All Stock Traders Need to Know Today: CPI, Rates, Earnings, PPI

The good news is the “core” rate (which strips out food and energy) is also starting to more aggressively weaken, slowing to an annual rate of +4.8%.

Interest Rates

Wall Street still widely expects the US Federal Reserve to hike interest rates by another 25 basis-points at its upcoming July 25-26 meeting, but investors are now more optimistic that it might also be the last rate hike in this cycle. Just look at the two-year yields which tumbled right after the release of the CPI data, going from 4.85% down to 4.75%.

Many Wall Street insiders argue that if the two-year yields stay steady or start to deteriorate the stock market bulls will have even more room to run higher, perhaps even retesting the all-time highs by yearend.

On the flip side, if the two-year yields again start to climb higher, stock market bulls could face more sizable headwinds.

There’s also still a great deal of debate over whether the Fed’s historically fast pace of rate hikes could pull the economy into recession. Bulls believe that the affects of the Fed’s hiking campaign have mostly already worked their way through the system and that the job market and household finances are strong enough to handle “higher rates for longer.”

Bulls vs Bears

Bears, however, argue that delayed impacts have yet to be fully realized, particularly in the financial and commercial real estate sectors, which could of course have consequences for the broader US and global financial systems.

Bulls are pointing to the Fed’s latest “Beige Book” report that showed an overall increase in US economic activity in June with inflation continuing to ease. That combination of steady growth and falling prices is what some call a “goldilocks” economy, aka an ideal environment of full employment, economic stability, and stable growth.

Bears continue to argue that falling prices are going to big problem for corporate earnings in the quarters ahead, regardless of whether the US avoids recession.

Bears are also quick to remind that some areas of “disinflation” in June may not continue or could possibly reverse course, in turn keeping overall inflation above the Fed’s +2% target rate. In other words, it is only one report and too soon to declare the inflation battle has been won.

Earnings

The real test for stocks in the weeks ahead will be Q2 2023 earnings season, which “unofficially” kicks off on Friday with results from big Wall Street banks.

Many Wall Street insiders are concerned that even if earnings and forward guidance surprise to the upside, stock price gains could be limited due to already high valuations.

The S&P 500 is currently trading at a 12-month forward price-to-earnings ratio of 19.2 times compared to its long-term average of 15.6, according to Refinitiv. At the same time, there is evidence that companies are rapidly losing their pricing power while simultaneously facing high labor and financing costs. Meaning profits going forward may be much tougher to achieve.

Today, earnings results are due from Conagra, Delta, Fastenal, and PepsiCo. The key economic data is the Producer Price Index (PPI) for June with economists expecting the headline rate to slow to +0.5% year-over-year from +1.0% in May, with the “core” rate holding steady at an annual rate of +2.8%. If PPI unexpectedly moves up, it will likely spark worries that inflation is poised to make a comeback. Stay tuned…