TRV - What The Fed Is Poised To Do After September 2023 CPI Report

2023-10-12 10:25:58 ET

Summary

• Consumer Price Index, or CPI, rose by 0.4% month-over-month, slower than the previous month's increase of 0.6%.
• Motor vehicle insurance increased by 18.9% over the last year, having a negative impact on consumers.
• Despite WTI crude rising last month, energy prices rose by 1.5% in the month, while the energy index decreased by 0.5% over the last 12 months.

The Bureau of Labor Statistics posted the Consumer Price Index for all urban consumers that barely changed by much. CPI-U rose by 0.4% month-over-month. This is slower than the 0.6% increase in August. In the last 12 months, the all items index increased by 3.7%, identical to last month’s report.

Markets trimmed pre-market gains after this seemingly “nothing burger” report. Readers looking for price increase stocks will find the data on inflation over the past 12 months. The shelter index increased by 7.2% and accounted for 70% of the total increase in all items less food and energy. Additionally, motor vehicle insurance increased by 18.9%.

Motor Vehicle Insurance Increased

The 18.9% increase in motor vehicle insurance over the last year deserves special attention. Insurance providers needed to adjust their rates to account for prior CPI increases earlier this year . Increased technology adds to the complexity of automobiles. When owners of those vehicles are involved in an accident, insurers need to pay for the increase in the cost of parts and labor. Insurance holders must pay a higher premium for the overall increase in automotive theft. This year, auto theft is up by 34% from last year .

Advance Auto Parts ( AAP ), which Kenvue ( KVUE ) replaced on the S&P 500 ( SPY ), is down by 66% YTD. AAP stock has a “strong sell” rating on Seeking Alpha’s Quant score.

The firm cannot blame the weak demand for automotive parts for its weak performance. Magna International ( MGA ) has better growth and profitability scores. Income investors who hold Schwab’s dividend fund Schwab U.S. Dividend Equity ETF™ ( SCHD ) should be aware that it holds AAP stock, albeit at a 0.102% allocation.

Since consumers must have insurance, readers may expect Allstate ( ALL ) and The Travelers Companies ( TRV ) to rebound from their stock slump that began earlier this year.

Valuations will need to fall to better levels before considering either stock.

Energy Prices Increased

WTI crude prices (CL1:COM) rose from around $80/bbl to peak at over $88 by Oct. 2, 2023. However, the energy index rose by 1.5% over the month. For the last 12 months, the energy index decreased by 0.5%. Still, the price volatility in Exxon Mobil ( XOM ) reminds us of the minimal correlation to energy inflation. Exxon is buying Pioneer Natural Resources ( PXD ) for $59.5B in stock . Investors may look for energy firms that are in a downtrend despite the rise in prices. Devon Energy ( DVN ) trades below $50 a share. The stock has a strong profitability score, like Marathon Oil ( MRO ). However, EQT Corporation ( EQT ) is up around 40% YTD and scores well on value and growth, too.

Food Price Increase Unchanged

In September, food prices increased by 0.2% in the month and by 3.7% in the last year. Prices for food away from home rose by 0.4% in Sept. It increased by 6.0% over the last 12 months. The report noted that food price increases ranged from 0.2% for meat, poultry, fish, and eggs. The vague item, other food at home, rose to 4.2%.

Investors do not have a meaningful trade from food away from home prices rising. Instacart ( CART ) already completed a successful initial public offering. Shares traded as high as $42.95 before settling recently at below $25. Uber ( UBER ) had a bearish “double top” chart pattern at around $49 . The stock closed on Oct. 11 at $46.64.

Natural Gas Prices Plunged

In the last 12 months, the natural gas index fell by 19.9%. Shares of Enbridge ( ENB ) are the worst performer in this category. In contrast, Cheniere Energy ( LNG ) is up by 6.71% in the last month and ONEOK ( OKE ) is up by 4.54%.

Used Vehicle Prices Declined

While new vehicle prices rose by 2.5% Y/Y, used car and truck prices fell by 8%. Carvana ( CVNA ) traders would not notice the negative impact of the supply glut in used vehicle prices. Shares are up by an astounding 698.95% YTD. But CVNA stock indicated a bearish double top formation at $55 .

Ahead of a steep decline in demand, Carmax ( KMX ) accumulated used vehicles it could not sell. KMX stock is still up by 13.5% YTD but down by over 15% in the last month.

General Motors ( GM ), Stellantis ( STLA ), and Ford ( F ) should benefit from the UAW strike. This will slow or stop the output of new vehicles. It will help sustain new vehicle pricing at current levels.

Investors with a long-term time horizon should continue to avoid all three firms, especially GM and Ford. They face higher costs for parts. Once it settles with the union, it must pay sharply higher wages. Both firms are losing billions in the crowded electric vehicle ambitions. Competition from Rivian ( RIVN ) in the Truck EV market will pressure them. In addition, Tesla ( TSLA ) is cutting prices again in the U.S., which will hurt the operating margins of all EV players. Tesla also has a Cybertruck that may appeal to its customer base and to EV enthusiasts.

Your Takeaway

The CPI report has subdued data that is in line with market expectations. It will not change the Federal Reserve’s interest rate policy of another 25 bps rate hike in 2023.

As always, watch treasury yields. More treasuries are crossing 5.00%. H4L or "Higher For Longer" interest rates will push yields at 5.5% for the foreseeable future. This will increase the attractiveness of such debt instruments compared to holding stocks.

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