Stocks rose Friday and this week as markets bounced back from last week's selling.
Consumer prices were the main talking point Friday, and the economic data highlight of the week. The Consumer Price Index reached its fastest pace in 39 years as it could put pressure on the Fed via a more aggressive tapering schedule and a potential third rate hike in 2022.
Meanwhile, the University of Michigan’s Consumer Sentiment index came in better than expected. The survey results had some interesting tidbits that we will get into later.
In stock news Friday, Moderna (MRNA) and Oracle (ORCL) had large swings.
Oracle surged after posting an earnings and revenue beat. A big highlight in the report was the 6% increase in total cloud services and a flat year-over-year operating margin despite aggressively building up its data-center count.
Moderna took a dive after the company released interim data from a Phase 1 study on its seasonal flu vaccine candidate. The vaccine seems to be about as effective as other flu shots, but has more side effects.
Consumer Update
Consumer prices and Consumer sentiment, were both reported Friday morning.
The Consumer Price Index increased at a faster rate than expected and, as mentioned earlier, hit a nearly 40-year high in inflation. Headline consumer prices increased 0.8% in November, against estimates for 0.6%. This was a slowdown from October’s 0.9% advance.
Excluding energy and other volatile prices, core prices increased inline with expectations, increasing 0.5%, again slower than in October when the number was 0.6%.
Gas prices were the primary contributor to the headline number’s increase, with the index tracking gasoline (all types) rising 6.1% in November. This was in line with the advance made in October. Prices on this front have started to ease, but too late to be captured in the November data.
Meanwhile, used cars and trucks had the largest increase in the core reading, increasing 2.5%, which was in line with its previous month’s increase. This puts used cars up 31.4% over the past 12 months. Issues with new car production, rental cars and other factors have lead to consistent demand and short supply for used cars.
Onto the sentiment. The University of Michigan’s Consumer Sentiment report came in higher than expected at 70.4 against estimates for68.0 and follows up November’s final reading of 67.4.
In the survey, the bottom third of income earners were the most positive. Which has only happened once before, in 1980, when it “initially signaled the end of the first part of the double recession.”
The bottom third expects income to grow 2.9% in the year to come, which is the highest since 1981. The middle third expects income to decline by 3.8% while the top third expects income to decline by 4.3%.
According to the report, this could suggest an emerging wage-price spiral, which suggests that rising wages increase disposable income, which in turn increases demand and causes prices to rise. The rising prices increase the demand for higher wages, which further increases the cost of production, raising prices further.
Considering all of the raised wages we have seen for service jobs this year, it’s no wonder the optimism would be with the bottom third at this point in time, as they would be the main people whose incomes may have outpaced inflation as, for example, a raise from $10/hour to $15/hour is much stronger than the 6.8% year-over-year increase that we saw in CPI report.
Furthermore, in the report, 76% of people said inflation was a greater threat than unemployment, while 21% said unemployment was the greater worry. The remainder said they were equal. But again, it makes sense as the top two-thirds faced fewer unemployment threats throughout the pandemic as their work was more likely to go remote.
This leaves us in an interesting position. If the pandemic was a normal recession, it would imply that the bottom-third would be in a position to start spending more and that economic activity would pick up.
But this is a pandemic. We need global supply chains to clear up and shortages to be alleviated. The rising costs are coming from rising difficulties to meet rising demand. If rising prices from wages are compounded with the existing pressures, then getting caught up in a spiral could be easier as production costs are already rising fast.
Right now, we have seen companies like Walmart (WMT) and Target (TGT) show declining margins as increased supply chain and labor costs cut into profits. By doing this, the companies are investing in new customers by offering prices that others can’t match during a time when people are in search of a bargain.
CNBC’s Jim Cramer went as far as to call the companies an “inflation fighter” back when they reported earnings in mid-November. At that time, I laughed at the irony of how what was once a tactic called “predatory pricing” in court cases against Walmart is now a sacrifice being made by the company. But, I guess if that helps keep another variable from having an influence on our prices, then I could be cool with the title.
Anyways, stocks rose this week. The S&P jumped 3.82%, while the Dow outperformed with a 4.02% rise. Meanwhile, the Nasdaq rose 3.61% and the Russell 2000 rose 2.43%.
