We are staying Long Consumer Staples. Hedgeye’s Macro team is calling for Quad 4 in Q2. Growth slowing remains the defining macro dynamic for 2022. Recent world events have introduced a new regime of inflation volatility. Food prices have hit a 40-year high. The average gasoline price in the U.S. has set a new record high. For Consumer Staples, we are seeing a high level of pervasive inflation. In the past two weeks, Consumer Staples stocks (historically the best performers in Quad 4) have reacted to Q1 shifting to Quad 3.
Recent events have not changed our expectations for Quad 4 in Q2. We still see an inflection in margins ahead for the Consumer Staples sector. The inflationary dynamic for the Consumer Staples sector remains intact and has likely been distorted to the upside by recent fat-tailed world events. Economic sanctions on one of the world’s top three oil exporters have led to a surge in oil prices. Oil price shocks or run-ups have preceded 11 of the last 12 recessions since WWII. Russia and Ukraine account for a quarter of the world’s wheat production. The causes of the inflationary pressures will likely prove sticky, notwithstanding the rate of change dynamics. Initial conditions do matter. A 1% change from 8% or 2% is not the same. While we see a rate of change in inflation, the absolute level will remain high. We emphasize companies with pricing power.
We will update many of our Themes Deck slides, review notable Q4 earnings results, focus on the Quad for Q2, do a deep dive on food inflation, and make adjustments to our position monitor, emphasizing the margin inflection and pricing power in the sector.
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