Markets skid on sluggish earnings and inflation data

Dow retreated 134, decliners over advancers 5-2 & NAZ was off 59.  The MLP index dropped 3+ to the 282s & the REIT index was off 2+ to the 359s.  Junk bond funds were mixed & Treasuries saw selling which raised yields.  Oil fell 1+ to the 81s & gold sank 46 to 2311.

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Employee compensation costs jumped more than expected to start the year, providing another danger sign about persistent inflation.  The employment cost index (ECI), which measures worker salaries & benefits, gained 1.2% in the first qtr, the Labor Dept reported.  That was higher than 0.9% in the 4th qtr of 2023 & above the estimate for a 1% increase.  In the larger picture, the rise added to concerns that a string of 11 Fed interest rate hikes has not done enough to ease price pressures & likely helps keep the central bank on hold before it can start easing monetary policy.  The Fed watches the ECI as a significant measure of underlying inflation pressures.  The rate-setting FOMC begins its 2-day meeting today.  Markets have priced in virtually no chance that the FOMC will change the target for its overnight borrowing rate of 5.25%-5.50%.  After the ECI index release, traders changed their outlook on the first cut coming in Sep, moving the odds to about a coin flip, according to the CME Group's FedWatch measure of fed funds futures pricing.  The implied probability of no cuts this year also rose to about 23%, after being near zero just a month ago.  On a year-over-year basis, compensation costs for civilian workers increased 4.2%, still above a level the Fed feels is consistent with its 2% inflation goal, though down from 4.8% a year ago.   Wages & salaries rose 4.4% while benefits costs increased 3.7%.  State & local gov workers saw their compensation costs rise 4.8%, down just narrowly from the same period in 2023.  The bigger increase likely was attributable to the high level of that group belonging to unions, which saw compensation costs increase 5.3%, compared with just a 3.9% gain for nonunion workers.

Worker pay rose more than expected in Q1 in another sign of persistent inflation

Coca-Cola (KO), a Dow stock & Dividend Aristocrat, reported quarterly earnings & revenue that beat expectations as consumers drank more of its Fanta & Fairlife beverages.  The beverage giant also raised its full-year outlook for organic revenue.  For the first qtr, EPS was 74¢, up from 72¢ a year earlier.  The company also recorded a $760M non-cash impairment charge for Bodyarmor, the company fully acquired the sports drink brand in 2021 for $5.6B.  CFO John Murphy said the charge reflects revised projections & a higher discount rate since the acquisition.  Excluding that charge & other items, EPS was 72¢ per share.  Net sales rose 3% to $11.3B & organic sales, which strip out the impact of acquisitions, divestitures & foreign exchange, climbed 11% in the qtr.  Its global unit case volume increased 1%, but its North American volume was flat for the qtr.  The metric excludes pricing & foreign currency.  For the full year, KO is now expecting organic revenue growth of 8-9%, up from its recent forecast of 6-7%.  The company said it anticipates price hikes in certain markets experiencing “intense inflation,” leading in part to its new outlook.  KO reiterated its outlook for full-year comparable earnings growth of 4-5%.  In the 2nd qtr, the company expects that its comparable revenue will include a 6% currency headwind & a 5-6% hit from acquisitions, divestitures & structural changes.  Currency fluctuations are also expected to pose a 8-9% headwind to its comparable EPS.  The stock fell 21¢.

Coca-Cola tops earnings estimates, hikes revenue outlook on higher prices

Home prices rose to a new record in Feb amid an ongoing housing shortage, even as high mortgage rates pushed affordability out of reach for more Americans.  Prices increased 6.4% nationally in Feb when compared with the previous year, the S&P CoreLogic Case-Shiller index showed.  That is up from the 6% annual increase recorded the prior month & marks the fastest pace of growth since Nov 2022.  On a monthly basis, prices climbed 0.4%, according to the index.  "Home prices continue to defy expectations in the face of high mortgage rates and worsening affordability," said Lisa Sturtevant, Bright MLS chief economist.  The 10-city composite, which encompasses Los Angeles, Miami and New York, rose 8% annually, compared with an increase of 7.4% in Jan.  The 20-city composite, which also tracks housing prices in Dallas & Seattle, posted an annual gain of 7.3%, which also marks an increase from the 6.6% figure recorded the previous month.  Prices rose in 18 of the 20 major metro markets tracked by the index.  The largest price gain took place in San Diego, which recorded a year-over-year increase of 11.4%.  It was followed by Chicago & Detroit, each with an 8.9% increase.  Home prices in San Diego, Los Angeles, DC & New York all hit an all-time high in Feb.  "Following last year’s decline, U.S. home prices are at or near all-time highs," said Brian Luke, head of commodities, real & digital assets at S&P DJI.  "Since the previous peak in prices in 2022, this marks the second time home prices have pushed higher in the face of economic uncertainty."  There are a number of driving forces behind the affordability crisis.  Years of underbuilding fueled a shortage of homes in the country, a problem that was later exacerbated by the rapid rise in mortgage rates & expensive construction materials.  Higher mortgage rates over the past 3 years have also created a "golden handcuff" effect in the housing market.  Sellers who locked in a record-low mortgage rate of 3% or less during the pandemic began have been reluctant to sell, limiting supply further & leaving few options for eager would-be buyers.

Home prices surge to another record high in February

Dow began the day trading in the red & buyers are staying away.  Earnings reported later in the cycle tend to be not so favorable.  Tomorrow, Powell will give results from the FOMC meeting.

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