Hot Inflation Report Fails to Roil Markets

Stocks are holding their own today despite a rather hot inflation report (see below). The Dow is up 60 points; the S&P 500 and Nasdaq are flat. The VIX Index, which uses options to gauge fear among traders, is at its highest level since mid-June. Traders are likely worried about earnings season, which kicked off today with Pepsico (see below). Capital markets are expected to remain choppy over the next 30 days. The bond market is catching a modest bid today. Long-term Treasuries are up about .2%. This isn’t a flight to safety, however, because junk bonds are also up about .4%. Treasury bond yields are up to their highest levels since 2007-08. The 2-year Treasury is now paying 4.29%. In other words, investors are at last finding some value in low-risk bonds. We may be coming close this cycle’s high point in yields.

Wholesale inflation remained stubbornly high last month, according to the Bureau of Labor Statistics (BLS). The Producer Price Index (PPI) rose .4% during the month after having sagged a bit in August. On a year-over-year basis PPI edged down to 8.5% from 8.7% in the prior month, but economists expected 8.4%. Jenny Harrington of Gilman Hill Asset Management, is surprised the stock market is holding up OK today. She believes investors are becoming resigned to the fact that inflation is “going to be higher for longer, [but] we know eventually it will get better. We know what the Fed’s terminal rate is expected to be.” It’s getting harder to “spook” the market.

Sahak Manuelian, head of equity trading at Wedbush, concurs. “Once investors start to believe that we are…near the end of the tightening cycle, that could certainly make for a great tailwind for equities.” But he thinks the bond market needs to find its footing before stocks can move sustainably higher.

Pepsico (PEP) reported strong quarterly results and the stock is up 4.5% in early trading. Revenue rose 9% from the year-ago quarter, and management expects organic sales—excluding acquisitions & divestitures—to be up 12% this year. North America beverage sales grew 4%, but snack food revenue shot up 20%. So despite price hikes, demand remains strong. The dollar has appreciated quite a bit against foreign currencies, and typically that would hamper Pepsi’s growth. But higher product prices offset that impact.