NEW YORK: With the Federal Reserve (Fed) prepared to meet this week and reveal their thinking about the path for interest rates, traders are looking to a key corner of the stock market for clues: shares of companies that make the stuff Americans buy.
Consumer-goods companies are struggling to start the year as companies from Kraft Heinz Co to Mondelez International Inc no longer have the justification to keep raising prices with inflation ebbing.
Indeed, Fed Bank of Richmond president Thomas Barkin is seeing signs that pricing power has peaked, which is optimistic for the central bank’s battle against inflation, but less so for the companies looking for consumers to pay higher prices for goods.
“The era of significant pricing power has largely passed,” Barkin said in an interview on March 7 ahead of the Fed’s blackout period.
“Less pricing power means less inflation, which is good for lots of folks in the economy. My hope is that this is one more factor in the normalisation of the post-pandemic economy and will free us up to be healthy again.”This explains why a key part of the consumer-goods industry, packaged-food makers, is trailing the S&P 500 Index to start the year. But the group has been suffering for a while, posting its worst annual performance relative to the broader market in more than two decades in 2023.
Many companies reported steeper-than-expected declines in sales volumes last year, and Wall Street grew increasingly nervous about the potential hit to packaged-food makers if more people started to take appetite-suppressing medications.
The Fed is widely expected to hold rates steady at its meeting on tomorrow.
But on the two-year anniversary of the central bank launching its most disruptive monetary tightening campaign in a decade, the pivotal question for equities traders remains when the easing will start, particularly after underlying inflation topped forecasts for a second month in February.
So the key really is in the Summary of Economic Projections, or dot plot, which shows where each voting member, like Barkin, thinks the Fed funds rate will end the year.
That’s why traders are closely following packaged-food stocks. Even as the volume of items sold has dropped in recent years, those companies have expanded their sales thanks to price increases.
But things get tricky from here. While slower price hikes are supposed to boost the volume of products sold, a better balance between price and volume is needed in 2024 to support profit margins and, in turn, share prices.
“Signs of volume improvement will certainly go a long way to improving the stock performance,” said Joseph Gabelli, portfolio manager at Gabelli Funds, which owns staples companies including Mondelez, Campbell Soup Co and PepsiCo Inc.
Volume growth will begin recovering in the back half of this year and continue into 2025, returning to a low single-digit range after a few years of “anemic” trends, he said.
When consumer-goods companies lose the ability to raise prices, they have to lean on volume to produce growth.
The problem now is that Americans aren’t back to buying goods in large volumes after spending more than 11% of their disposable income on food in 2022 – the highest level in more than three decades, according to data from the US Department of Agriculture released last month.
As some input costs come down, it will be more difficult for these consumer companies to raise prices.
PepsiCo said last month that shoppers can expect to see a slowdown in price increases, while Costco Wholesale Corp recently discussed plans to reduce some prices.
“Price power has peaked and it’s starting to dwindle,” Jennifer Bartashus, senior industry analyst at Bloomberg Intelligence, said over the phone. “When input costs come down – like for the cost of corn or wheat – the ability to argue that you still need to push through additional prices increases that outpaces inflation is a really tough.” — Bloomberg
