EDIT - Wall Street Lunch: The Issue Of Inflation

2023-09-29 11:50:00 ET

Summary

• The Fed's favorite inflation gauge falls below 4% for the first time in two years.
• Blue Apron to be acquired by Wonder Group for $13 per share.
• Market in the middle of "worst seasonal trends" of the year, but it is statistically normal - Goldman Sachs.

Listen below or on the go on Apple Podcasts and Spotify

The Fed’s favorite inflation gauge falls below 4% for the first time in two years. (0:15) Bill Ackman says keep shorting Treasuries after worst month this yea r. (2:07) GameStop’s Cohen calls for ‘ extreme frugality .’ (4:10)

This is an abridged transcript of the podcast.

Our top story so far

Is inflation hitting the Federal Reserve target zone?

In today’s consumer spending and income data, the Fed’s favorite inflation gauge, which is the core PCE price index , fell below 4% for the first time in two years.

It came in at 3.9%, rising 0.1% in August, a little softer than Wall Street expected.

Better yet, the three-month annualized pace of core inflation was 2.16%, which several strategists noted was close to the Fed’s target of 2%. The six-month annualized rate is 3%—just within the 2-3% range many economists say the Fed may be satisfied with to loosen.

Market odds of a quarter-point Fed hike in December fell closer to 30% from 40%.

Janney’s Guy LeBas says his best guess is that core PCE ends 2023 at +3%–3.2%.

Pantheon Macro notes that the Fed’s current focus is core services PCE ex-housing, where the three-month annualized rate is 3.4%, "a little changed from July but a sharp downshift from the 5.5% increase in January.”

“The Fed already has conceded that core goods and rent disinflation is well underway, and soon they will have to acknowledge the improvement in core services ex-rents, setting the stage for rate cuts next year.”

But Wells Fargo says that the “timing of the jump in energy prices and oil prices in particular is coming at a particularly inconvenient time for FOMC policymakers where the inflation objective is primarily focused on the core.”

They say that "to the extent that energy prices hindered consumer spending or gave headaches to policymakers in August, things only got worse in September."

In today’s trading

Stock bulls applauded the cooler inflation data and a weaker-than-expected Chicago PMI. The Nasdaq ( COMP.IND ) is up more than 1% and aiming for a week in the green, despite a miserable month.

The S&P (SP500) is up more than +0.5%, while the Dow ( DJI ) trails.

Equities also benefited from an easing of Treasury yields from 15-year highs. The 10-year yield (US10Y) moved close to 4.50%, while the 2-year yield (US2Y) fell to 5%.

Treasury price returns are on track for the worst month this year.

Schwab’s Kathy Jones says the "bond market sold off because (the Fed’s) higher-for-longer message really wasn't fully discounted ahead of time. If the fed funds rate is going to stay where it is or move higher beyond 5.5% into the first half of 2024, then all yields have to adjust higher."

Carol Schleif, chief investment officer at BMO Family Office, says the “path of least resistance for bond yields is higher as investors adjust to the new normal of neutral rates at 2-3%.”

She adds that “interest rates are here to stay, and that has implications for portfolio construction, lending, and business and consumer behavior.”

Billionaire investor Bill Ackman's bet against 30-year Treasuries (US30Y) is paying off, and he expects long-term yields will rise even further.

"I would not be shocked to see 30-year rates through the 5% barrier, and you could see the 10-year approach 5%," Ackman said.

Among active stocks

Blue Apron ( APRN ) rocketed up after announcing it entered into a merger agreement to be acquired by Wonder Group for $13 per share. The price represents a 137% premium to the September 28 closing price and a 77% premium to the 30-day volume-weighted average price of the stock. But it is far below the 52-week high for APRN of $70.68.

Editas Medicine ( EDIT ) traded higher after Stifel upgraded the gene editing biotech to Buy from Hold and raised its price target to $17 from $9, citing prospects against the blood disorder sickle cell disease.

And Nike ( NKE ) swung higher after the athletic apparel giant beat profit estimates and provided solid guidance during the conference call with management. During the call, Nike said it expects revenue growth to be up slightly in comparison to last year. Gross margins are anticipated to expand approximately 100 basis points from a year ago.

In other news of note

The French antitrust regulator raided chip giant Nvidia's ( NVDA ) offices in the country this week over suspected anticompetitive practices. That’s according to The Wall Street Journal reported.

The regulator did not mention Nvidia by name, and the company declined to comment on the matter.

And following up on yesterday’s GameStop events, newly-named CEO Ryan Cohen wasted no time in setting a new tone. Cohen sent a memo to employees Thursday that made it clear changes were on the way.

He said, "Our job is to make sure GameStop is here for decades to come... Extreme frugality is required .”

“Every expense at the company must be scrutinized under a microscope and all waste eliminated. The company has no use for delegators and money-wasters. I expect everyone to treat company money like their own and lead by example."

And in the Wall Street Research corner

The market is in the middle of the worst seasonal trends of the year, but it is statistically normal, according to Goldman Sachs derivatives strategist Scott Rubner.

Rubner says the "positive set-up for Q4 is about as good as I have seen” and "October and Q4 seasonals are very positive, especially during rally years."

He adds that "since 1900, there have been 56 years with the SPX up more than +10% heading into Q4. The market rose in 4Q in 48 of those 56 years (~86% hit rate). Across those 56 years, the median 4Q return was +5.8% and the average return was +4.6%."

"The best 4Q return in those 56 years was +17% in 1985. The worst was -28% in 1929. The average return for all Q4s was +3.6% (~77% hit rate)."

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