January CPI rises more than expected. (0:15) Rates move higher and odds of Fed cut sink. (1:05) CVS stock surges on earnings. (3:01)Show Notes5 reasons the Mag 7 are vulnerable Citadel’s Ken Griffin slams Trump's trade rhetoricEpisode transcripts: seekingalpha.com/wsb Sign up for our daily newsletter here and for full access to analyst ratings, stock quant scores, dividend grades, subscribe to Seeking Alpha Premium at seekingalpha.com/subscriptions.
Chapter 1: What are the highlights of the January CPI report?
Welcome to Seeking Alpha's Wall Street Lunch, our afternoon update on today's market action, news, and analysis. Good afternoon. Today is Wednesday, February 12th, and I'm your host, Kim Kahn. Our top story so far. Boom goes the inflation dynamite. The January consumer price index jumped 0.5% in January, accelerating from 0.4% in December and hotter than the 0.3% consensus.
That pushed the annual rate up to 3%. Core CPI, which excludes food and energy, rose 0.4% in January, also topping the 0.3% consensus and 0.2% prior. That translates to a 3.3% year-on-year increase. The forecast was for a drop to 3.1%. Egg prices, the hot topic at the moment, or hot potato maybe, saw a 15.2% jump last month and are up 52.2% from last year.
Chapter 2: How did inflation impact the financial markets?
Michael McDonough, chief economist of financial products at Bloomberg, says his bacon, egg, and cheese with a cup of coffee price index saw its largest ever monthly price jump in January, surging 6.1%, or 18 cents. The markets had predictable reactions. Stock index futures fell off a cliff after the numbers, and the major averages are lower.
David Russell, global head of market strategy at TradeStation, sees time running out on the bull market if inflation is attained soon. Inflation has gotten sticky with items like used cars and auto insurance ticking back up. This puts pressure not only on the Fed, but also on the White House to tread carefully on tariffs, he said. On the bond side, Treasury yields shot up.
Chapter 3: What are the implications of rising Treasury yields?
The 10-year yield is now close to 4.65%. Skyler Winan, CIO at Reagan Capital, says, While President Trump and Treasury Secretary Besson want 10-year Treasury rates to fall in order to relieve borrowing angst, the market is in control of long-duration yields. Recent spikes in consumer inflation expectations, coupled with some pullback in demand, have led to a rise in yields.
This trend can continue unless the government intervenes in some way. We can see 5% plus yields on the long end this fall. In the swaps market, a fully priced-in quarter-point Fed rate cut was pushed out to December from September. Fed funds futures now say the odds are 30% that the FOMC stays on the sidelines all year.
Chapter 4: What is the outlook for Fed rate changes?
Reagan Capital's wine end is in that no-cut camp, saying with inflation and inflation expectations rising, the Fed has nothing to do at this point but wait and see, and hope that the economic indicators change to suggest more progress. If consumer prices or inflation expectations rise any further, it is quite possible that the Fed's next move is to raise short-term interest rates.
But there are a couple of dovish silver linings in this report. First, Deutsche Bank points out that January is traditionally the month where the CPI sees the most upside surprises. Second, Pantheon Macro notes that the big rise in the core CPI was driven by two components which do not feed into the PCA deflator calculation. Auto insurance prices jumped 2%, and hospital services prices rose 0.9%.
PPI data are used for both to feed into PCE, the Fed's favorite inflation gauge. Among active stocks, CVS Health is rallying after it topped bottom and top line expectations, driven by the segments operating its insurance arm, Aetna, and its pharmacy network. Looking ahead, the company sees $5.75 to $6 in adjusted EPS, which stood in line with $5.97 projected by analysts.
Chapter 5: How is CVS Health performing amid market conditions?
Seeking Alpha analyst Brendan O'Boyle argued that given the uncertainties surrounding PBMs under President Trump and the pressure on the company's main pharmacy rival Walgreens, investors have become very pessimistic regarding the business. Given these lowered expectations, it's not surprising that the share price can rally substantially on any positive news, he said.
Kraft Heinz is close to a 52-week low after it reported a 4.6% decline in sales during Q4. Organic sales fell 3.1% during the quarter, close to the consensus expectation for a drop of 3.2%. The quarter showed once again that consumers may be trading down to cheaper private label alternatives from some of Kraft's well-known brands.
Looking ahead, Kraft Heinz said it expects full-year organic sales growth to be flat to down 2.5% and sees full-year adjusted EPS landing in the range of 263 to 274 versus the 304 consensus. And Biogen reported better-than-expected Q4 results. but its full-year outlook disappointed as its multiple sclerosis franchise underperformed.
The company warned of a mid-single-digit percentage year-on-year decline in its 2025 revenue due mainly to deteriorating multiple sclerosis product revenues. The midpoint of its adjusted EPS guidance of 1525 to 1625 was below the 1624 consensus. In other news of note...
Ken Griffin, CEO of Hedge Fund Citadel, had some strong words about the effects of President Donald Trump's aggressive stance on trade policy and his tactics involving tariffs. Speaking at the UBS Financial Services Conference in Florida, Griffin said, "...from my vantage point, the bombastic rhetoric, the damage has already been done.
It's a huge mistake to resort to this form of rhetoric when you're trying to drive a bargain because it tears into the minds of CEOs, policymakers, that we can't depend on America as our trading partner."
It makes it difficult for multinationals in particular to think about how to plan for the next 5, 10, 15, 20 years, particularly when it comes to long lead time capital investments that could be adversely impacted by a degradation of the current terms of engagement as amongst the leading Western countries when it comes to terms and trade. And in the Wall Street research corner...
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