Wall Street Breakfast: Simplify The CPI

Simplify the CPI

As the Federal Reserve ratchets up interest rates, inflation has started to cool, according to many recent economic reports. Most recently, wage growth rose less than expected in the December non-farm payrolls report, resulting in further assurance that a wage-price spiral has not developed. Average hourly earnings from previous months also included significant downward revisions, giving hope that price pressures will finally melt away.

Snapshot: Investors today will see if that trend is continuing when the Department of Labor publishes the latest Consumer Price Index. Headline inflation is expected to rise 6.5% Y/Y in December, easing from 7.1% in November, and dropping for the sixth consecutive month. Core CPI – which excludes volatile food and energy prices – is expected to increase 5.7% vs. 6.0% in November, but it comes as a new term emerges for market watchers to focus on – “supercore inflation.”

Fed Chair Jerome Powell mentioned at his December press conference that the services component of inflation, excluding housing, was particularly concerning as that tends to be harder to root out than goods inflation. Some are even going more hardcore, sizing up the figure without housing and healthcare, or even other categories. Also keep in mind that Fed policymakers generally give more weight to core personal consumption expenditures, rather than the CPI, which has diverged more than usual since early last year.

Complicated equation: The reaction from market participants after 8:30 a.m. ET will depend on what they expect the Federal Reserve to do in response to the report. Traditional sentiment would say that a much cooler reading would prompt the central bank to continue tapping the brakes on rate hikes, though others feel that it alone may not be enough to adjust the Fed’s policy path. With the unemployment rate and layoffs remaining low and job openings still high, a “more meaningful softening in labor demand and wage growth will be needed,” said Jim Baird of wealth management firm Plante Moran. “Labor conditions have weakened over the past year, but remain too robust for the Fed’s liking.” (11 comments)

Peltz at it again

A high-profile proxy fight has broken out at Disney (DIS) as activist investor Nelson Peltz attempts to join the company’s board. Peltz is a significant shareholder, with his Trian Fund Management holding around $800M worth of Disney stock, though the House of Mouse has rebuffed his advances. The battle also threatens another chaotic period at Disney following executive shakeups over the last few months.

What does Peltz want? He had previously advocated for the removal of Bob Chapek from the board, which he got after Bob Iger returned as CEO in November. The main thing right now is his own board seat, which was denied by Disney on Wednesday (Nike’s (NKE) Mark Parker was elected to replace Susan Arnold as Disney chair following the company’s next annual meeting). Trian wants to make operational improvements and reduce costs – like possibly cutting streaming losses, spinning off some media divisions, or restricting dealmaking – as Disney’s stock trades near pandemic lows.

“Trian’s objective is to create sustainable, long-term value at Disney by working WITH Bob Iger and the Disney Board,” the firm declared. “We recognize that Disney is undergoing a period of significant change and we are NOT trying to create additional instability.”

Response: “The Walt Disney Company remains open to constructive engagement and ideas that help drive shareholder value,” the board replied in a statement. “While senior leadership of The Walt Disney Company and its Board of Directors have engaged with Mr. Peltz numerous times over the last few months, the board does not endorse the Trian Group nominee, and recommends that shareholders not support its nominee, and instead vote for all the company’s nominees.” (7 comments)

Travel trouble

Major U.S. airlines including Delta (NYSE:DAL), Southwest (NYSE:LUV) and United (NASDAQ:UAL) expect operations to return to normal today after a disruption stranded travelers across the country. When all was said and done, nearly 12,000 flights were delayed or canceled on Wednesday – within, into, or out of the United States. It also appeared to be the first nationwide grounding of domestic traffic in over two decades, with the last following the terrorist attacks of Sept. 11, 2001.

What happened? The Federal Aviation Administration traced the outage to a damaged database file on the computer system that generates alerts called NOTAMs, or Notice to Air Missions. Those notifications must be reviewed by pilots and airline dispatchers before takeoff, as they include details about bad weather, runway closures or nearby airspace activity. Officials also noted that the outage was not the result of a cyberattack, though a similar system interruption occurred in Canada on the same day.

Many of those systems “are old mainframe systems that are generally reliable, but they are out of date,” explained Tim Campbell, a former executive of air operations at American Airlines (NASDAQ:AAL).

Outlook: The U.S. aviation sector is still likely to struggle on Thursday, with 63 cancellations and 527 delays as of 7:00 a.m. ET, but many hope that things will clear up later in the day. The disruption follows another turbulent period for the air travel industry, which resulted in government investigations. Over the holidays, Southwest Airlines canceled thousands of flights over the span of several days, citing problems with a legacy system that couldn’t keep up with crew scheduling changes.

Big stash

Crypto traders are also watching today’s CPI print, with hopes that any cooling on the inflation front could help restore a desire for riskier assets. In fact, Bitcoin (BTC-USD) was bid up overnight to its highest level in nearly a month, climbing over 4% to regain the $18,000 level. Some other notable developments are also hitting the sector following a court hearing on Wednesday for the collapsed crypto exchange FTX.

The latest: Bankruptcy attorneys sifting through the rubble left behind by founder Sam Bankman-Fried apparently found more than $5B in liquid assets, like cash and tradeable crypto, that may be sold to help repay creditors. It’s not yet clear where the money came from, and the figure doesn’t include another $425M in crypto held by the Securities Commission of The Bahamas. New FTX CEO, John Ray, has previously said that at least $8B of customer assets were unaccounted for in the worst case of corporate failure he had ever seen.

While FTX has already put some units up for sale since entering Chapter 11, such as LedgerX, Embed Financial Technologies, and FTX Europe and Japan, the selling of the newly discovered stash of crypto could dent prices. “If you try to sell $1B worth of crypto all at once, it’s going to depress the market,” noted Eric Snyder, partner and bankruptcy attorney at Wilk Auslander.

The other side: “We’ve had many negative events transpire over the past year, and if one looks at the price reaction to those events, in general it’s been declining less and less,” said Vijay Ayyar of crypto exchange Luno. It’s an “indication that the market is accepting the news quite well, sell pressure is being absorbed, and hence we’re moving to an accumulation stage. This could also mean that the market thinks the worst is over for crypto and that most negative news is now priced in.”