Enphase Energy (NASDAQ: ENPH) stock is up 16%. ENPH stock is rising as a result of the flat October inflation number. This might sound a little strange but it does in fact make good sense. Enphase Energy, and other solar stocks like SolarEdge (NASDAQ: SEDG), have been hard hit by the realisation of what high interest rates are doing to the business sector. The route from this CPI number through to good times returning for the solar sector is a little long but it does make logical sense. Lower inflation means interest rates decline sooner and therefore less pressure on those companies affected by the higher rates. Maybe. It might not quite work out that way.
The news itself: “The consumer price index was flat in October from the previous month but increased 3.2% from a year ago. Both were below Wall Street estimates, sparking a major rally on Wall Street. Excluding volatile food and energy prices, the core CPI rose 0.2% and 4%, against the forecast of 0.3% and 4.1%. The annual rate was the smallest increase since September 2021.”
The logic is that if high interest rates are what has been damaging the solar business then falling inflation will mean interest rates can come down. Therefore the business will recover. It may or may not work out that way. The Federal Reserve is known to look at core PCE, not CPI itself, as their main determinant of interest rates. Further, there’s a definite desire out there to have actually positive, in real terms, interest rates as an ongoing thing. So if core PCE becomes 2% - the target - and add 3% for real interest rates then 5% would be the Fed Funds rate. Not far off where we are right now in fact.
Enphase Energy stock price from Google Finance
That it is interest rates causing the problem is general accepted now for Enphase Energy: “Economy wide interest rates have been very low to negative over the past decade or so. Low if we look only at nominal rates, negative often enough if we look at real rates, adjusted for the inflation rate. This makes capital expenditure now in return for no future fuel costs look like a good deal. But once we’ve got to add back in financing costs at a positive real and nominal rate that appearance of a great deal rather disappears.”
This has also been true of SolarEdge: “SEDG stock is now down near 50% since the worries about stocks and sales levels first surfaced. This is also happening at Enphase Energy. We’d suggest that this is a sector wide problem, something caused by the changes in relative prices caused by rising interest rates. This is also something that’s not about to go away - interest rates might be at or near the peak of the cycle but they’re not going to decline that fast.”
We do tend to think this bounce is a little too large for the news. Because we really don’t - absent a recession - think we’re going to return to negative, or even flat, real interest rates. Not unless the Fed has overtightened and we’re headed for another recession.
