Wall Street Brunch: Last Leg Of Inflation Battle Is The Longest

Summary:

• The Fed’s focus shifts back to inflation with a key CPI report ahead of the last FOMC meeting of 2024.
• Key earnings reports this week include Oracle, GameStop, Adobe, Broadcom, and Costco.
• Wells Fargo updates its favored list of blue-chip stocks, highlighting companies like Disney, Starbucks, and Microsoft for long-term investment.

Listen below or on the go on Apple Podcasts and Spotify

Retail inflation is expected to remain sticky, up 0.3%. (0:18) GameStop earnings will test the meme crowd. (2:31) Syrian government falls to rebels. (3:20)

This is an abridged transcript:

The pendulum of the Fed’s dual mandate swings back to inflation this week.

The November consumer price index arrives Wednesday, just a week before the last FOMC meeting of 2024.

Last week’s November jobs report, buttressed the market’s belief that Fed chief Jay Powell and company can cut one more time before the year is out. With a rise in payrolls above expectations, but below 250,000, odds of a quarter-point December cut jumped to 86%.

Rick Rieder, CIO of Global Fixed Income at BlackRock says: “Overall, with labor markets still holding up, and inflation broadly moderating from cycle highs (although perhaps remaining near recent levels for the time being), the Fed should be in a position to move forward on the December rate cut, but (the) CPI report now becomes another significant milestone in the policy-adjustment calculus.”

The consensus is that the headline CPI rose 0.3% last month, with the annual rate edging up to 2.7% from 2.6%. The core CPI, excluding food and energy, is also seen up 0.3%, with the annual rate holding at 3.3%.

Wells Fargo economists say: “The stubborn picture of inflation that has emerged over the past few months is unlikely to be altered by the November CPI report.”

But while “inflation has proved stubborn the past few months, it is not as if there have been no signs of progress.”

They added: “The annual change in shelter inflation has slowed to 5.1% from 6.9% this time last year. With the November report, it should drop below 5% for the first time in two and a half years. Meantime, after bubbling up over the winter, the 12-month change in the CPI super core is back on the downswing.”

“That said, the final leg of inflation’s journey back to the Fed’s target is looking tougher and tougher.”

New “headwinds to disinflation have emerged, including the potential for higher tariffs and lower tax rates, which we have incorporated into our forecast. Overall, we expect the fight to get inflation back to the Fed’s 2% target when measured by the core PCE deflator to drag on through our 2026 forecast horizon, with negligible inroads made in the year ahead.”

On the earnings calendar, Oracle (ORCL), Toll Brothers (TOL) and Casey’s General Stores (CASY) kick off reporting on Monday.

Tuesday brings GameStop (NYSE:GME), AutoZone (AZO), Ferguson Enterprises (FERG), Ollie’s Bargain Outlet (OLLI) and Academy Sports and Outdoors (ASO).

Adobe (ADBE) weighs in on Wednesday.

On Thursday there will be numbers from Broadcom (AVGO), Costco (COST) and Ciena (CIEN).

GameStop will likely be the most interesting report, given the stock’s meme status. Goldman Sachs tactical specialist Scott Rubner says the holidays mean a jump in volume for retail traders and noted a rise in far-out-of-the-money call buying.

But a cryptic tweet last week by Keith Gill, AKA Roaring Kitty, failed to spark a meaningful move and the stock ended the week little changed.

Wall Street analysts remain generally bearish on the stock, with a consensus Strong Sell rating, while Seeking Alpha’s Quant Rating system has upgraded the stock to Buy from Hold ahead of its earnings results.

SA contributor Bernard Zambonin highlights that, despite declining sales, GameStop boasts a strong cash position with no debt, largely thanks to equity sales driven by retail investors. He says the company is focusing on omnichannel retail excellence, cost management, and brand equity, with potential investments beyond gaming under CEO Ryan Cohen.

In the news this weekend, the rule of the Assad family in Syria has ended after 50 years as rebels took control of Damascus Sunday.

Syrian state television aired a video statement by a group of men saying that President Bashar Assad had been overthrown and all prisoners had been set free.

The statement emerged hours after the head of a Syrian opposition war monitor said Assad had left the country for an undisclosed location, fleeing ahead of insurgents who said they had entered Damascus following a remarkably swift advance across the country, the AP reported.

Looking to commodity market impact, Illimar Mattus, co-founder of prop firm The Trading Pit and broker Tickmill, said Sunday: “With the fall of Assad and full capitulation of Russia and Iran in Syria, the tensions in [the] Middle East are going to decrease. This means that the risk premium in WTI Crude Oil is going to decline and so the price should decline.”

Nicky Shiels, head of research and metals strategy at industrial and trading services group MKS PAMP says: “Signs of Middle Eastern escalation should put a bid back in Gold, break the recent compressed range … and is a reminder how hard it is to be short gold given still elevated headline risk.”

And generative artificial intelligence has been adopted at a faster pace than personal computers or the internet, according to a working paper. The technology has a 39.5% adoption rate after two years, handily beating the 20% adoption rate of the internet and PCs over the same time period.

Researchers from the St. Louis Fed, Vanderbilt University and Harvard Kennedy School found that in August 2024, 39.4% of the U.S. population age 18-64 used genAI, with 32% using it at least once during the week they were surveyed.

The paper added that 28% percent of employed respondents used genAI at work, with 24.2% using it at least weekly and 10.6% of employees reporting daily usage at work. Microsoft-backed (MSFT) ChatGPT, the first to the race, is the most commonly used genAI program.

For income investors, Alphabet (GOOG) (GOOGL) and FedEx (FDX) go ex-dividend on Monday. Alphabet pays out on December 16 and FedEx pays out on January 3.

Ross Stores (ROST) goes ex-dividend on Tuesday, paying out on December 31. And Devon Energy goes ex-dividend on Friday, also paying out on New Year’s Eve.

Companies expected to increase their quarterly dividends include American Eagle Outfitters (AEO) to $0.15 from $0.125, Broadcom to $0.60 from $0.53and Abbott Labs (ABT) to $0.59 from $0.55.

And in the Wall Street Research Corner, Wells Fargo has updated its Core stock picks, “a favored list of industry-leading companies appropriate for long-term investment.”

Equity analyst John Sheehan says these are blue chip, industry-leading, and high-quality stocks that could be used to build a well-diversified portfolio or to supplement an existing one.

To put the list together, analysts focus on companies that have at least a midcap market cap and a substantial revenue base. Analysts also consider long-term revenue, earnings, common dividend growth rates and projected future growth. In addition, they look at management’s level of experience, return on invested capital, stability of revenues and earnings, stock price volatility, balance sheet strength, debt rating and other valuation measures.

Amon the names are Disney (DIS), Starbucks (SBUX), Walmart (WMT), Chevron (CVX), JPMorgan Chase (JPM), ADP (ADP), Microsoft (MSFT), Public Storage (PSA) and NextEra Energy (NEE).

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