The overall food index component of the CPI fell 0.4% in July, its first decline since April. The measure of food eaten at home dropped 1.1%, compared with a 0.7% rise in June, a 1% gain in May and a sharp 2.6% spike in April.
Food-at-home prices had been climbing as retail demand grew with restaurants closed for COVID-19 lockdowns. Staples like beef saw a jump in prices as demand at the supermarket rose while supply stayed steady. Last month the subindex for meat, poultry, fish and eggs fell 3.8%, with beef falling 8.2%. That could be a sign that producers are finding away to adjust the supply chain away from restaurants on onto grocery store shelves.
Food away from home prices rose 0.5% in July, the same as the month before, indicating some traction despite rollbacks in openings. The index for full-service meals rose 0.4%, down from a 0.9% rise in June, while the index for limited service meals rose 0.6%, compared with a previous rise of 0.5%.
At 1.6%, the spread between food away from home inflation and at home inflation is at its highest level since the early 1970s and hasn’t been close to these levels since 1991.
Looking year-over-year, though, the food at home index has been up more than 4% in the last four months and the overall rise in food prices for July of 4.6% y/y was the third-highest increase since 2012, noted Michael Underhill, fund manager at Capital Innovations, in a tweet.
That kind of sticker shock will have consumers continuing to adjust their budgets, especially at a time of uncertainty over further government fiscal support.
Consumers “feel food inflation quickly and it has an outsized effect on their perceptions of overall price levels. As much as bond prices may be discounting little-to-no inflation, Americans see a different reality,” DataTrek Research wrote last week. And “higher food prices are obviously unwelcome just now and stretch consumers’ limited budgets.”
The SPDR Financial Sector ETF (XLF, +1.6%) was the best-performing sector yesterday, one of only two in the green, along with industrials. It rose 1.2%, withstanding the late selloff as tech slumped.
The morning, XLF is up again as rates keep climbing.
The 10-year yield is up close to 0.69%, gaining another 4.5 basis points, following bigger-than-expected gains in the July CPI and core CPI.
Real rates are also up as inflation expectations edge higher. The 10-year real yield is at -0.96%
Over the last week the big banks, which have built up very strong balance sheets while exposure to weakness is nowhere near what it was in the Financial Crisis, have produced strong outperformance along with the rise in yields. JPMorgan Chase (JPM, +1.7%) is up 8.7%, Bank of America (BAC, +1.8%) has gained 7.6% and Citigroup (C, +1.6%) has posted a gain of 7.2% in the past five sessions. XLF is up 5.5%.
Financials have plenty of room to run to catch up to the broader market. But strategists warn that bond yields saw a similar move in early June where a selloff took the 10-year rate to 0.92% from 0.65% in just five sessions. But that rally lost legs at that peak and yields faded right back down in another five sessions. Since then, 10-year rates have seen a ceiling of around 0.75%.
Further to that, just a couple of days ago Ball Corp. set a record for low yield on a junk offering with a 10-year bond with an annual coupon of 2.875%.
Yesterday, a record $48 billion 3-year Treasury Note auction drew solid demand, with a high yield of 0.179%. At 1 p.m. ET there will be $38 billion auction of 10-year Notes.
There is also the specter of the Federal Reserve hovering over yields. It’s already communicated that it’s willing to let inflation run and that there’s no consideration of raising rates at any time, which will keep continued pressure on the short end of the yield curve.
For now, investors can ignore the “short-term noise” in yields until there are “real structural changes in the economy,” Jared Woodard of BofA Global Research says.
If there is a substantive move in rates there's always the chance that “the Fed will come in with yield curve control and cap any move anyway,” he told Bloomberg.
But financials can continue to outperform if “deposit growth slows and you start to see loan growth pick up,” he adds.
Energy stocks have been volatile, along with crude. They reversed course to close down yesterday, but are higher premarket, with the SPDR Energy Sector ETF (NYSEARCA:XLE) up 1.5%.
At 10:30 a.m. ET the EIA will issue its measure of weekly crude inventories. The API's measure out yesterday showed a bigger-than-expected drawdown in crude.
Big move in bonds
Interest rates are pushing into all-time lows again today, with Treasury yields down across the board. The 10-year yield is holding just above 0.5% and real 10-year rates are at -1.05%.
The Fed’s promise to do whatever it takes to restore growth and not even think about interest rates means no support for yields.
“The Fed is forcing you … into buying equities,” says Michael Purvis, CEO of Tallbacken Capital Advisors
The S&P could reach 3,700, another 12%, by the end of the year, driven by the dominant megacap companies that also boast “consistent earnings growth,” Purvis told Blomberg.
But this run into the end of the year is “predicated on the super-suppressed bond yields” and if the 10-year yield gets to 1% to 1.25% “this framework falls apart real fast”, he said.
There are fundamental reasons why these low rates will benefit megacaps, clearly illustrated by Alphabet’s (NASDAQ:GOOGL) recent move to secure $10B in debt.
Its five-year bond priced at 0.45% (far lower than the 0.8% paid by Amazon (NASDAQ:AMZN) and Pfizer when they recently raised five-year debt). The seven-year portion of Alphabet's sale had a record-low yield of 0.8% and the 40-year debt had a yield of 2.25%, also besting levels set by Amazon in June.
On the other hand, the Fab 5 aren’t exactly short of cash. If Microsoft (NASDAQ:MSFT) buys TikTok it wouldn’t need to look further than the $136B in cash and short-term investments it has on hand. In fact, its market cap rose $92B just on the expectation of the deal.
MSFT cash and short-term investments
But ultra-low rates do give legs to the There Is No Alternative (TINA) trade, with loads of cash looking for any kind of return and seeing growth equities as the place to be.
For a historical perspective, there have been many comparisons about the current megacap gains and the dot-com era. The Invesco QQQ ETF (NASDAQ:QQQ) was recently at a level above its 100-day MA not seen since that peak in March 2000.
Back in March 2000, the fed funds rate stood at 5.85% and the 10-year Treasury yield was at 6.4%. In the subsequent crash of the Nasdaq, the Fed brough its rate sharply down, but 10-year yields remained comfortably above 4%.
Attention is already on the employment picture as the White House and Senate Republicans and House Democrats continue to be at loggerheads over what a new fiscal stimulus package could contain. At the time of writing, federal supplement jobless benefits are over, and while both sides can agree on another round of $1,200 checks, the sticking point is still the $600 a week for the unemployed.
The caution on July jobs is showing in economists’ estimates. On average, payrolls are expected to have risen by 1.65M last month. That’s down from the 2.25M on Thursday, with downward revisions coming after disappointing weekly jobless claims.
Claims stayed persistently high at 1.4M, with continuing claims jumping by nearly 1M, indicating impact from the rollback of reopening measures. If payrolls arrive as expected, that would be more than 3M fewer jobs recovered than in June, which would jibe with the trend of higher claims and continuing claims.
Claims, continuing claims and nonfarm payrolls
Among sectors especially sensitive to employment, industrials tend to react heading into and shortly after the report. A weak payrolls number would indicate a major pothole in the road to economic reopening, a bad sign for stocks of companies that requires so many of their employees to work on site.
The SPDR Industrial Sector ETF (NYSEARCA:XLI) has lagged the broader market through the pandemic. It’s down 11.6% in 6 months that cover the time of the pandemic. It showed some traction in the last 30 days, but was about flat in the past week as earnings came in decidedly mixed. UPS (NYSE:UPS) rocketed up nearly 21% last week after reporting surging domestic volumes. But that was countered by an 11.5% drop in GE (NYSE:GE), which predicted a deteriorating macro environment, and Boeing (NYSE:BA), which was down 9% after what one analyst described as a “planewreck” quarter.
XLI is also weighed down by airlines, where the latest dour jobs news won’t even be reflected by the July report.
Work-from-home stocks, in contrast, look to be in kind of a sweet spot as far as the economic recovery is concerned. The BLS said last week that 31% of the U.S. workforce worked from home or telecommuted because of COVID-19. That’s down slightly from 35% in May. The numbers refer to those who specifically changed to working from home because of the pandemic.
And in the absence of a major treatment a vaccine breakthrough, it’s likely that 1/3rd of the workforce could continue to do so, keeping demand elevated customers of companies like Zoom. Companies are already making long-term decisions - Google, for example, is keeping its 200K employees at home until July 2021.
The new widowmaker - Long-dated Treasurys
Bringing up the rear is Hasbro (HAS, -7%), which is tumbling following quarterly results. At the other end, Amazon (AMZN, +1.2%) is rising and taking the sector as a whole with it, just behind Information Technology in premarket sector movers.
Hasbro missed the bottom-line consensus by $0.21. Revenue of $860.28M missed by $126.23M.
The toymaker stressed the positives, a digital-first strategy driving high-single-digit growth in point of sale, but it was an earnings report that shows just how much is outside of the control of management.
Supply chain disruption limited shipments, closed retailers naturally hurt sales and, perhaps the biggest wildcard, shutdown of production in entertainment is preventing the release of new toys and games.
Highlighting what drove its point-of-sale strength, the company noted products for older content Frozen 2 and Star Wars. And it does not expect to spend too much on content production for the rest of the year as it did in the first half.
“Given the timing of when content production is expected to resume, the Company now expects 2020 content production cash spend to be in the range of approximately $450-$550 million,” it said. “The Company spent $220.4 million on content production in the first half 2020.”
Instead it’s eyeing “a strong entertainment lineup for 2021, through internally developed as well as third-party entertainment.”
That’s hard to gauge given the loop that content producers and distributors find themselves in currently. Warner Bros., for example, is still committed to releasing Tenet in theaters, but has delayed the release again. As a result, AMC (NYSE:AMC) is pushing the reopening of its theaters. Either studios are going to have to roll the dice and release movies at a time when it’s unclear if people want to gather in a theater, or the cinema chains are going to have to have a wide open without a big-name picture. Both have been reluctant so far.
But investors in the sector are being helped by Amazon, again, indicative of a new safe-haven trade. With the dollar sinking and rates sliding, money is not just flowing to gold, which hit a record earlier, but to the megacaps, which have become the preferred safety trade over defensives.
Rates are under pressure, with the 10-year Treasury down 1 basis point at 0.58%. That’s a tough environment for financial stocks, which are flat premarket.
Also watch for any sell-side commentary on what the Fed might signal this week, which should also be crucial for financials.
McDonald’s (NYSE:MCD) will report on Tuesday before the bell. Analysts are looking for a profit of 74 cents per share on sales of $3.7B. U.S. comparable sales are forecast to be down 8%, with global sales down a whopping 20%.
Starbucks (NASDAQ:SBUX) is also scheduled for Tuesday, reporting postmarket. The consensus is for a quarterly loss of 57 cents a share, with sales of $4.14B. The company has guided U.S. and Americas comp sales to drop 40-45%.
The reported period covers the worst months for pandemic shutdowns, so any sign that business is turning a corner to follow the overall rebound in economic indicators will be welcome for investors.
But the Golden Arches is going into earnings season on the back foot. Along with the announcement that it is joining a host of companies requiring customers to wear masks, the company said it will be pausing reopening dining rooms for another 30 days.
“To further our efforts to slow the surge in COVID-19 cases and protect restaurant teams and customers, we will extend our pause on re-opening dining rooms for another 30 days. This means we will not approve the re-opening of any additional dining rooms,” it said.
McDonald’s and Starbucks have underperformed the broader market through the crisis. In the past 6 months, McDonald’s is down 6.9% and Starbucks is off 17.7%, The S&P is down 3.3% in the same period. In the past month, though, both stocks have outperformed, with McDonald’s up 6.5% and Starbucks up 2.9%, compared with the broader market seeing a 2.7% gain.
From a sector perspective, McDonald’s and Starbucks did even worse over 6 months. The Vanguard Consumer Discretionary ETF (NYSEARCA:VCR) is up 11.8%.
Domino’s has a natural advantage with its delivery-focused model. But its big investment in technology and digital sales also paid off during the lockdown months.
Chipotle last week reported a narrower-than-expected decline in comparable sales for the quarter, with digital sales soaring more than 200%.
"The sales recovery seen in the last two months has been impressive, outpacing our forecast by a couple months with comps up 6.4% so far in July despite lingering headwinds, and we expect the company to retain most of the digital sales achieved during the pandemic," BTIG said in support of its choice for CMG as a top pick.
For the sector to really break out, though, the big players have to get more traction. But a lot of that is out of the hands of management. McDonald’s and Starbucks are very reliant on a breakfast business that has all but disappeared. Even if their stores open fully, the morning traffic will require offices to open up as well and commuting to become the norm again.
Based on Seeking Alpha’s Quant Ratings, McDonald’s ranks second for restaurants, while Starbucks ranks 15. Both struggle on their value measurements but get top marks for profitability.
See a screen of all restaurant stocks and compare by Quant Rating or the ranks of Wall Street analysts and Seeking Alpha authors.
Dig deeper into the market-moving events for the week with Seeking Alpha’s Catalyst Watch.
Driving the gains were two big indicators of housing demand.
Existing home sales for June soared 20.7% to an annual rate of 4.7M. That was the biggest monthly rise on record. New home sales jumped 13.8%, blowing past economists’ estimates of 4%.
The sector is showing resilience in a very different environment from the one that cratered homebuilding in the financial crisis.
“In terms of the underwriting standards that support this market, the low interest rates that are going to spur new interest into the market and the soaring high prices, as well as the lack of inventory; all of that leads to a stability in home price appreciation this year,” Nela Richardson, investment strategist at Edward Jones, says.
“Housing has basically done well in every part of the country,” Richardson adds. “This is the response to a national epidemic where the value of being in a home has been amplified because we’re spending so much time at home.”
Vegas needs more than blackjack
Casino stocks, which have been a bellwether for the economic recovery, may be diverging from that if you look the assessment from Las Vegas Sands (NYSE:LVS).
The VanEck Vectors Gaming ETF (NASDAQ:BJK) is off 4.2% this week.
Las Vegas Sands reported a 51% drop in revenue in Q2 and a 94% decline in operating income.
“I don't want to predict 2021 because I don't feel I have enough insight into what might happen to the vaccine or the virus and no way to forecast that,” CEO and casino magnate Sheldon Adelson says. “But I would be less than honest if I didn't tell you that Las Vegas is in a very difficult place. Unlike Macao, where there's a real, real strong desire and belief that we'll see things return much quicker... Vegas is dependent on airlift, it's dependent on group and convention. It's not a casino-driven market anymore. So we're struggling here.”
“So in all the years as I've been here in Las Vegas, I've never felt more gloomier... about what's happening in Las Vegas short term. Hope long term, we can see a better day.”
Under the Radar
The St. Louis Fed’s Financial Stress Index dipped below the baseline for the week ended July 17.
“The STLFSI2 measures the degree of financial stress in the markets and is constructed from 18 weekly data series, all of which are weekly averages of daily data series: seven interest rates, six yield spreads, and five other indicators.”
There’s been no distinct catalyst for Amazon’s dip this week other than the rotation trade away from stay-at-home shares into recovery plays, although that’s been choppy. Amazon has followed the weaker path of rest of the Fab 5 this week.
The stock hasn’t been down five sessions in a row since late May (the only time this year), when it fell 1.9%. The SPDR S&P (NYSEARCA:SPY) was up 2.8% during that time in May. It’s now down 7.4% for the week.
Year to date, the stock is up more than 60% compared with a slight dip in the SPY.
Amazon dipped below its 10-day SMA yesterday, but is above the 50, 100 and 200 SMAs. All are sloping upward in the last month.
The stock could trade sideways for the next 1-2 years, as is its historical pattern, Robbe Delaet wrote on Seeking Alpha this week.
“(Jeff) Bezos mentioned that he prefers to keep investing money in future opportunities instead of focusing on rising margins already. That could hurt the stock price, which already anticipated on huge improvements.”
But he added “that the company will be able to keep growing strongly with its presence in major growth markets and there's plenty of upside if the company can keep growing margins like it did in 2018.”
AMZN vs. SPY