Inflation and pricing power

US retail sales fell 1.3% to $620.2 billion in May, while the US New York State manufacturing index was 17.4 in June, which is lower than expected (23). The data comes amid rising inflation, though investors, like the Fed, are betting that higher prices are due to easing economic restrictions and supply chain issues, and that it will only be temporary.

In this environment, the stock market indices continue to rise slightly. Or even a little better from time to time, like the Nasdaq 100 yesterday, which hit a new high with a bit of a lag compared to the other indexes. The atmosphere of easing restrictions creates an environment of confidence that reinforces strong economic projections.

Even if everyone seems more calm vis-à-vis inflation, the rise in prices is a reality that we must face. At the individual level, we understand that bread costs more when the price of flour and the energy used to bake it increase. But what does this mean in a slightly more complex production process? In other words, how does a sector cope with rising costs and what consequences can this have on its bottom line? An example is the automotive industry. It is commonly accepted that the sector, after a terrible year 2020, is in a phase of renewal in the short term (registrations are picking up) and in the longer term (electrification creates new opportunities). Indeed, the segment is one of three sectors that have gained 30% or more since the start 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 study by Bank of America shows that the price of raw materials per vehicle produced in the United States fell from 2210 USD to 3910 USD between April 2020 and April 2021, which represents an increase of 77%.

This is not yet visible in the company’s results, as the vehicles currently produced and sold are assembled under old contracts that are still priced correctly. BofA believes the impact could appear in the fourth quarter of 2021 and the first half of 2022. About half of the impact will have to be borne by manufacturers. And in this game, mainstream manufacturers will find it harder to pass on price increases than those selling high-end vehicles, which is always the case. Add to that semiconductor shortages, which naturally make supply more expensive, and structural shifts in vehicles: Ultimately, even if a sector shows good prospects for rapid revenue acceleration, profitability is far from guaranteed.

This is why, in the current context and even in the event of an economic upturn, investors tend to increase their allocations to companies capable of adjusting their prices. This is what is commonly called “pricing power”. Chanel or Louis Vuitton are more likely to be able to raise prices for their customers than Primark or H&M.

Economic highlights of the day

The session is full of data, with British employment figures and German inflation, French inflation. In the United States, retail sales and producer prices for May and the Empire Manufacturing index for June will be released, as well as industrial production for May, business inventories for April and the NAHB housing index. of June.

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

On the stairs :

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 said on Tuesday. von der Leyen.

* Facebook, Apple, Alphabet – The Court of Justice of the European Union recognized on Tuesday that a national supervisory authority can exercise its power over breaches of the EU’s General Data Protection Regulation (GDPR) before a court of a Member State even if this is not the case. leader, a setback for large American groups with European activities based in Ireland.

* Biogen loses 0.9% in premarketing 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 moves from Outperform to Sector Perform with a target of 3,400 GBp.
  • AstraZeneca: Berenberg advises its clients to buy the shares. The target price is still set at 95 GBP.
  • Auto Trader: Berenberg remains on hold with a price target raised from 520 GBp to 650 GBp.
  • 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 1570 GBP.
  • ITM Power: RBC begins tracking sector performance, targeting GBP 310.
  • John Laing: HSBC moved from buy to hold, targeting £403.
  • Page Group: Morgan Stanley moved from overweight to underweight, targeting £545.
  • Pfizer: Berenberg maintains its Neutral rating. The target price is unchanged at 43 USD.
  • Procore Technologies: Oppenheimer initiates hedge with outperform rating, $100 price target
  • RAPT Therapeutics: Cantor Fitzgerald raises pt to $71 from $51 for atopic dermatitis treatment results, maintains overweight rating
  • Rolls-Royce: Berenberg still views the stock as a Buy opportunity. The target price is unchanged and still at 150 GBP.
  • Nike: UBS maintains its positive view on the stock with a buy rating. The target price is set at 170 USD against 175 USD.
  • Oatly: Barclays initiates an overweight rating with a price target of $34
  • The Boeing Company: Berenberg’s research confirms his neutral view on the stock. The target price was raised from $215 to $245.
  • United Airlines: Citigroup adjusts price target to $67 from $65, maintains buy rating

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