Wall Street Breakfast: Inflation Peak?

Aug. 10, 2022 7:37 AM ET67 Comments
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Inflation peak?

Today's Consumer Price Index will provide the first look of inflation data for July, with market participants eager to see if the number topped out last month. Economists expect the figure to rise 8.7% Y/Y, down from the 9.1% clocked in June. Core CPI - which strips out volatile components like food and energy - is still expected to increase 6.1% vs. 5.9%, and that number is set to highly impact whether the Federal Reserve raises rates by 50, 75 or even 100 basis points in September.

Snapshot: U.S. national average gas prices are finally close to falling under the $4.00 mark, as commodity costs come down aggressively, though housing and labor costs are still soaring against a contraction in economic output. "Services are going to be challenging... they're stickier," noted Jose Torres, senior economist at Interactive Brokers. He's specifically looking at airfares and food away from home, as well as durable goods indexes and "how wage gains are being passed on to consumers."

Not everyone is calling a peak in inflation. Dan Varroney, CEO of consulting firm Potomac Core, doesn't "expect to see a significant reduction in the CPI," mostly because the June Producer Price Index ran hot at 11.3%. "Input costs remain really high," he told Seeking Alpha, and while gas prices have declined, "diesel costs haven't shrunk appreciably." M2 money supply also isn't pointing to lower inflation as "the Senate just approved legislation that's going to increase that amount of cash - and then the CHIPS Act - you're probably talking in round numbers about another billion in cash."

What does it mean for markets? Stocks have generally rallied since gas prices peaked in mid-June, while medium- and long-term Treasury yields dropped from their peaks on broad-based expectations of easing inflation. If this morning's CPI reading (scheduled for release at 8:30 a.m. ET) comes in stronger than expected, that could "shatter market sentiment, along with the strong jobs report on Friday," according to Torres. The U.S. dollar will also remain sensitive to the data, with investors "deciding whether slowing headline is more important than sticky and strong core," wrote strategists at TD Securities. (21 comments)

Streaming search

Just weeks after slashing its profit outlook (and sending its stock tumbling 10%), Walmart (WMT) is looking for some new growth drivers to recharge its subscription base. According to the NYT, the company is talking to media giants like Paramount (PARA), Disney (DIS) and Comcast (CMCSA) about including a streaming service in the Walmart+ membership program. The move is part of an effort to expand its relationship with customers beyond its big-box stores, especially as soaring inflation continues to impact spending.

Thought bubble: Paramount, Disney and Comcast each have their own high-profile streaming offerings in an increasingly competitive space, so they may not be inclined to reach a deal unless the price is right. A transaction could further be modeled off how wireless providers including Verizon (VZ) and T-Mobile (TMUS) have bundled streaming subscriptions as an incentive for new customer sign-ups. Whether it licenses a content library or creates more of a channels product, Walmart might also use the partnership to tap into advertising and expose viewers to its shopping ecosystem.

Efforts will clearly be aimed at competing with dominant retail subscription program Amazon Prime (AMZN). The latter has around 160M users in the U.S., and offers free shipping, Prime Video and Music, and other perks like a year of Grubhub delivery in a membership that costs $14.99 a month. In contrast, a Walmart+ membership costs $12.95 per month (and is said to have around 16M members nationwide), which gets users free shipping, discounts on fuel, and a free six-month subscription to Spotify's (SPOT) Premium music service.

Note: Walmart previously tried to get into streaming with the purchase of on-demand video service Vudu in 2010, but sold that offering to Comcast-owned Fandango in 2020 after it failed to gain wide adoption. (39 comments)

Crypto shocks

The "crypto winter" seen in Q2 overshadowed the quarterly results of Coinbase Global (COIN), which fell 10% during the session on Tuesday and another 6% in AH trading (the stock is down 65% YTD). The crypto exchange guided for less trading volume, alongside a smaller amount of monthly active users, in the wake of a cyclical market rout. It also reported a loss of over $1B for the quarter - some of which reflected impairment charges on its crypto and venture investments - compared to $1.6B in net income recorded in the same period last year.

Statistics: Monthly active users were 9M at June 30, compared to 9.2M as of March 3. Trading volumes slid 30% to $217B, from $309B in Q1. Assets on the platform tumbled 63% to $96B, from $256B in the prior quarter.

"Q2 was a test of durability for crypto companies and a complex quarter overall," Coinbase said in a letter to shareholders. "Dramatic market movements shifted user behavior and trading volume, which impacted transaction revenue, but also highlighted the strength of our risk management program. While we did see net outflows in Q2, we observed that the majority of this behavior was institutional clients de-risking and selling crypto for fiat as opposed to withdrawing their crypto to another platform."

Conference call: "Of course, we don’t control the macroeconomic factors or downturn," CEO Brian Armstrong told analysts, adding that the firm is continuing to focus on expense management and being at the forefront of crypto technology. The comments came after the company extended its hiring freeze into the foreseeable future after cutting 18% of its headcount back in June. (15 comments)

Stock sale

Elon Musk has been on a Tesla (NASDAQ:TSLA) stock selling spree over the past year, cashing out about $32B worth of shares in the electric vehicle maker. The latest round occurred between Aug. 5 and 9, as the Technoking offloaded another 7.9M shares valued at $6.9B immediately after Tesla's Cyber Roundup event. Musk said the transaction was "important to avoid an emergency sale of Tesla stock in the (hopefully unlikely) event that Twitter forces this deal to close and some equity partners don't come through."

The last time, I promise: "No further TSLA sales planned after today," Elon Musk tweeted on April 28, implying that was the last financing needed to take over Twitter (NYSE:TWTR). At the end of 2021, Musk also sold about 15.8M of Tesla shares, worth about $16B, to help pay a reported $11B tax bill after polling his followers. This time around, Musk has again vowed that he is "done selling," and would even buy back the Tesla stock if the Twitter deal doesn't end up closing (he now owns just under 15% of Tesla).

"This stock sale will raise a lot of conversation on Street for bulls/bears in the morning," tweeted Wedbush Securities analyst Dan Ives. "Musk tweet confirms our thoughts on Twitter. Street will read through this poker move that chances of Twitter deal more likely now." Under specific performance clauses, Musk is likely on the hook unless he can prove he was misled or a "material adverse event" had occurred at Twitter, or if debt needed to close the deal was no longer available.

Go deeper: In typical PR fashion, Musk overlaid the recent selling with a host of product announcements. As the SEC Form 4 filings were posted, he took to Twitter to announce that the "Tesla 500 mile range Semi Truck starts shipping this year, Cybertruck next year," as well as fresh milestones for SpaceX's (SPACE) Starlink and Starship. Asked if he thought about creating his own social platform if the Twitter deal doesn't go through, Musk replied in the affirmative, pointing to his website domain "X.com." (39 comments)

Today's Markets

In Asia, Japan -0.7%. Hong Kong -2%. China -0.5%. India -0.1%.
In Europe, at midday, London +0.1%. Paris flat. Frankfurt +0.2%.
Futures at 6:30, Dow +0.2%. S&P +0.3%. Nasdaq +0.3%. Crude -1% to $89.60. Gold -0.1% to $1810.20. Bitcoin -1.4% to $23,068.
Ten-year Treasury Yield -1 bps to 2.79%

Today's Economic Calendar

7:00 MBA Mortgage Applications
8:30 Consumer Price Index
10:00 Atlanta Fed's Business Inflation Expectations
10:00 Wholesale Inventories (Preliminary)
10:30 EIA Petroleum Inventories
11:00 Fed's Evans Speech
1:00 PM Results of $35B, 10-Year Note Auction
2:00 PM Treasury Statement

Companies reporting earnings today »

What else is happening...

Will streaming, revival in parks help Disney (DIS) beat earnings?

Norwegian Cruise Line (NCLH) sinks as losses projected to persist.

China inflation hits 2-year high on surging pork and food prices.

Biden ratifies NATO membership approval for Finland and Sweden.

Plug Power (PLUG) slips after Q2 miss, offers up 2025 targets.

Bookings decline and user growth misses at Roblox (RBLX).

Albertsons (ACI) gains on speculation about Ahold (OTCQX:ADRNY) deal.

Unity (U) sees revenue growing, stands by ironSource (IS) acquisition.

Micron (MU) issues weak forecast despite signing of CHIPS Act.

The Trade Desk (TTD) jumps 18% as sales, outlook top expectations.

This article was written by

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