Weekend Update #187
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The last trading week - beginning July 8 - launched markets into a new earnings season poised to test the resolve of resilient indices which continue to rewrite record books. The middle of the week saw the S&P 500 close at a new, historic high for the 37th time in 2024, peaking in the hours leading up to the Bureau of Labor Statistics release of the Consumer Price Index on Thursday, 7/11. While markets faltered in response before regaining support to close the week, the release of the Producer Price Index on Friday, 7/12 served as a culmination of a trading session largely defined by economic data and commentary from the chair of the Federal Reserve before Congress. Results from three core financial institutions released on Friday as well provided an early glimpse into the opening of the earnings floodgates that is set for the weeks to follow.
Spanning across Tuesday and Wednesday, Federal Reserve Chair Jerome Powell delivered his semi-annual Humphrey-Hawkins testimony before Congress, with market participants closely monitoring the commentary for enlightening remarks that would further clarify the Federal Reserve's stance on inflation. The latest Personal Consumption Expenditures data - the Federal Reserve's preferred measure of inflation - showed continued progress towards the 2% inflation goal, which aided in the reignition of market optimism regarding nearing rate cuts after inflation readouts remained elevated to begin the year. In characteristic form, Chair Powell held steadfast to the Federal Reserve's cautious, data-driven approach to responding to the inflation fight, noting that while his confidence has increased regarding the trajectory of inflation back towards the target level, further data confirming the trend is necessary given the inherent risks of cutting interest rates prematurely. That said, Chair Powell, in a shift of tone from the peak of the current inflation cycle, deliberately emphasized the more-symmetric pressure the Federal Reserve now faces with regards to their dual mandate, stating that elevated inflation alone is not a sole risk and that cooling in the labor market must continue to be monitored carefully. Such commentary signals a partial reweighting of risks that factors tightly in the Federal Reserve's response function with the timing of rate cuts and the targeting of a soft-landing.
On Thursday, the Bureau of Labor Statistics published their report of the Consumer Price Index - the most commonly cited measure of inflation. While market participants generally held expectations of continued progress, the published data surprised overall and demonstrated even more profound cooling. Headline CPI fell on a monthly basis for the first time since the onset of the pandemic, with the annualized measure falling below surveyed estimates to +3.0%. Similarly, Core CPI, which excludes volatile food and energy, rose just +0.1% in the month of June, below expectation as well - on an annual basis, Core CPI measured at +3.4%. In combination with the Consumer Price Index release, on Friday, the BLS published their report on the Producer Price Index - a dataset viewed as an indicator of cost-push inflation. Headline PPI measured above expectations on a month-over-month basis but trailed on a year-over-year basis, measuring at +2.2% versus consensus expectations of +2.5%. However, Core PPI presented the inverse, trailing month-over-month estimates while measuring in at +2.6%, above year-over-year predictions. While the Consumer Price Index readout provided further evidence of inflation cooling, the Producer Price Index data continues to muddy clarity of a definitive disinflationary trend. Throughout 2024, PPI Final Demand Goods have experienced deflation, alleviating some pricing pressures, yet PPI Final Demand Services have continued to grow.
In addition to the macroeconomic data and commentary, the trading week's attention was held by the earnings releases of three major financial institutions Friday morning. JPMorgan Chase, Wells Fargo, and Citigroup each published their results pre-market on the last trading day of the week, presenting results that demonstrated how elevated interest rates have continued to pressure banking performance. JPMorgan Chase and Wells Fargo each reported declines in quarterly profit, while Citigroup saw operational improvements derived from their current restructuring plan, but allocated a larger provision for potential loss in their retail lending business. Although still historically depressed, rising credit card delinquency rates in conjunction with persistently high interest rates present a threat to performance, leading some reporting institutions to lower outlook for the rest of 2024.
In the political sphere, turmoil throughout the Democratic Party regarding questions of President Biden's age and ability to defeat former President Trump in the November election continue to pervade nearly all headlines. Ignited forcefully by President Biden's performance at the presidential debate two weeks ago, concerns of the president's fitness have led high ranking politicians and prominent donors to publically call for a transition within the party, even as President Biden has firmly maintained his intentions to continue his campaign. In a pivotal moment, President Biden held a press conference Thursday evening while attending the NATO 75th Anniversary Summit in Washington DC, looking to allay fears from his critics. There, the president spoke at length on the foreign conflicts and factions which threaten the United States and its allies. The performance demonstrated President Biden's experience with and commanding knowledge of foreign policy, but generally left concerned views unchanged. As of Friday, large Democratic donors have implemented a freeze on their political donations, with the calls for President Biden to step aside growing in quantity and volume.
In the upcoming week, market participants will continue to maintain a watchful eye on all developments surrounding the 2024 Presidential Election as well as the broadening of earnings releases. Many more of the core financial institutions will report results to open the week, followed by data and commentary from firms across the healthcare and technology sectors.
Weekly Performance
S&P 500 5,304.72 -0.32%
Nasdaq 16,920.80 +0.70%
Dow Jones 39,069.59 -2.33%
Thank you Blue Room Analyst AIDAN FETTERLY
This week, the market was consumed by inflation data that many feel will lead to Fed rate cuts in the fall. Stocks overall started to rotate out of the mega-cap tech companies and began lifting market constituents more broadly. Companies that have been overlooked ever since the Magnificent 7 and AI-related stocks took center stage, began to show life. Fund One benefited from the rally as idiosyncratic holdings like 4D Molecular (up 29% for the week), Rocket Pharmaceuticals (+13%), Precision Biosciences (+10%) and Schrodinger (+8%) all boosted performance on very little company specific news. These stocks were playing catch-up to the recent market leaders.
Performance also benefited from several short positions, which bucked the upward market trend, like Mediterranean fast-casual restaurant chain Cava. We hold the belief that Cava shares ran well ahead of operating results, implying that the stock is overvalued. Apparently, other investors are now buying into our thesis.
Because of the strong stock moves, we did face some headwinds as well. A big detractor to weekly performance was our short position in solar company Enphase Energy. The stock participated in the market rally, finishing up 23% for the week. Overall, we have done a fair job trading the stock and Fund One benefitted as we covered some of our position before the rally. During the week, the company announced new residential and commercial products to help with solar projects which also generated some positive investor attention. For now, we are maintaining our Enphase position and we will be watching developments closely.
Earnings season kicked off in earnest this week with major banks reporting second quarter results on Friday. We look forward to keeping all of you updated on the portfolio results throughout the summer.
Thank you Blue Room Investing President JOHN FENLEY
— Prepared Remarks —
Melissa Napier
Good morning. This is Melissa Napier from Conagra Brands. Thank you for listening to our prepared remarks on Conagra Brand’s fourth quarter and fiscal year 2024 earnings. At 9:30 AM eastern this morning, we will hold a separate live question and answer session on today's results, which you can access via webcast on our Investor Relations website. Our press release, presentation materials and a transcript of these prepared remarks are also available there.
I'm joined this morning by Sean Connolly, our CEO, and Dave Marberger, our CFO. We will be making some forward looking statements today. And while we are making these statements in good faith based on current information, we do not have any guarantee about the results we will achieve. Descriptions of our risk factors are included in our filings with the SEC. We will also be discussing some non-GAAP financial measures. Please see our earnings release and slides for the GAAP to non-GAAP reconciliations and information on our comparability items, which can be found in the Investor Relations section of our website. And I'll now turn the call over to Sean.
Sean Connolly
Thanks Melissa. Good morning, everyone. Thank you for joining our fourth quarter fiscal 24 earnings call. I'll begin today's call by sharing some perspective on our fourth quarter and fiscal 24 performance, particularly in the context of our broader environment. Then, before I turn it over to Dave, I'll discuss how we're thinking about fiscal 25.
Let's get started with the key points we want to convey on slide five. Overall, we demonstrated solid progress throughout fiscal 24 amidst a challenging consumer environment. In Q4, we continued to see positive impact from our investments to maximize consumer engagement with our brands. This again resulted in sequential volume improvement in our domestic retail business.
We also saw strengthened share, particularly in Frozen and Snacks where our volume progress has been most meaningful. Even with these significant investments, we reported full year adjusted gross and operating margin expansion supported by productivity improvements across our supply chain. Further, our strong free cash flow enabled us to continue to reduce our net leverage ratio and strengthen our balance sheet consistent with our goals.
OVERVIEW
United States Producer Price Index YoY and MoM
PPI is a family of data that gauges the costs of production. There are three areas of PPI classification that use the same pool of data from the BLS: industry, commodity and commodity-based final and intermediate demand (FD-ID).
Finished Goods YoY~ Finished goods are goods that have completed the manufacturing process but have not yet been sold or distributed to the end user.
Final Demand ~ PPI for final demand measures the average change in prices received by domestic producers of goods, services and construction sold for personal consumption, capital, investment, government and export.
For the second straight month, consumer sentiment is essentially unchanged at 66.0. July’s reading was a statistically insignificant 2 index points below last month, well within the margin of error. Although sentiment is more than 30% above the trough from June 2022, it remains stubbornly subdued.
Nearly half of consumers still object to the impact of high prices, even as they expect inflation to continue moderating in the years ahead.
With the upcoming election, consumers perceived substantial uncertainty in the trajectory of the economy, though there is little evidence that the first presidential debate altered their economic views.
— Press Release —
July 8, 2024
“Consumers Expect Lower Inflation and Slower Home Price Growth Over the Next Year”
The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the June 2024 Survey of Consumer Expectations, which shows that inflation expectations declined at the short- and longer-term horizons, but increased slightly at the medium-term horizon. Similarly, one-year-ahead expectations about home prices and one-year-ahead expectations about specific goods prices all declined.
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