By Barbara Kollmeyer
After Wednesday’s downside inflation surprise rallied stocks and ushered the Nasdaq /zigman2/quotes/210598365/realtime COMP +1.63% out of a bear market , some may be wondering if a meltup is around the corner.
Stocks are rising as investors also waking up to more good news on falling U.S. gasoline prices (see below) and producer price inflation.
But should investors really count on prices continuing to fall from here? For one thing, war continues to rage in Ukraine, fueling Europe’s energy crisis and winter is coming. The Fed is probably also “far from declaring victory over inflation,” say Jefferies strategists.
“Jefferies economic team still believes that there is a persistent component to inflation, stemming from housing and labor shortages, which will not be resolved any time soon and these two forces outght to put a floor under core CPI at around 4%,” notes a team led by Sean Darby, global equity strategist, in a fresh note to clients.
One takeaway from that 8.5% July CPI reading is that “the risk of an overtightening in U.S. financial conditions has been removed. A deep U.S. curve inversion is unlikely now,” said Darby.
In our call of the day , we look at some switching up of stock strategies post data from Darby and the team.
Jefferies’ U.S. financial conditions index has “turned from its extreme,” and they are now taking a long, or bullish stance on an early cyclical basket over defensives, and have also upgraded financials to bullish. They’ve shifted to a bearish stance on healthcare.
Here’s a table showing which stocks have been the best performers after the yield curve has moved from inversion to steepening:
Darby also thinks the dollar /zigman2/quotes/210598269/delayed DXY -1.17% has likely peaked, prompting them to go long on a basket of S&P 500 /zigman2/quotes/210599714/realtime SPX +1.64% dollar beneficiaries, while they continue to prefer gold mining stocks on a view the Fed will find it tough to return to 2% inflation.
This Jefferies chart shows S&P 500 stocks that have been best performers three months after the Dollar Spot Index peaked in 2020.
“The drop in gasoline prices, long-term rates and CPI is excellent news for the global consumer. We have highlighted that never in history has global consumer confidence numbers been so ubiquitously bad,” said Darby, who is also lifting their weighting in a consumer discretionary basket to bullish.
U.S. stocks /zigman2/quotes/210598065/realtime DJIA +1.60% /zigman2/quotes/210599714/realtime SPX +1.64% /zigman2/quotes/210598365/realtime COMP +1.63% are higher, with bond yields /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -3.93% /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -5.27% dropping, along with the dollar /zigman2/quotes/210598269/delayed DXY -1.17% . Oil prices /zigman2/quotes/211629951/delayed CL.1 +4.64% are higher after the International Energy Agency said European heatwaves have been boosting demand for the commodity .
More encouraging news on inflation, as producer prices fell 0.5% in July on the heels of a 1% gain in the prior month. Earlier, AAA data showed gasoline prices dropping below $4 per gallon for the first time in months. Meanwhile, weekly jobless claims rose by 14,000.
Disney /zigman2/quotes/203410047/composite DIS +3.21% shares are climbing after the entertainment giant’s streaming subscriber numbers beat those of Netflix /zigman2/quotes/202353025/composite NFLX +8.32% , and it is hiking prices of those services by 38%. Also, Disney results may mark the end to streaming wars .