As Inflation Grows At Fastest Pace In 40 Years, Equity Futures Rally

 | Jan 12, 2022 10:27AM ET

The Consumer Price Index (CPI) was released before the open, revealing that inflation grew 7% year-over-year, but core CPI grew at 5.5% year-over-year and 0.6% month-over-month. Inflation hasn’t grown this quickly in 40 years. While the 10-year Treasury 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 be up about 25 basis points by Jan. 12 from the beginning of the year, you’d probably think we were getting killed in the stock market. But stocks continue to show more resilience as investors apparently believe there’s still room for growth. Last week we saw mortgage applications were higher in December, which suggests many homebuyers may be looking to lock in a rate before they rise.

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

With that said, some stocks fell in premarket action before the CPI report. Biogen (NASDAQ:BIIB) fell 9.8% in premarket trading on news that medicare would only cover the Biogen’s Alzheimer drug Aduhelm for certain recipients. The news also caused Eli Lilly (NYSE:LLY) to fall 1.7% because it has a similar drug.

Jefferies Financial handed out a few upgrades that resulted in premarket movement. PayPal (NASDAQ:PYPL) was downgraded from "buy" to "hold," prompting a 2.3% premarket selloff. DoorDash (NYSE:DASH) was upgraded, leading to a 2.8% rally.

Stocks were mixed during the morning trading session on Tuesday but turned bullish in the afternoon session with the Nasdaq Composite leading the charge. The tech-heavy Nasdaq rose 1.41%, while the S&P 500 followed, closing 0.92% higher. The market rally appeared to coincide with Fed Chair Jerome Powell concluding his testimony before the Senate banking committee. Powell didn’t say anything new and confirmed that the Fed plans to end all its bond-buying stimulus in March. Apparently, investors just wanted assurance that the Fed hadn’t changed its plans.

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The 10-year Treasury yield fell 1.91% and rested just above its March 2021 highs. However, crude oil prices rallied 3.96% in part from a report by the U.S. Energy Information Administration (EIA) boosting its 2022 crude price outlook by $5 per barrel. Even before the EIA made its announcement, 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 technology stocks rise. The PHLX Semiconductor Index rallied 1.84%.

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Oil and gas stocks have sprinted out of the block in 2022 and left all other sectors in the dust. The question is, are they good for the long run? When discussing inflation, gas and groceries are commonly the first products people think about because those are the products more often purchased. The ability of energy to maintain its lead may depend on how long inflation will continue to grow at a heightened pace. The Fed is committed to reducing inflation to its previous target of 2% per year, but many analysts think the Fed is behind inflation and may need to take aggressive actions to get back on top of inflation. However, there’s also questions on whether the Fed will have the political will to slow economic growth quick enough during a midterm election year. Whatever happens, it appears inflation and, by extension, energy may have a little more endurance than the Fed originally expected.

Over the last six months, investors have bought energy stocks, and exploration and production companies have been the top performers. Refiners and marketers have been the second-highest group, while oil equipment companies have trailed behind. It’s difficult to break up these groups because many large oil companies are integrated across groups.

You may be surprised to learn that not all energy companies benefit from rising oil prices. It largely depends on where they fall in “stream”. Generally speaking, upstream companies tend to profit from rising oil prices, but downstream companies are often hurt by rising prices.