We publish on a 3-day a week schedule:
– Sun eve / MON am
– SKIP MON
– Tue eve / Wed am
– SKIP WED
– Thu eve / Fri am
The October CPI, if soft, means Fed no longer has “back to the wall” on fighting inflation = very consequential
Apple warned that iPhone production has been impacted by COVID-19 restrictions. This will hurt production for $AAPL and it might even hurt the stock short term. But this should hardly cause lasting damage
- this is not a “demand” problem, it’s “supply” due to Foxconn and other China supplier production impacts
- this delay was also well telegraphed as multiple media stories showed hordes of Foxconn workers fleeing factories to avoid mandatory lockdowns (see below).
- China is already issuing new guidelines to reduce the burden from COVID-19 lockdowns and this likely means less disruptive measures in the future
In our view, the far more consequential event this week will be October CPI, which is expected to be released on Thursday Nov 10, 2022. The key events this coming week:
- US 2022 midterm elections 11/8 –> Republicans taking Senate = deflationary due to direction of Russia-Ukraine war + deflationary due to fiscal restraint
- October CPI on 11/10 –> we think odds favor a downside (positive) read below +0.5% Oct Core MoM = could be as much a “game changer” as “hot” Aug CPI derailed S&P 500 (4,120 to 3,491)
- U Mich prelim Oct inflation 11/11 –> 1-yr has been volatile due to gasoline and food = could be positive if this falls, but no sense of probabilities
Recall, equities went into a tailspin in September (9/13) the day the August CPI Core came in a “scorching hot” +0.6% MoM vs +0.3% forecast. And that was when the inflationistas began to harp on:
- services surging
- shelter/oer rents going to get far worse
And as shown below, the S&P 500 fell sharply:
- tanking from 4,120
- falling 15% over the next 20 trading days down to 3,491
CONSENSUS EXPECTING “HOT” OCT CORE: Street looking for October Core +0.5% MoM but we think Medical Insurance, weaker cars, plus housing possibly could drive downside in October CPI Core
We will have a more fulsome October CPI analysis on our Tue evening/Wed am commentary. But we wanted to highlight consensus forecasts:
- over 40 economists posted their Oct Core CPI MoM estimates
- consensus is +0.5%, similar to scorching +0.6% seen in each of last two months
- some even see +0.6% for October
- Only UBS sees +0.3%, a major outlier
BETTING MARKETS: See October Core CPI +0.45%, slightly below economist consensus
But betting markets are slightly more positive.
- they see +0.45%
- +0.05% better than Street consensus
STRATEGY: Why are equities the only “financial condition” to adversely tighten post-FOMC?
The Fed last week made what we believe is overall a positive shift:
- Fed downshifted pace of hikes –> more predictable
- Acknowledged “lags” and “other considerations like financial and monetary”
- But on other hand, want “higher for longer” possibly
- But as Goldman Sachs economists note, the tightening of financial conditions, post-FOMC was almost entirely equities
Here is the question. Why would FOMC action only have an adverse effect on equity markets? If higher for longer means higher rates, then bonds, both investment grade and high-yield should have sold off.
BONDS: Even JPMorgan Fixed Income team saw FOMC action as good for corporate bonds = good for equities
Take a look at the comments from JPMorgan’s Fixed Income team post-FOMC:
- they saw Fed action as positive for high-grade bonds (HG, aka investment grade)
- the “clarity” on near-term path of Fed hikes is less severe
And on the topic of “higher for longer” the JPMorgan team:
- puts less weight on “higher for longer”
- as Fed has a “poor track record of predicting the terminal rate”
- in other words, the “higher for longer” is just that, a future risk, but the near-term matters
Taking this back to equities, this is similarly the logic. The FOMC action was overall good for stocks. That was our point in our report last week.
- and as JPMorgan notes, “obviously places the onus on CPI”
EUROPE: War creating far more adverse consequences for inflation, complete reversal of the 80s period
The Russia-Ukraine war has fueled inflation to a far greater extent due to the impact on food (fertilizers, grains, etc) and energy. Even the FOMC makes this clear in paragraph 2 of its official statement (been there for many meetings).
Europe inflation far worse…
And the inflation consequences are severe. Look at the CPI 6M annualized rates below.
- double-digits throughout Europe
- yet, european central banks have far lower terminal rate assumptions priced in
- doesn’t this seem wrong? the risks of higher rates is in Europe
INFLATION 1970-1980: Germany have far lower inflation versus US, never even getting to double-digits
Here is what surprises me. Look at CPI and PPI of Germany vs USA since 1960:
- Germany CPI never got to double-digits in 70s-80s, while USA suffered horrifically high inflation
- same with PPI
- so, shouldn’t the US ultimately exit and weather this inflation far better?
- investors in the US are overly negative, in our view
And post-midterms, if the Republicans gain control of the Senate (they are expected to gain the House), we think funding for the war would also become more difficult. And this, likely puts pressure on US policy regarding Russia-Ukraine.
According to Tom Block, Head of Policy Strategy for Fundstrat:
- I think Ukraine fatigue is settling in… MTG (Marjorie Taylor Greene) reflects the similar isolationist view on the right.
- Republican control of House and/or Senate will bring more scrutiny of all Biden policies and try to make points of differences looking to 2024.
And there are more media stories of the US encouraging Ukraine to restrain its rhetoric as well.
BOTTOM LINE: As hopeless and negative as sentiment appears, positive data points could be on horizon
A sellside firm recently conducted a survey of its investors. And while we will not name the firm, here are some of the takeaways from their survey:
- For YE 2023 average survey results:
- Core CPI +3.6% (lower versus now)
- Fed funds +4.20% (lower versus now)
- 10-yr yield 3.75% (lower versus now)
- Recession severe 63% YES
- S&P 500 3,540 (lower versus now)
That is bleak. And the yields are lower, inflation is lower, but
- with 63% seeing severe recession
- S&P 500 is down hard.
This shows the state of the buyside. Quite bearish. But that doesn’t mean the buyside is wrong. But it does show that the positive surprise could be quite powerful in changing these views.
37 GRANNY SHOTS: Updated list is below
The revised 37 Granny shots are shown below. The list is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear in at least two portfolios:
- $AAPL in 4 of 6 portfolios
- $GOOGL $MSFT in 3 of 6 portfolios
- $AMZN $META in at least 2
- This reinforces our favorable view of FANG in 2H2022
37 Granny Shot Ideas:
Communication Services: $GOOGL, $META
Consumer Discretionary: $AMZN, $AZO, $GPC, $GRMN, $ORLY, $TSLA
Consumer Staples: $BF/B, $MNST, $PG, $PM
Energy: $CVX, $DVN, $EOG, $PSX, $XOM
Financials: $ALL, $AXP
Health Care: $AMGN, $HUM, $UNH
Information Technology: $AAPL, $AMD, $AVGO, $CSCO, $KLAC, $MSFT, $NVDA, $PYPL, $QCOM
Materials: $CF, $FCX, $LIN
Real Estate: $AMT, $CCI, $EXR