PPI Data Comes in Hot: Could Fed's Inflation Fight Require More Ammunition?

Investors awoke Thursday to a red-hot January Producer Price Index (PPI) gain of 0.7%, showing lack of progress in the inflation fight. Stock index futures extended early losses after the data.

Investors also grappled with weekly initial jobless claims and Philadelphia Fed data while they digested a solid earnings report from Cisco (NASDAQ:CSCO) released late Wednesday. The S&P 500 finished a few ticks below 4,150 yesterday, and that remains a tough resistance point that’s held up very well. Technical support could be near 4,100.

While “buy the dip” characterized the market earlier this week on pullbacks, it could be harder to find enthusiasm today after PPI.

Just in

Consensus ahead of the PPI data had been for a 0.4% rise in headline PPI and a 0.3% rise in core PPI, according to Briefing.com. Investors got 0.7% and 0.5%, respectively.

Today’s report shows that input costs for businesses remain elevated, and if companies choose not to pass them along to customers, they’ll see their profit margins get hurt. This isn’t a good report for equities, offering evidence that investors had grown a little too optimistic about the trajectory for inflation. There’d been hopes that with inflation moderating, the Federal Reserve could pause rate hikes later this year, but a report like this suggests the market had grown too optimistic.

Weekly Initial Jobless Claims of 194,000 came in below expectations, another sign of the hot economy not cooling down. At the same time, February’s Philadelphia Fed Index reading of -24.3 was well below Wall Street’s consensus. This is the kind of data the market doesn’t want to see: rising inflation accompanied by a sign of economic weakness in the Philly Fed reading.

Looking for any positives? Nearly 1.6 billion passenger trips were made in China during the Spring Festival travel rush that ended Wednesday, according to the country’s Xinhua news agency. That’s up more than 50% from a year ago, suggesting that the reopening is picking up steam. Asian stocks finished mostly higher Thursday.

Stocks in Spotlight

Cisco (CSCO) shares leaped 6% in premarket trading after the networking equipment provider’s earnings report and positive forecast beat Wall Street’s estimates.

Growth in CSCO’s core networking business that connects devices, users, and applications could signal an improving business economy because most companies rely heavily on these products but pull back if they anticipate tough times. That’s why CSCO’s results are often seen as a proxy for general corporate health.

CSCO’s strong quarter also contrasts with some other tech companies that reported slower growth and cut jobs recently. Could CSCO’s impressive showing be a harbinger of better things ahead of the industry, or is it the exception? Investors might have to go one earnings report at a time, though CSCO’s solid quarter raises hopes for the entire info tech sector. Nvidia (NASDAQ:NVDA), the next big tech company on the calendar, is expected to report earnings next week.

Mega-cap tech stocks: As major indexes remain near recent peaks, companies like Tesla (NASDAQ:TSLA), Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) have helped keep them there.

This has some analysts worried about a top-heavy market. The S&P 500 index (SPX), heavily weighted toward mega-caps, looks strong on the surface but could hide weakness within. A “breadthless rally” like the one in 2018 isn’t usually one that lasts. If you’re bullish about the market, it’s far better to see a rally that lifts all boats.

What to Watch

Applied Materials (NASDAQ:AMAT)is expected to report after the close, providing more insight into the semiconductor sector. AMAT makes chip manufacturing equipment, which offers a bird’s eye view of industry demand. Some analysts are a bit gloomy about the company’s 2023 prospects, but AMAT did beat analyst estimates on revenue and earnings per share (EPS) last time it reported, though its press release then cited “geopolitical and macroeconomic challenges.”

Leading indicators:Tomorrow, January’s Leading Economic Index report from the Conference Board will wrap up a wild trading week ahead of the long Presidents Day weekend. This particular metric has been down 10 straight months, reinforcing ideas that the United States could face a recession, according to Charles Schwab’s Chief Investment Strategist Liz Ann Sonders.

Consensus on Wall Street is for a 0.3% drop in January Leading Indicators that would extend the streak, according to Briefing.com.

Deere (NYSE:DE) is expected to report Friday morning before the open. As a large multinational agricultural equipment maker, DE is particularly exposed to moves in the dollar. It could be interesting to see if the dollar’s decline from last year’s 20-year highs might’ve provided a bit of a tailwind for DE in the quarter that just ended.

DE shares jumped when it reported last November, lifted by its stronger-than-expected 2023 revenue guidance based on “positive farm fundamentals” and greater investment in farm infrastructure. As for how those fundamentals have held up, look to crop prices, notably corn and soybeans. Both are near historically high levels but below their 2022 peaks. Still, both crops remain at profitable levels as the Northern Hemisphere’s planting season nears, and a healthy farm economy often means a healthy DE.