Stocks Fall as Hawkish Fedspeak Belittles Favorable Inflation Reading

Last Updated: Tuesday, November 22, 2022 3:36 PM | Nick Dey

Stocks fell this week despite starting off on an optimistic note. Hawkish talk from Federal Reserve officials and a strong retail sales report suggested a higher-for-longer Fed, despite a promising Producer Price Index report that came on the heels of last week's better-than-expected CPI report.

Inflation Battle

The biggest report of the week was the Producer Price Index, which helped rally markets on Tuesday with its lower-than-expected reading.

Headline producer prices rose 0.2% in October against estimates for a 0.5% rise. This matched September’s pace, which was downwardly revised to 0.2%. Meanwhile, core prices were unchanged in October following a downwardly revised 0.2% rise in September. This was much lower than estimates for a 0.5% advance.

The aggregated numbers were certainly a good step, but the meat of the report really impressed markets concerned by sticky inflation. Disinflation shined through as unprocessed goods for intermediate demand plunged 11.7% from last month, while processed goods for intermediate demand fell 0.2%.

This was really encouraging, particularly the sharper unprocessed figure, as these goods contribute at a foundational level in supply chains. These are both defined by the BLS as “goods purchased by businesses as inputs to production”, and in the case of processed goods: “excluding capital investment”.

Material shortages push prices up every step of the way through supply chains, so easing at the base should work its way incrementally through to lower prices for consumers. One report showing disinflation, of course, is a good sign - not a trend.

While markets were hyped by this report and last week’s CPI report, the Fed played the party pooper with a chorus of hawkish Fedspeak in the wake of the report. San Francisco Fed President Mary Daly said a pause in rate hikes was “off the table”, while St. Louis Fed President James Bullard said the terminal rate for this hiking cycle should be at least 5% to 5.25%.

Retail Sales

Retail sales were much better than expected in October. Both the headline and less volatile figure that excludes auto sales rose 1.3% month over month.

The retail sales figure is not adjusted for inflation, meaning some of the increased spending can be attributed to rising prices. Gasoline station spending surged 4.1% from the previous month, which coincided with rising gas prices throughout October.

Unfortunately for stocks, better-than-expected retail sales underscore to the Fed that it still has room to raise rates. The Fed is hell-bent on not letting inflation get away from it and is aiming to slow the economy, so good reports get a bad rep as it indicates room to raise rates further.

Further, retail sales are very much boosted as a result of a red-hot labor market that has very low unemployment and accumulated nest eggs during the pandemic. With the Fed aiming to not have a wage-price spiral on its hands, markets are looking for retail sales to not show strong discretionary spending.

Housing Update

The housing market had a surprisingly good week.

The biggest win didn’t come from the economic reports that we will dig into shortly but actually came from mortgage rates.

Mortgage rates have been sky-high this year as the Fed hikes rates. Last week, rates averaged 7.08%. This week, the rate fell by its most in 41 years to 6.61% according to Freddie Mac. The drop came following a change in methodology by Freddie Mac to use its automated underwriting system rather than lender surveys. The change is intended to give a more accurate view of the housing market.

Housing starts and building permits were both better than expected. Housing starts fell to an annualized rate of 1.425 million in October following September’s upwardly revised rate of 1.488 million starts. Meanwhile, permits fell from 1.564 million in September to 1.526 million in October.

Lastly, existing home sales also fell less than expected from an annualized rate of 4.71 million in September to 4.43 million in October. Months supply improved slightly but remained in a seller's market with 3.3 months as high rates create an expensive repurchase proposition for would-be sellers and push out prospective buyers.

Retail Earnings

Company earnings went every which way this week as retailers reported en masse.

Walmart (WMT), Home Depot (HD), Lowe’s (LOW), Target (TGT), Macy’s (M), and Kohl’s (KSS) were among the biggest names to report this week.

Walmart and Target were the yin and yang in retail this week, with Walmart bringing the good and Target bringing the bad. Walmart topped estimates and provided in-line fourth-quarter guidance while announcing a $20 billion share repurchase program. Meanwhile, Target missed the mark with earnings and revenue misses, as well as it saying that its margins shrunk by $400 million so far this year as organized retail crime surges.

Home Depot and Lowe’s both had constructive quarters as the home-improvement retailers topped estimates all around. Both companies are finishing the week marginally lower than they started, which can likely be attributed to profit-taking as both stocks rallied during the month leading up to the report.

Lastly, Macy’s and Kohl’s both surged following their earnings reports. While both stocks topped estimates, they also offered cautious comments ahead of the holiday season ahead. Sales fell for both companies year-over-year and the companies noted that consumers may be delaying holiday shopping.

Companies had been marking down to clear inventory ahead of the holiday season. This didn’t go fully as planned given the trend of delayed shopping and is worrying for retailers in need of a strong holiday season.

All told, stocks fell this week. The S&P 500 dropped 0.69%, while the Nasdaq finished 1.57% lower. The Russell 2000 declined 1.86% and the Dow fell 0.01%.

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