Red Sea Tension Escalates, December PPI, Bank Earning
January 12, 2024
US equity futures are pointing to a modestly lower open as investors grapple with renewed Middle East tensions. Following yesterday’s hotter-than-expected December Consumer Price Index data, this morning’s focus will be on the December Producer Price Index (PPI) as well as the start of big bank earnings with results due from JPMorgan (JPM), Bank of America (BAC), and Citigroup (C). Bank earnings and what they say about lending activity, consumer spending, and mortgage activity will offer another view on the vector and velocity of the economy.
Much like yesterday’s CPI report, the headline PPI for December is expected to rebound to +1.3% from November’s 0.9% print. Core PPI for the last month of 2023 is expected to dip to 1.9% YoY from 2.0% the month before, but the market will be watching for a hotter print just like we saw the December core-CPI. Given the leading relationship between the PPI and CPI data, final December prints above consensus expectations will be another blow to market rate cut expectations that still call for six rate cuts this year even after yesterday’s CPI report.
So far, the Fed’s not convinced. Federal Reserve Bank of Cleveland President Loretta Mester said it was premature to consider cutting interest rates as soon as the US central bank’s March meeting, emphasizing that fresh inflation data suggests policymakers have more work to do. Chicago Fed President Austin Goolsbee also chimed in saying he thinks the Fed needs to see more data to confirm any rate cut plans. Those comments set the stage for Minneapolis Fed President Neel Kashkari, who speaks shortly after today’s market open.
Oil prices are moving higher this morning following escalating tensions in the Middle East. The US and its allies launched joint military strikes against Houthi rebels in Yemen aimed at halting their campaign of attacks on shipping traffic in the Red Sea. In response, Houthi rebels have said they remained undeterred from launching more attacks in the region. Also trading up on these developments are shipping stocks, including Nordic American Tankers (NAT), Global Ship Lease (GSL), ZIM Integrated Shipping (ZIM), and Golden Ocean Group (NDAC).
And we are starting to see the fallout of Red Sea shipping issues. Citing a lack of components due to shifts in transport routes because of attacks on vessels in the Red Sea, Tesla (TSLA) shared it will suspend most car production at its factory near Berlin from January 29 to February 11. The odds that Tesla is the only company impacted by this is extremely low, and that means we are likely to hear other companies talk about the pinch it’s having on their business as the December quarter earnings season heats up. This poses a risk to 1H 2024 earnings guidance as well as further inflation progress expected by the market.
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Model Tidbits
Consumer Inflation Fighters - “The December Consumer Price Index captures both the broader disinflation taking place inside the goods sector and the persistent inflation inside the service sector.” Read more here
Data Privacy & Digital Identity - “Carta shuts trading platform after data privacy breach allegations.” Read more here.
Aging of the Population - “The U.S. population is aging faster than ever. One hundred years ago, one out of every 20 Americans were senior citizens; by fifty years ago, this share had doubled. New U.S. Census projections estimate this share will soon double once again to one out of every five Americans.” Read more here.
The strategies behind our Thematic Models:
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Consumer Inflation Fighters - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Precision Ag & Agri Science – Companies that look to address shrinking arable land by helping maximize crop yields utilizing technology, science, or both.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The strategies behind our Dividend Income Models:
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.