Daily Markets: Inflation May Not be 'Transitory' After All

Today’s Big Picture

Equity indices in Asia finished most lower with India’s Sensex shedding 0.7% while Japan’s Nikkei slumped 0.6% and South Korea’s Kospi closed 0.2% lower. Hong Kong’s Hang Seng closed 1.0% higher on the day while China’s Shanghai Composite climbed 1.2% despite conflicting news regarding China Evergrande’s (EGRNF) delayed debt payments. The Chinese government is reportedly looking at relaxing property rules to make it easier for troubled developers to sell assets. By mid-day, equity indices in Europe were mixed while U.S. futures point to modest positive start to the trading day ahead.

Following the hotter than expected October Consumer Price Index report yesterday and comments this morning that the European Central Bank could curb its bond buying sooner than expected, the notion that inflation is transitory is getting a serious re-think. Odds are that will prompt investors to similarly re-think interest rate sensitive positions as well as more defensive ones following the sharp year-to-date rise in equities. The bond market is closed today in honor of Veterans Day and is the reason why there are no economic data releases today.

Data Download

Coronavirus

New coronavirus cases in the U.S. have dropped nearly 60% from the recent peak of 172,500 per day in mid-September to 74,000 over the past week. That’s the good news. The not so good news is that over the past three weeks, the average number of cases per day has vacillated between 70,000 and 75,000, meaning they are no longer on the decline. The average number of lives lost per day has risen 1% over the past week, standing at over 1,200. While the number of daily new cases in the South has dropped dramatically, the numbers in the Midwest and Northeast are rising. For example, Minnesota is seeing the highest average number of new cases so far in 2021.

International Economy

As China’s Central Committee’s sixth full session, or “plenum,” wraps, Chinese President Xi Jinping is set to deliver the first resolution on Communist Party history in 40 years, giving him the mandate to potentially rule for life. The approval of the document was announced earlier today, and the Central Committee called on China to “unite around the party with Xi at the core.”

The UK’s GDP in Q3 (preliminary estimate) came in at 6.6% YoY after rising 23.6% YoY in Q2 and compared to expectations for a 6.8% YoY pace. Industrial Production in the UK registered -0.4% MoM after rising an upwardly revised 1.0% in August and compared to expectations for 0.2%. On a year-over-year basis, September Industrial Production rose 2.9% YoY after rising a revised 4.0% in August.

Governing Council member Robert Holzmann shared the European Central Bank could stop buying bonds as early as next September if inflation looks to have sustainably returned to the official target. The current consensus view has the ECB’s bond-buying tool in operation through the end of 2023.

Domestic Economy

Yesterday’s October Consumer Price Index data came in much hotter than expected, up 0.9% MoM versus expectations for 0.6% while the core CPI was up 0.6% versus expectations for 0.4%. The year-over-year rates rose to the highest levels since 1990-1991, with headline accelerating to 6.2% YoY from 5.4% in September, well above the expected 5.9% pace and core up to 4.6% YoY versus consensus for 4.0%. Price increases were also broadly based across most goods and services. This data contradicts Monday’s consumer price readings out of the PPI report and is most concerning in its large sequential increases. Digging into the details, the price pressures are not about strong demand growth -- global demand is relatively soft -- but rather about the supply challenges from material shortages to labor market disfunction that includes very slow recovery in the workforce participation rate.

Speaking of labor force angst, despite the record-high job openings and unusually high quit rates in the era of “The Great Resignation,” average weekly earnings declined 0.9% in October and have now been declining for six out of the past seven months. That’s not a robust sign for future spending. If consumers decided to have a blowout Christmas after last year’s pandemic-induced Ebenezer year, they are going to have to do so on credit.

Markets

The S&P 500 fell 0.8% yesterday as the hotter than expected October CPI data threw some cool water on the market via the pop in Treasury yields. The 2-year yield settled higher by ten basis points to 0.50%, and the 10-year yield settled higher by 13 points to 1.56%. The Nasdaq Composite lost 1.7% and Russell 2000 fell 1.6% while the Dow Jones Industrial Average shed 0.7%. WTI crude futures fell 3.5%, or $2.93, to $81.23/bbl amid bearish inventory data. The VIX rose above its 200-day moving average for the first time since mid-October.

The bond market continues to price from camp “transitory,” with the 30-year Treasury yield rose around 10 basis points to 1.925% which is still well below the nearly 2.5% level from earlier this year. Also to keep in mind, when headline and core CPI rates were where they are today back in the early 90s, the dominating factor ended up being the headwinds they created to the economy which led to the yield on the long bond falling over 50 basis points.

Stocks to Watch

Meta Platforms (FB), the company formerly known as Facebook, and Microsoft (MSFT) announced a partnership yesterday that will allow customers to integrate Meta’s Workplace enterprise social network software with Microsoft Teams.

Not to be outdone by its archrival, Apple (AAPL) announced yesterday that it is launching a business tools service for companies with up to 500 employees. The service is currently in beta testing, slated for full release in spring 2022, with subscriptions starting at $2.99 a month.

Shares of Poshmark (POSH) were down over 33% at one point during normal trading hours yesterday and closed 28.8% lower after reporting weaker than expected revenue and EPS late Tuesday. Shares are down nearly 83% year-to-date through Wednesday.

Shares of DoorDash (DASH) were up over 15% during yesterday’s trading on the news that the company is going to acquire the international food delivery platform Wolt for $8.1 billion.

Uber (UBER) is raising its base fares in London by 10% in a move designed to attract more drivers. Customers traveling from Heathrow, Gatwick, Luton and Stansted airports will face an additional 15% increase in fares at peak times.

Sony (SONY) reduced its PlayStation 5 production outlook for the year due to component and logistics constraints. The company had targeted 16 million units and now sees that production near 15 million.

General Electric (GE) announced plans to buy back as much as $23 billion in debt as it looks shore up its balance sheet.

And for all those Tesla (TSLA) investors and watchers, Elon Musk reportedly sold $5 billion of TSLA stock this week. And yes, it’s only the start of Thursday.

Earnings Announcements & Guidance

Before the market open, Edgewell Personal Care (EPC), GrowGeneration (GRWG), Li Auto (LI), Sally Beauty (SBH), Tapestry (TPR), and YETI Holdings (YETI) will be among the companies reporting their latest quarter results.

Walt Disney (DIS) shares traded off following weaker than expected September quarter results for both its revenue, EPS and slowing Disney+ subscriber count. We’d note on a YoY basis Disney+ subscribers grew 60% to 118.1 million but average revenue per subscriber fell to $4.12 from $4.52. As expected, the company’s Disney Parks, Experiences and Products revenue for the quarter increased to $5.5 billion vs. $2.7 billion in year ago quarter. On the earnings conference call, CEO Bob Chapek shared Disney would be partnering with third parties for online betting, leveraging its ESPN brand. Tomorrow, Friday, Nov. 12, Disney will host its 2021 Disney+ Day at which it will reportedly share some of the 340 streaming programs it is working as part of its plan to re-accelerate subscriber growth at Disney+.

Hand crafted beverage company Dutch Bros (BROS) served up quarterly results that beat top and bottom-line expectations as company-operated store revenue increased 62.9% to $108.7 million. BROS issued upside guidance for the current quarter with revenue of $125-128 million vs. the $121.4 million consensus.

Beyond Meat (BYND) reported a wider than expected quarterly loss as revenue came up short of expectations. That paired with guidance for the current quarter that left investors wanting resulted in the shares coming under pressure in after-market trading last night. Weighing on its profitability were higher transportation and warehousing costs as U.S. revenue fell 13.9% YoY due primarily to weaker grocery demand.

Shares of Affirm Holdings (AFRM) surged in after-market trading last night following news the company will serve as Amazon's (AMZN) only third party, non-credit card, buy now, pay later option in the U.S. Affirm also shared it sees its quarterly revenue of $320-$330 million vs. the $296.9 million consensus.

IPOs

The Amazon and Ford (F) backed EV start-up Rivian (RIVN) began trading yesterday with an opening price of $106.75 per share after pricing its IPO at $78 per share. The stock closed the day at $100.73, up 29%, ending its first day as a public company valued at almost $88 billion making it worth more than both Ford, at $77 billion, and General Motors (GM), at $87 billion.

M&A

PowerSchool (PWSC) signed a definitive agreement to acquire Kickboard, a provider of K-12 education behavior management solutions.

CooperCompanies (COO) signed a definitive purchase agreement to acquire Generate Life Sciences, a privately held leading provider of donor egg and sperm for fertility treatments, fertility cryopreservation services, and newborn stem cell storage, from GI Partners, a private investment firm, for $1.6 billion.

Tencent Holdings (TCEHY) acquired an almost 90% stake in Wake Up Interactive, Japanese creative studio with several Nintendo Switch hit games, for ~$44 million.

After Today’s Market Close

Blink Charging (BLNK), Flowers Foods (FLO), Lordstown Motors (RIDE), and RE/Max Holdings (RMAX) will be among the companies reporting their quarterly results. Those looking for more on which companies are reporting when should head on over to Nasdaq’s Earnings Calendar.

On the Horizon

• November 12: JOLTs report, Michigan Consumer Sentiment
• November 15: NY Empire State Manufacturing Index
• November 16: Retail Sales, Export & Import Prices, Industrial Production, NAHB Housing Market Index, Business Inventories, Overall Net Capital Flows, Foreign Bond Investment, Long-Term Tic Flows, API Crude Oil stock changes
• November 17: Housing Starts, Building Permits, EIA Crude Oil and Gasoline Stocks
• November 18: Weekly jobless claims and Philadelphia Fed Manufacturing Index

Thought for the Day

“Thursday is how Friday says, ‘Hang on, you are almost there.”

Disclosures

• Beyond Meat (BYND), Blink Charging (BLNK), Li Auto (LI), Tesla (TSLA) are constituents of the Tematica BITA Cleaner Living Index
• Beyond Meat (BYND), Blink Charging (BLNK), Li Auto (LI), Tesla (TSLA) are constituents of the Tematica BITA Cleaner Living Sustainability Screened Index
• Microsoft (MSFT) is a constituent of the Tematica Research Thematic Dividend All-Stars Index

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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