Futures are pointing to more gains, as investors also waking up to more good news on falling U.S. gasoline prices (see below).
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
has likely peaked, prompting them to go long on a basket of S&P 500
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. stock futures
On the heels of that inflation tumble, gasoline prices dropped below $4 per gallon for the first time in months.
Struggling crypto exchange Coinbase
has confirmed a probe by the Securities and Exchange Commission of its listing and staking programs.
Weekly jobless claims and producer prices are ahead.
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