After CPI: The Expectation Gap for CARS, CVNA, and TSN

The December CPI report landed right on the consensus line, but the market's reaction will hinge on whether the details met the whisper number for specific sectors. The headline CPI rose 0.3 percent on a seasonally adjusted basis in December, matching the 2.7% year-over-year increase. That's the baseline: inflation held steady, not accelerating. The real story, however, was in the core data. The index for all items less food and energy, which the Fed watches most closely, rose 0.2 percent for the month. That was a positive surprise, cooling to its slowest pace since March 2021. For the market, this was the key expectation gap. The whisper number for core inflation had been for a slight uptick, not a slowdown. The print beat that, suggesting some underlying price pressures are easing.

The most volatile category, used car and truck prices, delivered a dramatic swing. The index saw a 1.7% unadjusted monthly drop, the biggest decline among major categories. On a seasonally adjusted basis, it still fell 1.1%. Yet, year-over-year, prices remain 1.6% higher. This is the expectation arbitrage in action. The market had likely priced in a continuation of the recent used car price slide, but the sheer magnitude of the monthly drop may have been a surprise. For stocks like Cars.com and Carvana, this data is a direct catalyst. A steeper drop in used car prices could accelerate the shift to online marketplaces, benefiting CARS and CVNA.

The bottom line is that the report was a mixed bag for consumer discretionary stocks. The cooling core CPI is a positive for the broader sector, as it keeps the Fed's foot off the brakes. But the persistent strength in food prices, which rose 0.7 percent for the month, and shelter costs, which remain a major driver, point to sticky inflation. The market's move will depend on which part of the data it deems more important for the forward trajectory. A beat on core inflation is good, but the headline print meeting consensus means no major surprise to reset expectations. The real move will come from how this data influences the Fed's next steps and, more immediately, how it shapes the outlook for consumer spending on big-ticket items like cars.

CARS & CVNA: The Used Car Expectation Gap

The expectation gap for used car stocks isn't just about the monthly CPI dip; it's about the lag between headline inflation and the underlying market reality. The official CPI-U index showed a 1.6% year-over-year rise in used car prices, but the wholesale market tells a different story. The Manheim Used Vehicle Value Index, a key benchmark for dealers, rose only 0.4% year over year in December. This 0.4% figure is below the official CPI print, highlighting a potential lag in price transmission to consumers. More importantly, it shows wholesale prices remain sticky, not collapsing as some market narratives might have priced in.

This disconnect creates uncertainty for the growth thesis of online marketplaces. The data suggests consumer spending trends showed signs of a slowdown in December, with affordability concerns pulling back on the spending reins. Yet, the wholesale index still shows a marginal year-over-year increase. For Carvana (CVNA), this played out in the stock price. Shares were trading around $56.20 on January 6th, down from a high of $60.44 in early December. This pullback suggests some 'sell the news' pressure, as the market digested the steeper-than-expected monthly CPI drop but may have been disappointed by the lack of a sharper wholesale price decline.

The bottom line is a market caught between two data points. The headline CPI beat expectations for a core inflation slowdown, which is positive for the broader sector. But for used car stocks, the real story is in the wholesale index, which shows prices are still elevated. This creates an expectation gap: the market may have priced in a steeper used car price decline to accelerate the online shift, but the data suggests the transition is more gradual. The forward view hinges on whether this wholesale price stickiness persists or if it finally starts to fall, resetting the trajectory for these companies.

TSN: Beef Prices and the Inflation Reality Check

The CPI data creates a direct conflict for Tyson Foods, a company whose profitability is squeezed from both sides. On one hand, the report shows a cooling core inflation trend, which is positive for the broader consumer discretionary sector. On the other, it highlights the persistent strength in food prices, a critical input cost for Tyson. The official CPI-U for used cars and trucks fell 1.7% unadjusted in December, a positive for consumer affordability and potentially boosting demand for discretionary spending. Yet, year-over-year, food price inflation was 3.07 percent, up 0.56 percentage points. This is the expectation gap for TSN: one category is cooling, while another critical input cost is accelerating.

For Tyson, this tension is immediate. Higher protein prices directly pressure its margins. The company is a major supplier of beef and chicken, and when the cost of these staples rises, it must either absorb the hit or pass it on to consumers. The latter risks dampening demand, especially for discretionary cuts. This creates a mixed signal for the stock. Lower used car prices could free up consumer cash flow, but higher food bills, particularly for staples like beef, may offset that benefit. The market is weighing these opposing forces.

The bottom line is that Tyson's forward view hinges on which inflationary pressure wins. The cooling core CPI suggests the Fed may hold rates steady, supporting consumer spending power. But the acceleration in food prices, driven by factors like tariffs and supply chain costs, is a more direct threat to Tyson's earnings. The company's guidance and investor calls will need to navigate this reality check, explaining how it plans to manage input cost inflation while maintaining demand for its products.

Catalysts and Risks: What to Watch for a Re-rating

The current market positioning for these stocks is a bet on a specific future. For CARS and CVNA, it's a bet that used car prices will fall fast enough to boost retail sales volumes and margins, accelerating the online shift. For TSN, it's a bet that the company can manage input cost inflation without sacrificing demand. The coming data will confirm or contradict that bet.

The next major catalyst is the official January Manheim Used Vehicle Value Index release. The December data showed a 0.4% increase for wholesale used-vehicle prices year-over-year, a sign of stickiness that may have disappointed the market's hope for a sharper decline. If the January index shows prices stabilizing or even rising further, it will confirm the expectation gap: the wholesale market isn't collapsing as the online growth thesis requires. Conversely, a sharp drop in January would signal the trend is accelerating, potentially justifying a re-rating for the used car stocks.

A key risk across the board is that higher food and energy prices continue to pressure consumer discretionary spending. With food price inflation at 3.07 percent year-over-year and energy at 2.30%, the squeeze on household budgets is real. This could dampen demand for both new and used cars, as well as protein products, regardless of price declines in specific categories. The market's current optimism may be priced in a scenario where used car affordability gains outweigh the drag from higher grocery bills, but that balance is fragile.

For investors, this sets up a clear watchlist. Monitor the January Manheim index for the used car thesis. Watch for any signs that consumer spending trends, which showed a slowdown in December, are improving or worsening. For Tyson, the focus will be on whether it can pass on costs or if demand for its products is being pulled back. The expectation gap will be tested in the coming weeks; the data will show if the current valuations are justified or if a re-rating is imminent.