Stocks Fall Ahead of Light Data Week; Producer Prices, Earnings on Deck

Stocks fell Monday ahead of a light but important week for economic and earnings reports. The biggest report this week will be the Producer Price Index report, which will be the final producer inflation reading ahead of the Federal Reserve meeting next Wednesday.

The ISM Non-Manufacturing Index expanded at a faster pace of 56.5% following October’s 54.4% reading. This was against estimates for a slower 53.5% reading. While the report as a whole supported a higher-for-longer Fed given that services comprise the largest section of the economy, the Prices Paid index, encouragingly, eased - but remained elevated.

Producer Prices

The Producer Price index report for November could prove pivotal to markets begging for a (Fed) pivot.

The PPI report due Friday is expected to show headline prices match last month’s 0.2% rise. Meanwhile, core prices are expected to increase by 0.2% after remaining unchanged in the prior month.

Last time around, the most important takeaway was the disinflation found within the report. Unprocessed goods for intermediate demand plunged by 11.7% and processed goods for intermediate demand fell by 0.2%.

Importantly, these are both defined as “goods purchased by businesses as inputs to production”. Just like how price increases follow downstream, so do reductions. This makes the meat of the upcoming PPI report extremely important.

While last month’s report was a solid step, I am reminded of a quote from the James Bond book and movie Goldfinger that goes: “Once is happenstance. Twice is coincidence. The third time it's enemy action”. Thus in this case, once is chance, twice is coincidence, and the third time’s a pattern. We have the first, so hopefully, we can take a step toward a disinflation trend on Friday.

Price increases and decreases aren’t passed downstream in step. This means that price changes this month to producers could get passed to consumers anytime between next month and several months from from now. This makes a pattern of disinflation in the producer report integral to easing stubbornly high inflation to consumers as it can take time for reductions to make it downstream.

Earnings

Despite that earnings season has come to a close, the market will still be watching the few earnings reports this week closely.

This week has a healthy mix of reports, including some retail-investor favorites, food producers, retailers, and more.

GameStop (GME) is up to bat Wednesday for its Reddit army. Analysts are expecting the company’s loss per share to narrow in the third quarter report and for revenues to rise. Despite some hope for an improving situation, GameStop was added to New Constructs' list of “zombie stocks” in August, citing the company’s cash burn and lack of profitability.

For investors looking for a rollercoaster ride, a beat and/or trendy comments by the CEO could swing the stock in traditional stonk fashion. However, for the majority of investors that aren’t looking to subject themselves to unnecessary volatility, steer clear.

Lululemon (LULU) reports Thursday and is expected to see its earnings per share shrink to $1.96 in the third quarter from $2.20 in the second quarter. Revenues are expected to rise slightly.

Despite many consumers cutting back on spending, analyst price targets on Lululemon have been rising ahead of the report. Analysts including John Kernan of Cowen have cited strong brand loyalty and “healthy, high-end” customers as a tailwind for the stock’s growth prospects.

Lastly, Costco's (COST) earnings should be interesting. While the wholesaler could be poised to capitalize on consumers searching for savings, the company also recently missed November same-store sales while projections are for the slowest pace of growth in three years.