, with the midpoint of year-over-year total revenue per available seat mile about 0.5 points lower.

S&P Global dropped its issuer-credit rating on Advance Auto Parts ( AAP ) to BB+ from BBB- with an outlook Stable. S&P said the company's efforts to improve its inventory and product availability have languished due to inconsistent execution.

And Danish drugmaker Novo Nordisk ( NVO ) announced that its board has greenlighted a two-for-one split of its trading units listed on Nasdaq Copenhagen and the NYSE.

In other news of note:

The European Commission is launching an investigation into Chinese subsidies for electric vehicles in an effort to stem a flood of cheap imports that has led to the bankruptcies of pioneering companies in the sector.

The EC says prices are "kept artificially low by huge state subsidies" that are "distorting" the market.

Shares of NIO (NIO), Li Auto (LI), and XPeng ( XPEV ) lost ground.

And the earlier Wall Street Breakfast podcast touched on this, but it’s a movie/markets crossover story, so worth another mention.

Get ready for the GameStop ( GME ) movie.

The meme stock frenzy of early 2021 gets the silver screen treatment , hitting theaters next week.

Director Craig Gillespie's Dumb Money is based on Ben Mezrich's best-selling book on the meme traders involved with the GameStop stock explosion that caught some hedge funds off-guard.

Early reviews of the Sony Pictures movie have been largely positive. Paul Dano plays Roaring Kitty, whose thesis on GME prompted the short and gamma squeeze that brought trading in more than 50 names on Robinhood ( HOOD ) to a halt.

Other cast members include Pete Davidson, America Ferrera, Nick Offerman, Anthony Ramos, Sebastian Stan, Shailene Woodley, Seth Rogen, and Vincent D’Onofrio. (Price of admission right there.)

And back to the Wall Street Research Corner:

Money managers have abandoned their long-held aversion to U.S. stocks, shifting to Overweight and coming closer in line with retail allocations. That’s according to the latest BofA survey.

The September Global Fund Manager Survey showed allocation to U.S. equities surged 29 percentage points month-over-month, from a net 22% Underweight to 7% Overweight.

Cash moved out of emerging markets equities, with the allocation sinking to 9% Overweight from 34%.

In sectors, cash moved to Industrials (XLI), REITs (XLRE), Healthcare (XLV), and Utilities ( XLU ) and away from Communications Services (XLC), Tech (XLK), Energy (XLE), and Banks (KBE).

The biggest tail risks in the survey were high inflation keeping banks hawkish at No. 1, followed by geopolitics worsening, a systemic credit event, a bank credit crunch, a global recession, and the popping of an AI or tech bubble.

The question is whether you think the flood of money from institutions is a bullish sign for U.S. equities or a contrarian indicator that the trend is long in the tooth.

For further details see: