Easing Inflation And Big Earnings By Banks Lifted Stocks YesterdayStocks closed higher yesterday, led by the Nasdaq with a gain of 0.90%. Yesterday's better-than-expected Consumer Price Index (CPI – retail inflation) report was welcome news. The headline number was off -0.4% m/m vs. last month's 0.5% and views for -0.1%. The y/y rate came in at 3.5% vs. last month's 4.2% and estimates for 3.8%. The core rate (ex-food & energy) was flat (0.0%) vs. last month's 0.2% and forecast for the same. The y/y rate was at 2.6% vs. 2.9% and outlook for 2.9%.
The softer headline numbers, which includes energy (oil was falling last month), was expected to show easing. But with oil heading back up (although, nobody is expecting a return to conflict highs), it does suggest the next report, if that trend continues, could firm up. But the core rate (which excludes energy) was the real positive surprise. That number is not directly influenced by the rise and fall of energy. So seeing that cool gives hope that structural inflation pressures could be easing. We'll get another look at inflation this morning with the Producer Price Index (PPI – wholesale inflation). The headline number is expected to be down -0.1% m/m vs. last month's 1.1%. The y/y rate is estimated to come in at 6.2% vs. last month's 6.5%. The core rate (ex-food & energy) is forecast to be up 0.4% m/m, in line with last month. The y/y rate is expected to come in at 5.2% vs. last month's 4.9%. In other news yesterday, the NFIB Small Business Optimism Index improved to 97.4 vs. last month's 95.3 and the consensus for 95.6. Fed Chair Kevin Warsh, in yesterday's semi-annual testimony before the House Financial Services Committee, said the Fed will work to "get monetary policy right." He said "the members of our Committee have no tolerance for persistently elevated inflation. And we have a resolute commitment to restoring price stability." Those comments definitely sounded hawkish.
But he also said that the Fed needs a "regime change in policy, and we need new consideration of practices, some of which have been working, some of which haven't." We will have to see what that means in coming FOMC meetings. Separately, it's worth pointing out that he said the economy is "expanding at a solid pace, showing resilience in the face of recent developments." He'll give his semi-annual testimony before the Senate Banking Committee today. Earnings season unofficially began yesterday with several big banks (Bank of America, JPMorgan Chase, Citigroup and Goldman Sachs) all posting positive EPS surprises and positive sales surprises. Their EPS growth rates (quarter vs. same quarter a year ago) impressed with BAC up 36.0%, JPM up 23.8%, C up 60.7%, and GS up 92.1%. Wow. Global enterprise company IBM, however, didn't report yesterday, but their pre-announcement did briefly cast a pall over stocks. They warned that Q2, citing weakness in software and infrastructure businesses, would see EPS at $2.93 vs. estimates for $3.02. While that would still show revenue growth of 1% and EPS growth of 4.64%, it's not what analysts were expecting. And the reasoning was worse. They said they had "faltered" in their focus on data center infrastructure, and as a result, "numerous large deals failed to close on the timelines we expected." IBM was down -25.21% yesterday. Today we'll hear from banks Morgan Stanly, PNC Financial, and BlackRock, along with healthcare company Elevance and Johnson & Johnson. And, of course, everybody will be monitoring developments in the Middle East. Should be a busy day. See you tomorrow,  Kevin Matras
Executive Vice President, Zacks Investment Research |
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