Why traders are so infatuated with inflation

CNN

By Nicole Goodkind, CNN

A Valentine’s Day surprise doesn’t usually include egg and gas prices, but the heart wants what the heart wants, and Wall Street is entranced by January’s Consumer Price Index.

What’s happening: Investors will get some market direction clarity on Tuesday morning with the release of key inflation data. And though consumer prices in January are expected to climb by 0.5% from December, the annual rate is expected to tick down to 6.2%, continuing a trend of disinflation that began last summer.

Core CPI, which is also being released, strips out volatile energy and food prices, and is more closely watched by the Federal Reserve. It is expected to have remained steady between December and January and to tick down year over year.

If inflation comes in higher than expected, there will be some heartbreak on Wall Street as it could mean that the Fed has more work to do. But if disinflation accelerates, there could be a fairly large boost in market sentiment and a surge in traders’ commitment to equities.

Either way, expect a bit of volatility, says Randy Frederick, managing director at Charles Schwab. Market swings have been significant on CPI release days over the past few months.

Markets closed higher on Monday ahead of the report as investors expressed optimism — but they might be getting ahead of themselves. “It wouldn’t shock me in the least,” if the CPI report surprises on the downside and markets give up all of their gains on Tuesday, said Frederick.

The report could exemplify the long and “bumpy” path of disinflation that Fed Chair Jerome Powell referenced last week in an interview with the Economic Club of Washington DC.

It’s not all about the Fed: Traders are infatuated with CPI, but it’s likely going to affect markets more than it will future Fed policy. It’s good to keep that in mind as volatility could lead to a roller coaster ride on Wall Street, said Frederick.

“CPI is the big inflation report that affects markets more than any other,” he said. “The Fed pays more attention to PCE [the Personal Consumption Expenditures Price Index], but consumers and investors pay a lot of attention to the CPI. It tends to be the one that moves markets most by far.”

What could go wrong: The price of goods has come down over the past few months as supply chain pressures have eased — core goods inflation has declined from 12.3% in February 2022 to just 2% last month — but there are signs that the largest contributors to a drop in inflation have already tapered out, said Gargi Chaudhuri, head of iShares Investment Strategy, Americas.

The decline in new and used car prices may be ending, said Chaudhuri, with new car sales hitting their most brisk pace since May 2021. The weakening of the US dollar since November could also mean the prices of imported goods will rise.

An increase in energy prices, driven by higher gasoline prices, will also likely drive monthly headline numbers higher. Data from AAA shows that gas prices rose by 4.4% in January.

Inflation in the services sector is even more worrisome. Analysts from Bank of America predict that the cost of core services likely rose by 0.5% from December, owing largely to a 0.7% increase in shelter costs.

Even beyond housing, the services sector has seen year-over-year inflation higher than 3.9% every month since March 2021, said Chaudhuri. And as Powell noted in Washington last week, the stickiness of core services inflation is his greatest concern.

EV bonanza, Barney and Twitter: What investors are watching today

▸ Pickups are going electric. Ram revealed the production version of its electric pickup on Sunday. The Ram 1500 Rev, due out in late 2024, will join the ranks of Ford’s F-150 Lightning, Chevy’s Silverado EV and GMC’s Sierra EV.

Ford, meanwhile, announced that it’s investing $3.5 billion to build a battery plant in Michigan, a move that will help the automaker take advantage of more federal tax credits for electric vehicles. The battery plant will be in addition to plants in Kentucky and Tennessee that Ford announced in 2021.

Ford has said it plans to be able to produce 2 million electric vehicles globally by late 2026. In the short term, the company expects to have the capacity to build 600,000 electric vehicles by the end of this year.

▸ Mattel is cashing in on Millennial nostalgia.

The toy company announced on Monday that Barney (the big purple dinosaur from the 1990s), is making his triumphant return to the small screen — and toy shelves — next year.

Mattel said that the new franchise will include TV, film and Alphabet (GOOGL)-owned YouTube content as well as music and a vast array of merchandising, including toys (of course), clothing and books. And yes, that includes apparel for adult fans too.

▸ More than half of Twitter’s top 1,000 advertisers in September were no longer spending money on the platform in the first weeks of January, according to data provided to CNN by digital marketing analysis firm Pathmatics by Sensor Tower, in a striking sign of how far reaching the advertiser exodus has been following Elon Musk’s acquisition of the company.

Some 625 of the top 1,000 Twitter advertisers, including major brands such as Coca-Cola, Unilever, Jeep, Wells Fargo and Merck, had pulled their ad dollars as of January, according to estimates from Pathmatics, based on data running through January 25.

Is it time to invest in romance stocks?

Nothing says romance like putting on your finest jewelry (Signet), popping a bottle of bubbly (Constellation), indulging in some chocolate (Hershey’s) and … scrolling through Tinder (Match Group).

Even though the economy feels a bit wobbly at the moment, love is in the air: The National Retail Federation forecasts that consumers will spend $25.9 billion on Valentine’s Day in 2023 — that would be one of the highest spending years on record.

Here’s how you can invest in the holiday no matter what your relationship status is.

Chocolate: Candy is the top VDay gift, according to the NRF. But Hershey, Nestlé, or Mondelez International shares can provide satisfaction without all of that extra sugar.

The Hershey Company’s stock rose in early February after beating fourth quarter earnings expectations and forecasting strong growth through 2023. Mondelez International, which makes Cadbury chocolate, also delivered a better-than-expected quarter.

Jewelry: A diamond is forever, but forever is a long time and some people prefer to stay liquid. Those people may want to consider investing in jewelry stocks instead. Pandora and Signet Jewelers (Kay Jewelers, Zales, Blue Nile) are some of the largest brands on the market. There’s also Tiffany’s, owned by Louis Vuitton Moet Hennessy, for those looking to go a bit more high-end.

Signet is up nearly 17% so far this year, Pandora is up about 26% and LVMH is up more than 17%.

Dating Apps: Match Group (the company behind Tinder, Match.com, OkCupid and Hinge) shares are up more than 11% so far this year. Bumble, meanwhile, is up 19% and Grindr has gained 22%.

There’s no denying that swiping has replaced the meet-cute and these stocks are certainly feeling the love so far this year.

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