Tag: Consumer Price Index (CPI)

The Thanksgiving Rally Should Not Be Trusted

Posted on by Matt Thalman

The market rally during the shortened holiday trading week of November 21st-25th should not be trusted just yet.

The Dow Jones Industrial Average rose 1.78% during the week, the S&P 500 increased by 1.53%, and the technology-heavy NASDAQ grew by 0.72%.

The move higher came for several reasons, but none materially changed the economy's outlook over the coming six to twelve months.

The biggest news was from the Federal Reserve. The Fed's meeting minutes from their November 1st and 2nd meeting pushed prices higher after several Fed members expressed interest in slowing the pace of rate hikes during future meetings.

Just the fact that the Fed is talking about reducing the amount of their rate increases is significant, and many economists applaud this move. Economists are happy with this because the Feds policy changes have a lag, meaning it takes time for rate increases to show in economic data reports.

The concern has been the Fed is raising rates too quickly, and by the time the lag sets in, the economy will be in the dumps. So, slowing the pace today is a possible way the Fed can avoid running the economy into the ground. Not running the economy into the ground is the "soft landing" we often hear about when people refer to the Fed and its current policies.

Another catalyst for the recent move higher was the Consumer Price Index in October, which was up 7.7% from a year ago. This was the lowest CPI reading increase since January of this year. But, let's be honest, a 7.7% increase year-over-year is still ridiculously high inflation.

However, many economists are actually saying they are seeing inflation leveling out. We aren't yet seeing that happen with the CPI numbers because we are still looking at year-over-year comparables before inflation got out of control.

The true sign that inflation has slowed, or is still climbing, will be in 2023 when we see year-over-year comps comparing current inflation measures with the elevated inflation we began seeing in early 2022. Continue reading "The Thanksgiving Rally Should Not Be Trusted" →

Is Inflation Truly Whipped?

Posted on by George Yacik

Last week’s consumer price index report showing inflation — at least by some measures — had slowed in October to its lowest level since the beginning of the year set off a massive rally in stocks and bonds.

But is the market overreacting, and does the report necessarily imply that inflation has finally and truly peaked and that the Federal Reserve is just about done tightening? It may be a little too early to declare victory.

The report was at least encouraging, certainly, but whether we’re home free or not remains to be seen. The headline CPI rose 7.7% compared to a year earlier, down from September’s 8.2% pace and the smallest year-on-year increase since January.

The core index — which excludes food and energy prices — rose by 6.3%, down from the prior month’s 6.6% pace. But the monthly increase in headline inflation was 0.4%, unchanged from September.

Did all that justify a 5% jump in the NASDAQ last Thursday and the sharpest one-day drop in bond yields in more than 10 years, with the yield on the benchmark 10-year Treasury note falling to 3.83% from 4.15%? (The bond market was closed Friday for Veterans Day.)

If you believe Wharton professor Jeremy Siegel, who has been saying for months that the Fed is seriously overcounting inflation, then last Thursday’s massive rally was justified.

Not only did he tell CNBC that "inflation is basically over,” but that "we're in negative inflation mode if the Fed uses the right statistics, not the faulty statistics that they've been using."

Siegel specifically cited the cost of housing and rent, which he says are overinflated in the data the Fed uses to set interest rate policy. Once the Fed sees the light, he says, the markets are poised for a “good year-end rally," but if it doesn’t, we could be headed for a rate-driven recession.

There’s certainly reason to doubt the Fed’s competence to measure and assess home price inflation, which it has failed to accomplish the past several years and other times before that.

Despite blatant evidence that the housing market was overheating during and after the pandemic, the Fed continued to suppress interest rates, allowing home prices to skyrocket — and keep homeownership out of reach for more people. Continue reading "Is Inflation Truly Whipped?" →

Taming Inflation - Tough Action Needed

Posted on by Noah Kiedrowski

Curbing Inflation - The Priority

Rolling back inflation is an absolute necessity before these markets can start to turn back this tide of relentless selling. The process of curbing inflation will not be quick, nor will it be an easy feat. A delicate balance must be exercised to curb inflation via rising rates while not destroying the economy.

To curtail these 40-year highs in inflation, the economy will need to slow, demand will need to cool and the supply chain will need time to catch up to come back into balance.

The Federal Reserve will raise short-term interest rates from historic lows near zero as the economy recovered from the pandemic. The Federal Reserve will be looking for lower CPI numbers, softer labor market conditions and resolution of supply chain constraints prior to taking a dovish stance on future rate hikes. The latter will be the confluence of catalysts the market needs to propel higher.

Overall Markets

The overall markets have been under heavy and relentless selling. The average Nasdaq stock has undergone a 50% drop from its high.

The S&P 500 now trades at a level first reached more than 16 months ago in early February 2021. This move negates the post-Covid advance in equities.

The multi-wave corrections that culminated in February 2016 and December 2018 both bottomed at levels first reached nearly two years prior. Thus, these markets are reaching the point where the past two years of appreciation has been erased.

Bank of America’s Bull & Bear Indicator, which captures fund flows and other market-based risk-appetite measures, is well in the fearful depths that typically imply a buying opportunity. During prolonged stressed periods (i.e., 2000-’02 and 2008-’09) bear markets had this gauge persistently stuck at these low levels while prices continued to trend lower.

University of Michigan consumer sentiment poll came in at a level lower than during the global financial crisis and if not revised higher will rank as the bleakest monthly reading since 1978. Extreme negative readings in the University of Michigan poll have served as great inflection points for how stocks perform over the subsequent 12-month period.

Per JPMorgan the S&P 500 has averaged a 25% gain in the year following the eight Michigan sentiment troughs going back 50 years, with the worst return at 14%.

It’s noteworthy to point out that hindsight is 20/20 thus troughs are only known in a look-back analysis after sentiment starts to recover from a low. The markets may be close but may not be at this point yet.

Key Macroeconomic Factors

The Consumer Price Index (CPI) has become the most influential and critical variable in today’s market. The CPI readings directly impact monetary policy put forth by Federal Reserve via interest rate hikes, bond buying and liquidity measures.

Inflation continues to be persistent throughout the economy and the Federal Reserve must balance curtailing inflation without destroying the economy. The impact of inflation is now flowing through to companies and consumers alike. Inflation has reared its ugly head and is now negatively impacting companies’ gross margins and dampening consumer demand due to soaring prices, specifically gasoline.

The confluence of rising interest rates, inflation, China Covid lockdowns and the war in Ukraine has resulted in first half of 2022 overwhelmingly negative. As such, the market appears to be factoring in a worst-case scenario that may result in a Federal Reserve induced recession as a function of over-tightening on monetary policy and/or its inability to combat inflation responsibly to engineer an economic “soft landing”.

However, if any of these macroeconomic factors abate (i.e., CPI, China re-opening, Russian/Ukraine conflict and interest rate hikes) this could serve as a launching pad for the markets to stabilize and appreciate higher.

Inflation - 40 Year Highs

Inflation pushed higher in May as prices rose 8.6% from a year ago for the fastest increase in nearly 40 years. Excluding volatile food and energy prices, core CPI was up 6%. Both CPI and core CPI exceeded estimates and came in hotter than expected. Surging costs for shelter, gasoline and food prices all contributed to the increase.

The latest CPI numbers casted doubt that inflation may have peaked and adds to fears that the U.S. economy is nearing a recession.

The CPI report comes at a time when the Federal Reserve is in the early stages of a rate-hiking campaign to slow growth and bring down prices. May’s report likely locks-in multiple 50 basis point interest rate increases ahead. With 75 basis points of rate rises already put in place, markets widely expect the Fed to continue tightening through 2022 and likely into 2023.

Conclusion

Curbing inflation is an absolute necessity for the markets to stabilize and start to reverse the tide of relentless selling. A delicate balance must be exercised to curtail these 40-year highs in inflation.

As a consequence, the economy will need to slow, demand will need to cool and the supply chain will need time to catch up to come back into balance.

The Federal Reserve will be looking for lower CPI numbers, softer labor market conditions and resolution of supply chain constraints prior to taking a dovish stance on future rate hikes. The latter will be the confluence of catalysts the market needs to propel higher.

The Consumer Price Index (CPI) has become the most influential and critical variable in today’s market. The impact of inflation is now flowing through to companies and consumers alike with Target and Walmart issuing profit warnings.

The market appears to be factoring in a worst-case scenario that may result in a Federal Reserve induced recession as a function of over-tightening on monetary policy and/or its inability to combat inflation responsibly to engineer an economic “soft landing”. It will likely take successive downward CPI readings before rates will stabilize and the markets can appreciate higher.

However, if any of the other macroeconomic factors abate (i.e., China re-opening and Russian/Ukraine conflict) this could serve to accelerate the stabilization of the markets and remove the functional constraints for the markets to appreciate higher.

Noah Kiedrowski
INO.com Contributor

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Signs Of Peaking Inflation?

Posted on by Noah Kiedrowski

Inflation – The Stock Market Achilles Heel

The stock market is a forecasting instrument that anticipates and prices-in future economic conditions. The confluence of rising interest rates, inflation, China Covid lockdowns, and the war in Ukraine has resulted in months of selling. The relentless, indiscriminate selling has pushed the Dow Jones and S&P 500 deep into correction territory while pushing the Nasdaq deep into a bear market. As such, the market appears to be factoring in a worst-case scenario that may result in a Federal Reserve induced recession as a function of over-tightening of monetary policy and/or its inability to combat inflation responsibly for an economic “soft landing.”

The markets are anticipating sequential rate hikes through 2023; however, if inflation has peaked and the tightening cycle turns dovish, then the markets will likely turn the tide on this relentless selling. If inflation has peaked and yields stabilize, these oversold conditions could easily reverse course. For April, market conditions have not been this bad for the Nasdaq and S&P 500 since the Financial Crisis and the Covid 2020 lows, respectively. With signs of inflation peaking, the markets may have fully priced in a worst-case scenario for an inflection point from these oversold conditions. During Federal Reserve tightening cycles, markets typically generate positive returns with an average of a 6.6% return over the tightening period (Figure 1).

Inflation
Figure 1 – Market performance during periods of Federal Reserve tightening cycles

Signs Of Peaking Inflation

There are many areas of the economy where inflation is receding or has peaked. Although energy prices remain elevated due to the Russia-Ukraine conflict, other commodities and inputs into the CPI composite that contribute to inflation are falling. There have been pullbacks in used car sales, easing supply chains (China’s Covid lockdowns are prolonging the supply chain recovery), copper, steel, grain, soy, freight, lumber, and aluminum prices. Continue reading "Signs Of Peaking Inflation?" →

End Of The Pandemic Or The Beginning Of A Recession?

Posted on by Tim Snyder

“The following is an excerpt from Tim Snyder’s “Weekly Quick Facts” newsletter. Tim is an accomplished economist with a deep understanding of applied economics in energy. We encourage you to visit Matador Economics and learn more about Tim. While there, you can sign up for his completely free Daily Energy Briefs and Weekly Quick Facts newsletters.”

What is it about the truth that scares people?

Gasoline prices this week took a bit of a respite after several weeks of steep climbs. The relief at the pump is palatable and very much appreciated by those on fixed budgets. But the fall from record highs, may not continue if inflation continues to run unchecked.

Diesel prices fell as word of another variant of Covid-19 seems to be making the rounds. The Chinese Government shut in 26 million people this week, sending a signal that demand for the products may falter over the next couple of weeks.

Gas Prices - Recession

Are we at the end of the pandemic or the beginning of a recession? Continue reading "End Of The Pandemic Or The Beginning Of A Recession?" →