What to know today

  • It’s PCE week again.
  • Is NVDA a buy?
  • Coffee and burgers are hot.

It’s Getting a Little Cooler

Rents won’t come down for a while yet.

Almost every bit of recent incoming data suggests that inflation continues to cool in the US.

That includes the Federal Reserve’s preferred measure, the Personal Consumption Expenditures Price Index, more specifically the core PCE.

Core PCE strips out food and energy prices.

The Federal Reserve’s preferred measure of inflation, the core PCE Price Index, continues to decline.

The data that isn’t cooperating is about shelter inflation.

According to a new research paper from the Federal Reserve Bank of Boston, market rents have moderated in recent months but a pandemic-related surge in 2021 and 2022 still hasn’t worked its way through the economy

“As a result,” Christopher D. Cotton writes, “rents are on track to exert upward pressure on overall inflation for quite a while to come.”

Private-sector indicators of market rents rose much faster than the rent calculation for the Consumer Price Index as Americans used relief funds, existing savings, and rising wages to upgrade their housing.

Market rent data is calculated based on people signing new leases. That doesn’t capture the effects of long-term leases or the reluctance of tenants to raise rent on existing tenants or local laws designed to limit increases.

There is a turnover process, though, and we’re still working through it.

According to data crunched by Cotton, the process will add 0.7 percentage point to the core CPI over the next year and 0.3 percentage points to core PCE.

Shelter inflation is adding 0.7 of a percentage point and 0.3 of a percentage point to core CPI and core PCE inflation.

That makes shelter inflation “a known known,” if that’s even a thing I didn’t just invent or borrow from Donald Rumsfeld.

So people are starting to watch the labor market a little more closely for signs the Fed will move more than once and earlier than currently expected from its current interest rate policy.

Here’s how Nick Timiraos of The Wall Street Journal framed the new emerging picture in the aftermath of the most recent Federal Open Market Committee decision in mid-June:

To be sure, the trust-but-verify approach risks putting the Fed in a catch-22. Powell and his colleagues are waiting until they have more convincing evidence that the Fed’s interest-rate setting is as restrictive as they think it is. But that raises the risk it will be too late to avoid a more serious employment downturn by the time they see that evidence, a point Powell acknowledged on Wednesday.

“We completely understand that that’s the risk—and that’s not our plan, to wait for things to break and then try to fix them,” Powell said.

Fed Governor Christopher Waller, Chicago Fed President Austan Goolsbee, and San Francisco Fed President Mary Daly are speaking today.

And we’ll get consumer confidence and new home sales data, a final first quarter GDP estimate, initial jobless claims and pending home sales data, plus speeches from Governor Michelle Bowman and Governor Lisa Cook, from Tuesday through Thursday.

And we’ll get earnings reports from Nike $NKE and FedEx $FDX.

But the big thing for investors, traders, and speculators is Friday’s PCE report at 8:30 a.m. ET.

The consensus forecast is that the headline figure was flat month over month in May and up 2.6 percent year over year.

The core figure, they say, was up 0.1 percent month over month and 2.6 percent year over year.

It’s maybe not “cool,” but it is cooler.

deep dive

Nvidia Is Growing in Every Direction

This major trend is extraordinary.

Nvidia $NVDA was the most valuable company in the world for a time last week, ahead of both Microsoft $MSFT and Apple $AAPL in an exclusive $3 trillion market cap club.

Rough trading on Thursday, though it did hit a post-split high early, and on Friday took it down a couple of pegs.

Still, that price action has been historically explosive, NVDA setting all kinds of speed records on the way to its present company.

The cool thing is the No. 1 AI chipmaker is putting up similarly explosive growth in key operating metrics such as free cash flow.

Little more than a year ago Nvidia was generating $5 billion on an annual basis.

Lately it’s doing $15 billion per quarter.

The stock is up more than 1,000 percent since October 2022 and about 160 percent so far in 2024.

It was down 3.22 percent on Friday to close at $126.57, its market cap shrinking to $3.113 trillion, behind MSFT at $3.342 trillion and AAPL at $3.181 trillion.

The question is whether NVDA still represents good value at these levels.

The surge in Nvidia’s $NVDA share price has been matched by exponential growth in its free cash flow.

Bulls see revenue doubling to $120 billion this year and rising to $160 billion next year, with significant upside to current earnings expectations on its AI dominance and the continuing proliferation of data centers.

Bears question customers’ ability to come up with the cash to cover their infrastructure-buildout budgets.

There’s also the potential impact of Meta Platforms $META and Amazon.com $AMZN as well as Microsoft diversifying their supplier bases and buying chips from competitors like Advanced Micro Devices $AMD.

NVDA is expensive based on traditional metrics like price-to-earnings ratios – it’s pushing 80 there. The GOAT value investor, Benjamin Graham, often spoke about 15 as a magic number for that ratio.

On a one-year forward earnings basis it looks a little less expensive at 47.

That figure compares to an average of 35.9 for the Philadelphia Stock Exchange Semiconductor Index, 29 for the Nasdaq 100 Index, 22.6 for the S&P 500, and 17.8 for the equal-weight S&P 500.

Wall Street is generally bullish: 53 analysts rate the stock a “buy” or a “strong buy.” Five rate it a “hold.”

Zero analysts say to sell NVDA.

deep dive |
June 24, 2024

Nvidia Is Growing in Every Direction


People Have Money To Spend

Income and compensation are beating inflation.

“Inflation!” is such an emotional topic – and there’s no dispute here about the good reasons why – that consistently faster growth for disposable income and employee compensation is almost completely forgotten.

People keep spending because they have money to spend, and that goes for needs as well as wants.

According to the US Department of Commerce, retail sales were up 0.1 percent month over month and 2.3 percent year over year to $703.1 billion in May.

Headlines emphasized that the overall number came in below a consensus forecast for 0.3 percent growth.

Here’s the thing about that: Overall sales were lower than they would have been because lower gasoline prices weighed on receipts for service stations.

You know what else is an emotional topic?

Flavor. People have to have theirs.

Disposable income and employee compensation growth have both outpaced the growth of the PCE Price Index over the past year.

Goldman Sachs – selectively constructive on the industry – has identified two industry names likely to stand out in a notoriously volatile landscape.

Starbucks $SBUX still generates annual sales of more than $35 billion and pays a solid dividend. But customer traffic is slowing, and it missed top-line expectations last quarter.

SBUX is down 16.76 percent in 2024, 25.77 percent from its 52-week intraday high of $107.66 on November 16, and 32.29 percent from its all-time closing high of $118.03 on July 26, 2021.

Goldman suggests the decline presents a buying opportunity, rating SBUX a “buy” with a 12-month price target of $100.

Wall Street is more circumspect, with 12 analysts rating the stock a “buy” versus 25 analysts rating it a “hold.” 

Goldman is also high on burger chain Shake Shack $SHAK, which continues to generate positive revenue growth, though it missed the consensus top-line forecast last quarter.

SHAK is up 20.08 percent in 2024, rising to a 52-week intraday high of $111.29 on May 6. Its all-time closing high is $130.76 on February 11, 2021.

Goldman said management has a clear strategy for growth and that improvement in new-store results should drive upside from here.

The firm rates SHAK a “buy” with a 12-month price target of $110.

Nine Wall Street analysts rate the stock a “buy,” 12 rate it a “hold,” and two rate SHAK a “sell.”

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