Price Check: Inflation Optimism and Stocks Rise After Mild PPI Report

For the second time in less than a week, investors saw evidence that Corporate America’s long inflation nightmare may be easing.

October producer prices rose just 0.2%, according to Tuesday’s Producer Price Index (PPI) report. That was below Wall Street’s 0.4% average estimate. Core PPI, which strips out food and energy, was flat last month. Analysts had expected an increase of 0.5%.

One or even two better inflation numbers isn’t a trend, so the Federal Reserve isn’t likely to pivot based on one month’s data. And inflation can always rear its ugly head. So, consider putting today’s reading into context. However, both today’s PPI and last week’s Consumer Price Index (CPI) data indicate we’re going in the right direction, and the PPI reinforced what we saw in CPI.

The CBOE Volatility Index remained below 24 early Tuesday, down slightly from yesterday’s levels. Other market metrics also fell this morning, including the benchmark 10-year Treasury yield and the U.S. dollar index. If you’re looking for direction in the stock market, it’s never a bad idea to check bonds and the greenback. Their weakness this morning cleared the path for the early rally.

Just In

Walmart Inc (NYSE:WMT) Delivers. The retailer’s earnings impressed investors this morning, who sent shares up 6% in premarket trading. The stats looked solid all around, with 8.7% revenue growth, 8.2% same-store U.S. sales growth, and a higher full-year outlook to reflect Q3 performance.

Grocery sales helped drive quarterly strength, the company said in its press release. Earnings per share and revenue both beat Wall Street’s average estimates.

• On the inventory front, an area many retailers including WMT have struggled with, there’s progress,. Walmart’s inventory levels grew 13% in Q3, down from 25% growth in Q2. Even 13% is misleading, since those values are also driven mainly by inflation. On a unit basis, it’s much less.
• Slowing inventory growth is healthy for WMT, but industrywide, overstocked inventories have led to markdowns that have possibly eased price inflation around the country. If inventories are becoming less of a problem, maybe companies won’t have to discount as much, leaving them in healthier shape.
• On a sour note, WMT expects holiday quarter same-store sales, excluding fuel, to rise just 3%. That’s below Wall Street’s estimates and reflects WMT possibly being conservative about the consumer.
• One thing that’s reassuring from the consumer perspective, however, is that WMT had a good quarter even though some had worried inflation would hurt WMT’s main customer base, which tends to be more vulnerable to rising prices. WMT’s earnings are a good sign that lower-income customers may be escaping the worst impacts of inflation.

WMT’s stock gains early Tuesday might be helping shares of competitors like Target (NYSE:TGT) and Macy’s (NYSE:M) as well.

Like a lot of companies this quarter, WMT announced a new share buyback plan. Buybacks are gaining popularity as many firms try to get ahead of a new law raising taxes on buybacks in 2023.

Home Depot (NYSE:HD) Earnings Impress, Shares Don’t: Everything appeared to go right for HD in its earnings released this morning. Revenue and earnings beat Wall Street’s projections. Same-store sales rose 4.3%, above the 3.1% Wall Street estimate, and HD reaffirmed 2022 guidance. Nothing wrong there. Why are shares falling this morning? Perhaps some see the guidance as a bit conservative, but that stands to reason. HD benefited in a massive way from the recent housing surge, so it’s not surprising they’d see slowing growth. There’s nothing shocking there, and the stock is only down about 1%.

Of the two big-box retailers reporting this morning, WMT was the outlier, but in a good way.

Potential Market Movers

With these lower-than-expected PPI numbers, it will be worth watching how sectors react. Companies feeling less pain from rising wholesale prices will be less likely to pass along costs to their customers or eat costs that could hurt their margins. Lower wholesale price indicators will likely be a boon to industrial firms that have to pay up front for raw materials on the wholesale market. Think automakers, for instance.

Before the PPI results, there was unpleasant inflation news Monday from the New York Federal Reserve. Consumer expectations of inflation aren’t falling despite the Fed’s rate hike and hawkish words. Instead, they’re rising.

• Consumers now see 5.9% inflation over the next year and 3.1% over the next three years.
• They previously had expected 5.4% and 2.9%, respectively.

That’s the opposite direction the Fed wants to see, especially considering Fed Chairman Jerome Powell’s concerns about inflation expectations becoming “entrenched” and potentially driving future price gains.

This could be additional proof that it will take far more than a single bullish CPI report to reset consumer thinking. Especially if high-profile prices for things like food, gas, and rent continue rising. After all, it doesn’t help most people if used car or appliance prices fall, unless they have to buy one right away. For most of us, it’s the day-to-day costs like food and fuel that shape our expectations of the price environment, and those keep rising.