Equity Index Futures Pick Up Steam After Stunning CPI Data

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key takeaways:

  • Consumer price index shows inflation rising at a rate not seen in 40 years
  • Breaking down the energy sector by industry group
  • Not all energy companies react equally to rising oil prices
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The Consumer Price Index (CPI) released ahead of the open showed inflation rose 7% year-on-year, but the core CPI rose 5.5% year-on-year and 0.6% month-on-month. Inflation has not increased so rapidly in 40 years. While the 10-year Treasury (TNX) yield traded 0.29% higher on the news, equity index futures actually traded higher after the CPI report.

If I told you that the 10-year Treasury yield would increase by about 25 basis points from the beginning of the year to January 12, you would probably think we were being hit in the stock market. But stocks continue to show greater resilience as investors believe there is still room for growth. Last week we saw that mortgage applications were higher in December, which suggests that many homebuyers may be looking to lock in a rate before increasing.

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We may still see more volatility in the near future, but — with a focus on earnings starting later this week — investors may be able to turn to the growth story.

Simultaneously, some stocks were falling in premarket action even before the CPI report. Biogen (BIIB) fell 9.8% in premarket trading on the news that Medicare would only cover Biogen’s Alzheimer’s drug EduHelm for certain recipients. The news also caused Eli Lilly (LLY) to drop 1.7% because it has a similar drug.

Jefferies Financial (JEF) handed out some upgrades that resulted in premarket movements. paypal
PYPL
(PYPL) was downgraded from buy to boost to 2.3% premarket selloff. DoorDash (DASH) was upgraded to rally 2.8% respectively.

Shares remained mixed during the morning trading session on Tuesday, but were bullish with Nasdaq in the afternoon session.
NDAQ
Composite (COMP:GIDS) is leading the charge. The tech-heavy Nasdaq rose 1.41%, while the S&P 500 (SPX) closed 0.92% higher. The market rally appeared to coincide with the conclusion of Fed Chair Jerome Powell’s testimony before the Senate Banking Committee. Chair Powell said nothing new and confirmed that the Fed plans to end all of its bond-buying incentives in March. Obviously, investors just wanted reassurance that the Fed hasn’t changed its plans.

The 10-year Treasury Yield (TNX) fell 1.91% and remained just above its March 2021 high. However, a report by the US Energy Information Administration (EIA) showed crude oil prices rose by 3.96%, leading to a $5 per barrel increase in crude oil prices in 2022. Even before the EIA was announced, investors were already buying energy stocks again. The Energy Select Sector Index rose 3.42% on the day and led all other sectors.

The technology sector was the second strongest, with the Technology Select Sector Index rising 1.21%. Semiconductors helped propel tech stocks. The PHLX Semiconductor Index (SOX) rose 1.84%.

burning calories

Oil and gas stocks ran out of the block in 2022, leaving all other sectors in the dust. The question is, are they good for the long run? When discussing inflation, gas and groceries are usually the first products people think of because those products are bought more often. The ability of energy to maintain its growth may depend on how long inflation continues to accelerate. The Fed is committed to reducing inflation to its previous target of 2% per year, but many analysts believe the Fed is behind inflation and may need to take aggressive action to return to the top of inflation. Is. However, there are also questions about whether the Fed will have the political will to sharply slow economic growth during a midterm election year. Whatever happens, it appears to be inflationary and, by extension, energy may have a bit more endurance than the Fed originally expected.

Over the past six months, investors have bought energy stocks, and exploration and production companies have been top performers. Refiners and marketers have been the second largest group, while oil equipment companies have lagged behind. These clusters are difficult to break down because many large oil companies are integrated into the groups.

It may surprise you to learn that not all energy companies benefit from rising oil prices. It largely depends on where in the “stream” they fall. Generally, upstream companies benefit from rising oil prices, but downstream companies are often hurt by rising oil prices.

Upstream: Oil exploration and production companies are the “upstream” segment of the energy sector because it includes the exploration, exploration, testing, drilling and extraction phases of oil and gas. In the S&P 500, these companies include ConocoPhillips . Are included
COP
(COP), EOG Resources
all images
(EOG), Pioneer (PXD), and Devon (DVN) to name a few. Upstream companies are most sensitive to oil prices because there are certain price points that must be met in order for certain wells to cover their costs and be profitable enough to make extraction worthwhile. This means that if oil prices fall they also fall quickly.

Oil service companies such as Halliburton
matter
(HAL) and Baker Hughes
BHI
(BHI) offers engineering, maintenance, surveying, testing, and so forth, up and down streams. However, upstream activity usually occurs where their services are in greater demand. Therefore, they are also sensitive to oil prices.

middle of: Oil storage and transportation companies are midstream companies that transport and store crude oil. They can use pipelines, trains, or trucks to get oil from drillers, to store, and eventually to refiners. S&P 500 oil storage and transportation companies are Kinder Morgan
KMI
(KMI), Williams (WMB), and ONEOK
Fine
(Fine).

Upstream and downstream companies tend to come together in favor of more pipelines because they keep costs lower than trucks and railroads. enbridge
ENB
(ENB) and Energy Transfer (ET) are two companies that specialize in pipeline construction, but there are several other companies named here as well.

Downstream: Oil and gas must be refined before use. This is where refining and marketing groups come in. These companies make gasoline, heating oil, synthetic rubber, plastics, lubricants, pesticides, and more. They then deliver these products to consumers through marketing and sales, or by selling the products through non-energy companies. In the S&P 500, these companies include Marathon (MPC), Phillips 66. Are included
psx
(PSX), and Valero (VLO).

The big companies you usually think of when discussing energy like Exxon Mobil
XOM
(XOM) and Chevron
cvx
(CVX) are also refiners, but they participate in other phases as well.

Downstream companies may actually be hurt by rising oil prices because crude cannot be exported; Only refined products can be exported. This means that once a refiner reaches maximum capacity, it cannot meet demand.

All energy is capital intensive. This means that a lot of cost is incurred in machinery and raw materials before making money. It can also take a long time to go up and down wells, pipelines, trucks, refiners, etc. This means oil production will take time to meet demand and drive down prices.

TD Ameritrade® Commentary for educational purposes only. Member SIPC.

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