Despite a flat out bad June CPI report, Fed officials sound "measured" (vs "expeditious") ...arguably enabling equities to see "less bad"

Despite a flat out bad June CPI report, equities starting to see “less bad”

In the 36 hours since the horrific June CPI report, equities have managed to better with Technology stocks managing gains.

• initial “hawkish” market reaction was to price near 100% odds of +100bp for July hike
• but as the Fed funds futures chart shows, this was reversed during the trading session Thu
• this is the first sign, in our view, of a change in the Fed’s reaction function to “measured”
• unlike the May CPI (June 10th release) where Fed made “expeditious” move to +75bp (from +50)
• Fed officials seem far more measured in their reaction to June CPI

This is change, in our view, that should be favorable to equities. If the Fed moves towards a “measured” approach, instead of “expeditious”, this means fewer negative shock to markets.

• and if incoming data starts to support a weakening inflation narrative
• this further supports equities re-rating higher

Fed’s Waller and Bullard made “measured” comments today

Two Fed governors made comments today and as highlighted below, their statements are “measured” in their reaction to the horrific June CPI print. Bullard is St. Louis Fed President. Waller has been on the Board since 2020.

• neither seem supportive of +100bp

Gasoline worst “offender” in June CPI, but revenge travel, supply chain tightness and cars still bad

Underneath the hood, the June CPI was bad overall, but as shown below, the worst offenders were:

• Revenge travel –> airline + hotels >20% YoY
• Cars +10% YoY
• Furnishing +10% YoY
• but many items are elevated (see chart below) but the worst offenders are above

The leading indicators for many of these items are already rolling over. We highlighted this earlier this week including high-frequency measures of travel (hopper.com), manheim (cars) and piling inventories for retailers.

Gasoline was the worst and ultimately impacts most of the economic activities

But the biggest negative shock in the June CPI in Energy. As shown below:

• Motor fuel (gasoline) accelerated its contribution to headline CPI
• June was +2.30%
• May was +1.85%
• March was +1.74%

Gasoline, in other words, on a year over year basis, is contributing more to CPI than anytime since the start of the pandemic.

Not that this is all that important, but excluding gasoline, headline CPI actually peaked in March 2022. The chart below highlights this. But the obvious pushback is the 6.76% YoY is still too high.

Oil and Gasoline futures tell us retail gasoline has a long way to fall…

As Steve Liesman, CNBC Economist likes to say, gasoline rises in an escalator and falls down a feather. And this is shown below where retail gasoline is down 8% while crude oil is down 31%.

And as analysis by our data science team, led by tireless Ken, shows, gasoline futures and retail gasoline have basically 100% correlation over time. At least since 2005.

• this implies AAA retail gasoline is likely to fall to $3.84 in the next few weeks
• retail gasoline is $4.60 today.
• this is nearly a 20% further drop

…Drop in gasoline to $3.84 would mean gasoline is outright “deflation” in July

As shown below, if gasoline falls to $3.84, gasoline would be deflationary in July:

• Gasoline would be -49bp in July CPI MoM
• Gasoline was +55bp in June CPI MoM
• this is a 104bp swing
• June CPI was +130bp MoM
• All else equal, July CPI would be +36bp MoM

In other words, July headline CPI could show a major deceleration.

In fact, the Cleveland Fed “Inflation Nowcasting” shows this:

• July headline CPI tracking to +0.39%
• July headline CPI was +1.3%
• Core still accelerating though at +6.05% YoY
• Core still includes autos, apparel, travel, furniture, etc
• So there are multiple effects

…Arguably month-over-month CPI more important than YoY

Take a look at 6 important components of inflation. The index prices for 4 of 6 are falling already:

• gasoline down
• wheat futures down
• used cars down
• lumber down
• yet, these 4 are still showing significant positive YoY

It will be 6 months before these could be down YoY.

STRATEGY: Will the Fed actually wait until CPI YoY declines to 2%? When month over month will show persistent declines?

This gets us back to a key conceptual question. We realize the Fed needs to fight inflation.

• many clients say Fed won’t stop until CPI YoY is back towards 2%
• this seems somewhat illogical since there is a huge time element involved in YoY
• and raising rates until YoY gets towards 2% is obvious overkill
• more logical is for CPI to show substantial progress,
• along with leading indicators affirming this
• how long this takes is unknown, but soft indicators show a pace that if reflect in CPI
• would show substantial decline in CPI

S&P 500 and Russell 2000 earnings are up +40%/+72% since 2019, while index only +17%/+4%

2Q2022 earnings season is underway. And while there are going to be disappointments, a lot of bad news is priced in. And as we have stated in other notes, we believe “i” matters more than “e” since this cycle slowdown is engineered by the Fed. As shown below, some perspective is helpful:

• Russell 2000 is only up 4% since the end of 2019
• But revenues are +27% higher and EPS +72% higher
• Thus, the carnage in 2022 has discounted a lot of bad news

Even the S&P 500 shows this impact to a lesser extent:

• S&P 500 is up +17% since end of 2019
• Revenues are +17%
• Earnings +40%

So the S&P 500 is already discounting a massive hit to earnings.

GRANNY SHOTS: 33 names, 8 stocks added in last rebalance. YTD outperformance +349bp

Our reviewed Granny Shots of 33 stocks is below. Recall, our July rebalance additions are:

• META-4.14% ,
• AZO0.42% ,
• GPC1.35% ,
• ABT1.92% ,
• BIIB2.03% ,
• ISRG-1.69% ,
• MRNA-0.59% ,
• REGN0.32%

33 GRANNY SHOTS: Updated list is below

The list on the table below is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear on at least two portfolios:

• AAPL-1.22%  in 5 of 6 portfolios
• GOOGL-1.47%  MSFT-1.48%  in 4 of 6 portfolios
• AMZN-2.56%  META-4.14%  in at least 2
• This reinforces our favorable view of FANG in 2H2022

33 Granny Shot Ideas:

Consumer Discretionary: AMZN-2.56% , AZO0.42% , GPC1.35% , GRMN-0.85% , TSLA-1.92%

Information Technology: AAPL-1.22% , AMD-5.44% , AVGO-4.31% , CSCO0.44% , KLAC-2.67% , MSFT-1.48% , NVDA-9.55% , PYPL0.24% , QCOM-2.68%

Communication Services: GOOGL-1.47% , META-4.14%

Energy: CVX1.52% , DVN0.78% , XOM

Financials: ALL2.28% , AXP6.23%

Real Estate: AMT0.18% , CCI0.88% , EXR-1.30%

Health Care: ABT1.92% , BIIB2.03% , ISRG-1.69% , MRNA-0.59% , REGN0.32%

Consumer Staples: BF/B, MNST-0.71% , PG0.55% , PM2.82%

We publish on a 3-day a week schedule:

Monday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday

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33 Granny Shot Ideas: We performed our quarterly rebalance on 7/12. Full stock list here –> Click here

POINT 1: Total COVID-19 cases 824,174 over past 7D (avg 117,739 per day), up +115,311 (+16,473 per day) vs same period 7D ago…

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Current Trends — COVID-19 cases (past 7D vs. 7D prior):
 – Total new cases 824,174 vs 708,863 7D prior, up +115,311
 – Avg daily cases 117,739 vs 101,266 7D prior, up +16,473
 – Hospitalized patients  35,251, up +9.3% vs 7D ago
 – 7D Avg daily deaths 404, flat vs 7D ago
 _____________________________

Over the past week, a total of 824,174 (avg 117,739 per day) new cases were reported in the US, up +115,311 (avg +16,473 per day) compared to the same period 7 days prior.

• COVID-19 cases have been rising gradually over the past week. Despite the “true-up” following the Independence Day holiday, BA.4 and BA.5 variants could most likely be the reason.
• According to the latest CDC variant proportion report, the share of new cases that were associated with BA.4 and BA.5 has surpassed 80%. Yet, unlike France and Germany, we have not seen cases really surge yet.
• The other metrics, such as current hospitalization and daily mortalities, are also stable. Current hospitalization has risen at a similar speed to the case rise, and the absolute level of hospitalized patients remains low. The mortality trend remains at the nadir and has not really turned upwards.
• Anecdotally, it seems like there are more friends/family members who tested COVID positive recently. However, as the COVID trend in the US remains flat, we are wondering if this could stem from unreported positive self-tests (while Europe might have a different standard on case reporting).
• Nevertheless, we are not really questioning the “data quality.” Instead, this is totally understandable and should be part of the process as we shift to a post-pandemic mode. If a renewed wave of pandemic hits again, as more people are severely sick and seek medical care, the numbers of cases, hospitalizations and deaths would eventually be reported and turn upwards. If one is self-tested positive and recovered by him or herself without seeking medical services, we are essentially not in a pandemic anymore.
• That said, it is still too early to make a decisive conclusion. We will continue tracking the COVID development closely.

Daily cases have been essentially flat since late May. The 7D delta in daily cases has fluctuated between positive and negative territories. But recently, we have seen more positive readings than negative ones. It bears watching if the 7D delta continues to rise or starts to fall.

Besides the case trend, we have not seen any rapid surge in hospitalization and daily death.

• Current hospitalization has been rising since mid-April along with the daily cases, but the speed of the rise has been stable. In addition, the absolute number of hospitalized patients has been low compared to prior waves.
• Daily deaths have fluctuated recently primarily due to the “holidays”. Overall, the trend has been essentially flat.

The latest CDC variant report shows BA.4 and BA.5 together now accounted for over 80% of new cases in the US.

• BA.5 itself accounted for nearly 2/3 of the new COVID cases
• At the regional level, the BA.4 and BA.5 variants are dominant in all regions – they used to be less dominant in the northeast states, but now the shares have also quickly caught up.

Below is the list of US states sorted by the new cases they reported over the past week.

• FL, IN, NY, and TX are the states with the largest increase in weekly cases
• AZ, CA, CT, and NV are the ones with the largest decline (MA recently changed its reporting schedule from daily to weekly, which caused the drop in new cases)

By the way, it seems that the BA.4/5 case surges in France and Germany have peaked. And the daily cases in both countries have started or are about to roll over. But, there has been a lag between daily cases and daily deaths – the daily deaths in both countries are still rising

POINT 2: VACCINE: CDC Updates Switch From Daily to Weekly

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Current Trends — Vaccinations: 
– avg 0.2 million this past week vs 0.2 million last week
– overall, 32.8% received booster doses, 66.8 fully vaccinated, 78.2% 1-dose+ received
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In the three weeks since the authorization of COVID vaccines for children under age 5, only about 300,000 children (about 2% of the under 5 age group) have received a shot. An April Kaiser Family Foundation survey found that 1 in 5 parents of children under age 5 would get their children vaccinated immediately upon approval, 38% responded that they would wait and see, and almost 40% responded that they would not elect to vaccinate their children under age 5 or only if mandated. While the data is showing a vaccine uptake pace slower than that of other age groups, this is in line with experts’ estimates.

In an investor presentation last week, Pfizer and BioNTech announced plans to start clinical trials for universal, or pan-coronavirus, vaccines in the second half of this year. The company aims to provide “durable variant protection” in light of the steady stream of new variants.

Vaccination frontier update –> all states now above 100% combined penetration (vaccines + infections)

*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent. 

Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC). 

– Currently, all states are above 100% combined penetration 
– Again, this metric can be over 100%, as infected people could also be vaccinated, but 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated

The CDC has recently started reported vaccination statistics weekly, rather than daily, which is why the most recent data point shows 1.6 million doses given. Those 1.6 million doses were given over the last 7 days.

This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.

In total, 599 million vaccine doses have been administered across the country. Specifically, 259 million Americans (76% of US population) have received at least 1 dose of the vaccine. 222 million Americans (66% of US population) are fully vaccinated. And 109 million Americans (32% of US population) received their booster shot.

POINT 3: Tracking the seasonality of COVID-19

***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***

As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus. The possible explanations for the seasonality we observed are:- Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer- “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors- Opposite effects hold true in the winter

During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, southern states are not showing as much of a spike as other states. This could be attributed to spring weather in the south encouraging more outdoor activities.

CASES

HOSPITALIZATION

DEATHS