A softer-than-expected Producer Price Index (PPI) print boosted equity futures on Tuesday morning but stocks closed mixed in the face of rising bond yields. This comes a day before the release of the final Consumer Price Index (CPI) report for 2024.
The Bureau of Labor Statistics said PPI rose by 0.2% month over month in December, short of a consensus forecast of 0.3% and down from 0.4% in November. On a year-over-year basis, PPI accelerated to 3.3% from 3.0%.
"It was encouraging to see the PPI Index come in well below expectations," observes Charlie Ripley, senior investment strategist for Allianz Investment Management, who notes too that wholesale price data doesn't translate directly into consumer price data. "Reaction in the bond market was relatively muted, but we are expecting a wider range of outcomes following tomorrow's release on the latest consumer price data."
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The yield on the 10-year U.S. Treasury note traded up to 4.809% from Monday's close of 4.805% before settling at 4.786%. The 10-year Treasury yield has risen 142 basis points from 3.642% the day before the Federal Reserve started cutting interest rates in September.
The BLS will release December CPI data tomorrow at 8:30 am Eastern Standard Time. "The December CPI report should indicate that the underlying trend in inflation is not re-accelerating, but it is unlikely to allay the FOMC's increased concerns that inflation has become stuck uncomfortably above its target," write Wells Fargo economists Sarah House and Aubrey Woessner.
House and Woessner forecast month-over-month headline CPI rose 0.4% on gains in energy prices, pushing the year-over-year figure to 2.9%, a five-month high. The economists see core CPI, which excludes energy as well as food, easing from 0.3% to 0.2% month over month and leaving the year-over-year rate at 3.3% for a fourth straight month.
According to Stuart Kaiser, head of U.S. equity trading at Citigroup, the cost of at-the-money S&P 500 puts and calls indicates a move of 1% in either direction for the index on Wednesday. It would be the largest implied move ahead of the release of a CPI report since March 2023.
At Tuesday's closing bell, the Dow Jones Industrial Average inched up 0.5% to 42,518. The S&P 500 added 0.1% to 5,842, and the Nasdaq Composite gave back 0.2% to 19,044.
Weight loss drug sales weigh on LLY
Eli Lilly (LLY) stock was down 6.7% after management reported that sales of its blockbuster GLP-1 drugs will miss Wall Street's expectations for the second consecutive quarter and that overall fourth-quarter revenue of $14.5 billion will fall short of its guidance.
LLY has rallied more than 120% since 2023 on the potential of its obesity and Type 2 diabetes drugs, Zepbound and Mounjaro. For the fourth quarter, Eli Lilly expects sales of Mounjaro to be $3.5 billion vs a FactSet consensus of $4.4 billion. Zepbound sales will arrive at $1.9 billion, short of a $2.1 billion forecast.
Lilly's updated revenue guidance anticipates strong performance from its oncology, immunology and neuroscience medicines, and management's guidance for 2025 is slightly ahead of Wall Street's forecast, a range of $58 billion to $61 billion vs a FactSet-compiled consensus of $58.4 billion. The company will report its full quarterly results in early February.
Novo Nordisk (NVO), Eli Lilly's top competitor in GLP-1 drug space, declined 4.1%, while Viking Therapeutics (VKTX), which is still developing its own GLP-1 drugs, lost 12.7%.
Big banks prepare to report
Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM) and Wells Fargo (WF) highlight a big earnings calendar day on Wednesday.
Based on data collected by FactSet, "The Financials sector is predicted to report the highest year-over-year earnings growth rate of all eleven sectors for the fourth quarter at 39.5%."
Sean Ryan, the associate director of the banking and specialty finance sector at FactSet, notes that net interest margin and loan and deposit growth should be positives for the banks, while non-interest income and the impact of higher long rates will likely be negatives.
"The most important new information is likely to be refreshed forward guidance on the earnings calls," Ryan explains, "which is likely to skew bullish based on late fourth-quarter conference commentary, a steeper yield curve, and industry anticipation of a more favorable regulatory environment than has existed in several years."
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