Premarket: Apple is green

apple premarket green 5-14-21From the Wall Street Journal’s “Stock Futures Rise Ahead of Retail Sales Data” posted early Friday:

Stocks recouped some losses on Thursday after sliding in response to data showing consumer prices leapt in April, which added to evidence from commodity markets of building inflation. Investors worry that a surge in prices for raw materials will eat into profit margins. A burst of consumer-price inflation could also prompt the Federal Reserve to pare back easy-money policies that have buoyed stocks.

But several Fed officials have said this week the central bank has no intention to withdraw that support, helping to calm markets. The Fed needs to see several more months of data on jobs and inflation before determining when to begin tightening monetary policies, Gov. Christopher Waller said Thursday.

“The Fed has been very consistent,” said Paul Donovan, chief economist at UBS Global Wealth Management. “That is telling you something: it is telling you [higher inflation] clearly is transitory.”

Nonetheless Mr. Donovan expects markets to remain jumpy in response to higher inflation numbers in the coming months. “There will be volatility in the near term over this: not just volatility over inflation, but volatility over the central bank response to that.”

Money managers will glean fresh insights into the pace of the economic recovery from data on retail sales, due at 8:30 a.m. ET. Economists expect consumer spending to have risen in April, albeit at a slower pace than in March, when stimulus checks boosted household incomes.

Data on industrial production, scheduled for 9:15 a.m., will give clues into the extent to which supply-chain bottlenecks have held back output at factories, mines and utilities. Production is forecast to have risen in April as factories looked to keep up with demand for autos, appliances and other goods.

My take: Fridays are always a bit fraught.

12 Comments

  1. Robert Paul Leitao said:
    From my reading of the Fed’s policy approach, the focus is on full employment. Inflation is real. However, higher employment numbers are the primary goal. The Fed will allow the inflation rate to move above the target rate, at least temporarily, to support job growth. We really have no idea if rising prices are “transitory.” That will be revealed in the coming months. Investors that get jittery over one month’s employment numbers or one month’s inflation numbers might want to consider a different preoccupation. At this time the Fed isn’t likely to raise benchmark rates or taper stimulus in response to what may be momentary trends. Meanwhile, this week’s sharp drop in share prices may have created buy opportunities for long-term investors. Investors just need to be a bit selective in their choices among their various investment options.

    2
    May 14, 2021
    • Mark Visnic said:
      Robert,
      The narrative that began in February and was a pretext for Apple, Amazon, and the tech sector, in general, to correct originally was linked to a rapid rise in rates (reference 10 year Treasury as the proxy) from 0.60-0.70% to 1.5-1.6%. The narrative further expounded on the rate increase signaling substantial forward systemic (and expressly not transitory, in discord with Jay Powell) inflation. The narrative postulated that Apple and other tech names were going to be hurt by significant rate increases.

      The narrative was: Rapid 80-100 bps rate increase in late 2020/early 2021 ===> signaling significant systemic inflation / Fed policy error, exacerbated by massive fiscal stimulus ====> leading to continuing significant increases in rates === leading to continuing pressure on tech sector shares.

      Purported evidence was: 1. said 80-100 bps rate increase. 2. commodity price surge

      That narrative largely remains in place although just this week there are signs of it beginning to substantially erode. The problem with the narrative is: rates largely have ceased rising from a peak of ~1.75% in late February/early March and are back down to where they were 7-8 weeks ago. 2. Jay Powell, the man with the best and most timely at at his disposal continues to affirm that price increases are transitory.
      continued

      3
      May 14, 2021
      • Mark Visnic said:
        Contd. 3. Conclusions of transitory price increases are supported by history: a rapid economic expansion off a severe contraction is always expected to lead to acute albeit transitory price increases as plants build up and orders sharply increase and disrupted supply chains move out of disequilibrium. 4. commodity price increases have leveled off and contracted.

        In my view, the narrative always has been flawed. First, rates rose off extremely low levels as the economy expanded into 2021. Rates remain at extremely low levels albeit 80-100 bps higher than the lows. Rates did what the should have done i=with signs of expansion, especially from such extreme base levels. Second, prices are rising because of the expansion. Prices should rise as demand rises from extreme base levels. In fact, if prices didn’t rise in this circumstance we all would be in big big trouble with massive unavoidable deflation in the face of heavy monetary and fiscal stimulus. Third, contd

        3
        May 14, 2021
  2. Mark Visnic said:
    contd Third, The Fed is determined to maintain stimulus at present levels (ie without tapering) precisely because it wants to avoid deflation. Fourth, the global economy features systemic deflationary forces at play with acceleration in information and transportation technology that is creating unprecedented opportunities for nearly unlimited price discovery and broadened competition.

    In sum, deflation, not inflation has been the conscern of central banks around the world, for very good reason.
    You are right to say, we cannot be sure how transitory the price increases will be. Jay Powell is betting they are still in the transitory zone. He is the house. I like betting with the house.

    Finally, the narrative is flawed as well because, even if we had some increase in systemic inflation. it would not be deleterious to Apple or Amazon or all of the technology companies with the exception of the underfunded, no income, nose bleed price to sales names.

    We will not have hyper-inflation. Rates will not rise to the moon. Apple will grow next year at a double digit rate barring an economic contraction. Apple should be now and will be higher in the coming months once it becomes clearer how flawed this narrative is and analysts raise numbers.

    5
    May 14, 2021
    • Robert Paul Leitao said:
      Mark: Thank you for the thoughtful reply. I do agree. Inflation “would not be deleterious to Apple” and other high-quality tech industry names. Apple maintains pricing control in its primary markets and the world economy is pushing off the serious risk of deflation which would have been far more dangerous than the upward price pressure we are witnessing today.

      3
      May 14, 2021

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