VIDEO: July's PPI Data Can Impact a 50 BPS Rate Cut

In today’s Daily Rundown video, Chris Versace discusses the better-than-expected July PPI print and explains why the remaining data coming this week could raise questions about a 50 basis point September rate cut by the Fed.

Versace also discusses how Home Depot’s HD weak outlook impacts Monday's downgrade of a portfolio holding to a four rating and Tuesday's decision to add more of this portfolio power pain point play.

He closes out this Daily Rundown video with some thoughts on the new Starbucks SBUX CEO news, and why he doesn’t see it impacting the portfolio.

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Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here-- Tuesday, August 13th. Stocks are moving higher today, shrugging off Home Depot's negative revision for comp sales for the current year, being lifted, of course, by that much-better-than-expected July PPI print across-the-board headline or even core PPI, simply better than the market was looking for. And by better, I mean lower on a sequential basis, lower on a year-over-year basis compared to the month of June.

Clearly, the market is seeing this as just the latest sign that the Fed is that much closer to embarking upon a rate-cutting cycle. And I don't disagree with it. But-- and of course, you knew there had to be a but. While I don't disagree with it, let's remember that Fed Chair Powell and the Fed are extremely, extremely aware of being head-faked by inflation data.

And I just bring this up because, when we trace back the PPI data for April, May, and June, it was all moving higher, in other words, not in the direction that gave the Fed more good data, but one that was kind of a little bit of alarming. So I think the Fed is going to see this better-than-expected move in July, down considerably compared to the month of June as good progress. But they're going to be a little more cautious in their comments compared to the reaction that we're seeing in the market.

That's fine. We've got a lot more data to come. Tomorrow, we do get the CPI report for July, and that should show some further progress as well. And then, before the Fed's meeting in mid-September, we should get the August PPI and CPI. So we'll get some confirmation that these moves that we're seeing in the PPI data and potentially in tomorrow's CPI data are sustainable. And that's really what the Fed wants to see.

I do think there are some questions as to whether or not we will see a 50-basis-point rate cut at the Fed's September meeting. [? Land ?] of Fed GDP now 2.9%. We'll have to revisit that after we get the July retail sales data, housing starts data, industrial production data all this week. And I think, if it supports a vibrant economy, then the expectations for that 50-basis-point rate cut in September are going to have to come back.

That could keep the market volatile as we move through August, which is typically a lower-volume month. People are on the beach, at the lake, whatever, squeezing in the last bit of summer vacation. We've talked about this. But we'll be ready for that and be able to pounce on any opportunities that come our way. But at least today, we are seeing some of a more interest-rate-sensitive positions-- Builders FirstSource, United Rentals, Vulcan Materials-- all moved nicely higher.

We're also seeing the same happen with a number of our tech positions. You can see this in the shares of Nvidia that are up nicely today, Universal Display, Qualcomm, and of course Marvell. So we will enjoy it all. But remember, there is more data to come.

I will also say, when it relates to Home Depot's earnings, the big thing that stood out, as I mentioned, was the negative revision in the comp sales for this year. The company now sees them down somewhere between 3% and 4%. Their prior guidance was down 1%.

So that is another data point that tells us the consumer remains selective. They're deferring purchases. But there's other data, too, that's been out in the last 24 hours. And I'm referring to a new survey by the New York Fed that shows that consumers are cutting the amount that they expect to spend over the coming year. And that came-- kind of dovetailed along with an interview given by Bank of America CEO Brian Moynihan in which he said that the bank's data, taking a look at July and August so far, consumers are dialing back their spending.

So this just kind of speaks to something I talked about yesterday when we trimmed back and then ultimately downgraded the shares of Coty to a 4 rating, which is that the growing number of data points that point to consumers pulling back on their spending, retrenching, being more selective-- call it what you will. All of this kind of ratchets up the probability that, when Coty reports next week, they could deliver something that is less than the market consensus.

And if that's the case, as we've seen throughout the earnings season, companies that come up short on guidance, they tend to get beaten up. And we have taken enough lumps in Coty. They were past, I should say, our panic point, which kind of triggered this whole renewal process on the position.

So the panic point for Coty doing exactly what it's supposed to do, forcing us to take a hard and serious rethink, a disciplined view, an unbiased view, on [? name. ?] And when we do that, there are reasons to be concerned about, as I said, what Coty's guidance could be just given the backdrop of the consumer.

So our move was to trim back the position yesterday, downgrade it to a 4. And our decision has been that we will use near-term strength in the Coty position that's remaining to work our way out of it. And we'll look to redeploy the returned capital into some other positions that are far better-- I hate to say this word positioned-- but positions that have far better prospects for the back half of the year and into 2025.

And in fact, we did that this morning. We took down another slug of Eaton ETN shares. The catalyst for that is that, yes, we are seeing more utilities talk about the looming pain point that data centers are going to create for overall electrical capacity. We do see this translating into increasing capital spending from utilities. And as I shared in the trade note for Eaton, when we added that slug of shares this morning, we will be watching what utilities have to say in the coming months about their capital budgets for the end of the year and for 2025 and beyond.

Remember that the data center buildout is not a 2024, 2025 event. If we look at some of the expectations that's going to span out to 2028 and beyond. And utilities are saying that data centers will take up a significant piece of their capacity. So we want to continue to position ourselves for that pain point. Eaton shares are a great place to do that.

Even after the trade that we made today, Eaton is only going to be about 2% of the portfolio or so. So we will have room to continue to take down more Eaton shares. But we'll do so in a disciplined fashion.

I also just want to touch on one other thing here that's regarding the CEO change that was announced today with CEO of Chipotle, Brian Niccols going over to Starbucks. Big positive for Starbucks, no question. But I do think that he's going to have his work cut out for him. If you think of what Chipotle is/was-- it is a quick-service, largely US footprint business.

Starbucks-- clearly an international beverage and food company, not just in terms of the storefronts that they have, but also with their businesses in grocery, their beverage partnership with PepsiCo for bottled beverages and other things and, again, just a bigger international stage on which the company has to operate. So I do think that, as great a CEO as Niccols is-- and he was simply fantastic for Chipotle.

We benefited in the portfolio tremendously from the things that he did as a great operator and a menu innovator. He is going to have his work cut out for him. We're anxious to see what he does. But when it comes to Dutch Bros, one of our newest positions in the portfolio, the question that we're probably going to hear from some folks is, is this going to do anything to really derail the story at Dutch Bros, which is, of course, centered on geographic expansion.

I don't think so. If anything, I think, at least, over the next several quarters, Niccols is going to have his job cut out for him, kind of riding Starbucks and getting it back on a growth trajectory. And we will be taking-- following him rather closely, as I said.

Do I expect that, at some point, in his first 90 days in tenure, Niccols could pull a classic CEO move and toss out guidance and reset everything, throwing out the proverbial kitchen sink. I think it's a distinct possibility. Clear the decks, reset, and allow him to march forward. But it is something we'll be watching. But in the meantime, we're going to continue to opportunistically pick up incremental shares of Dutch Bros and build out our position, continuing to use the recent pullback in the shares and the growth opportunity ahead to do so.

So with that, I would say, please-- we've got a lot of stuff coming this week, a lot more retailer earnings-- we've got also the July CPI report and all the other economic data. So please, folks, continue to check your emails. Check your alerts. We want to make sure that you're catching our latest thinking. And as you know, if we make any other moves with the portfolio, we want to make sure that you are right there with us. Thanks for watching.