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Inflation and pricing power

06/15/2021 | 09:21am EDT

Today, investors got some fresh data on how much Americans spent last month, as well as manufacturing data. Financial markets are unstoppable and inflationary fears seem to have disappeared. Prices did not stop rising overnight, but investors are now taking it in stride.

US retail sales declined by 1.3% to $620.2 billion in May, while United States NY Empire State Manufacturing Index came in at 17.4 in June, which is below forecasts (23). This data comes in a context of rising inflation, although investors, just like the Fed, are betting that this price hike is due to the easing of economic restrictions and supply-chain issues, and it will only be temporary.

In this environment, stock market indices are still tracking slightly upwards. Or even a little better from time to time, like the Nasdaq 100 yesterday, which reached a new high with a little delay compared to the other indices. The atmosphere of easing restrictions creates an environment of confidence that reinforces solid economic projections.

Even if everyone seems to be more relaxed about inflation, rising prices are a reality that we have to deal with. On an individual level, we understand that bread costs more when the price of flour and the energy used to bake it increases. But what does this mean in a slightly more complex production process? In other words, how does a sector deal with increased costs and what consequences can this have on its results? An example is the automotive industry. It is commonly accepted that the sector, after a terrible year in 2020, is in a phase of renewal in the short term (registrations are picking up again) and in the longer term (electrification creates new opportunities). In fact, the segment is one of the three sectors that have gained 30% or more since the beginning of the year. However, this beautiful mechanism can quickly break down and the transmission belt from sales to profits may not be as favorable as expected. A Bank of America study shows that the price of raw materials per vehicle produced in the US rose from USD 2210 to USD 3910 between April 2020 and April 2021, which represents a 77% increase.

This is not yet visible in corporate results, as the vehicles currently being produced and sold are assembled under old contracts that are still priced correctly. BofA believes the impact could emerge in Q4 2021 and H1 2022. About half of the impact will have to be borne by manufacturers. And in this game, consumer manufacturers will have more trouble passing on price increases than those selling high-end vehicles, which is always the case. Add to this the shortages of semiconductors, which naturally make supply more expensive, and the structural change in vehicles: The bottom line is that even if a sector shows good prospects of rapidly accelerating revenues, profitability is far from guaranteed.

This is why, in the current context and even if an economic surge is here, investors tend to reinforce their allocations to companies that are able to adjust their prices. This is what is commonly known as "pricing power". Chanel or Louis Vuitton is more likely to be able to raise prices for its customers than Primark or H&M.


Economic highlights of the day

The session is packed with data, with British employment figures and German inflation, French inflation. In the US, May retail sales and producer prices and June Empire Manufacturing index will be released, along with May industrial production, April business inventories and June NAHB housing index.

The dollar/euro pair is trading at EUR 0.8259. Gold is still struggling around USD 1865. Oil is firm at USD 73.5 a barrel for Brent and USD 71.7 a barrel for WTI. US debt yields are almost unchanged at 1.48% over 10 years. Bitcoin is back up just above USD 40,000 apiece.


On markets:

The Boeing Company - The European Union and the United States have reached a compromise to end a 17-year dispute over state aid to the aviation industry, European Commission President Ursula von der Leyen said Tuesday.

* Facebook, Apple, Alphabet - The European Union's Court of Justice on Tuesday recognized that a national supervisory authority can exercise its power over violations of the EU's General Data Protection Regulation (GDPR) before a court in a member state even if it is not the lead authority, a setback for large U.S. groups with EU operations based in Ireland.

* Biogen loses 0.9% in pre-market trading after announcing the failure of a Phase III clinical trial of a potential treatment for choroideremia, a genetic eye disease.


Analyst recommendations:

  • Anglo American: RBC upgrades from Outperform to Sector Perform with a target of GBp3,400.
  • AstraZeneca: Berenberg advises its customers to buy the stock. The target price is still set at GBp 95.
  • Auto Trader: Berenberg remains Hold with a price target raised from GBp 520 to GBp 650.
  • Biogen : JPMorgan adjusts pt to $435 from $269, maintains neutral rating
  • GlaxoSmithKline: Berenberg is positive on the stock with a Buy rating. The target price is still set at GBp 1570.
  • ITM Power: RBC starts tracking at sector perform, targeting GBp 310.
  • John Laing: HSBC upgraded from buy to hold, targeting GBP 403.
  • Pagegroup: Morgan Stanley upgraded from Overweight to Underweight, targeting GBP 545. 
  • Pfizer: Berenberg is keeping its Neutral rating. The target price is unchanged at USD 43.
  • Procore Technologies : Oppenheimer initiates coverage with outperform rating, $100 price target
  • RAPT Therapeutics : Cantor Fitzgerald hikes pt to $71 from $51 atopic dermatitis treatment results, keeps overweight rating
  • Rolls-Royce: Berenberg still considers the stock as a Buy opportunity. The target price is unchanged and still at GBp 150.
  • Nike: UBS retains his positive opinion on the stock with a Buy rating. The target price is set at USD 170 versus USD 175.
  • Oatly : Barclays initiates at overweight rating with $34 price target
  • The Boeing Company: Berenberg's research confirms its neutral opinion on the stock. The target price has been raised from USD 215 to USD 245.
  • United Airlines : Citigroup adjusts price target to $67 from $65, keeps buy rating

ę MarketScreener.com 2021
Stocks mentioned in the article
ChangeLast1st jan.
ALPHABET INC. -1.59% 2638 Delayed Quote.50.52%
ANGLO AMERICAN PLC 0.57% 3085 Delayed Quote.26.73%
APPLE INC. -1.49% 146.77 Delayed Quote.10.61%
ASTRAZENECA PLC -0.48% 8236 Delayed Quote.12.68%
AUTO TRADER GROUP PLC -0.37% 647 Delayed Quote.8.56%
BIOGEN INC. 0.61% 333.96 Delayed Quote.35.56%
FACEBOOK INC -1.25% 367.81 Delayed Quote.34.65%
GLAXOSMITHKLINE PLC 0.06% 1397.8 Delayed Quote.4.26%
ITM POWER PLC -0.83% 383.8 Delayed Quote.-25.62%
JOHN LAING GROUP PLC 0.35% 400.8 Delayed Quote.20.72%
NIKE, INC. -0.32% 164.57 Delayed Quote.16.33%
OATLY GROUP AB -6.17% 17.5 Delayed Quote.0.00%
PAGEGROUP PLC 0.00% 620 Delayed Quote.38.58%
PFIZER, INC. 0.69% 42.1 Delayed Quote.14.37%
PROCORE TECHNOLOGIES, INC. -0.12% 99.37 Delayed Quote.0.00%
RAPT THERAPEUTICS, INC. -2.28% 30.91 Delayed Quote.60.15%
ROLLS-ROYCE HOLDINGS PLC 1.06% 98.05 Delayed Quote.-11.67%
THE BOEING COMPANY -1.59% 222.27 Delayed Quote.5.51%
UNITED AIRLINES HOLDINGS, INC. -1.64% 48.65 Delayed Quote.12.49%