Stocks slipped into the red in yesterday’s session as continued tension over inflation, the Fed, and upcoming earnings dominated the newsfeeds. Producer price inflation is not giving up according to the latest PPI release, leaving investors wondering if things will ever get back to the old normal.
Unfounded hope. It has certainly dominated my morning notes lately, and it’s not just because I have a personal interest in it, it is because it has been affecting your net worth. I am sorry to keep you brutally in the know about the ongoing debate around interest rates, the economy, and yes, inflation. I, like you, wish that I could just focus on something else for a while and hope for a positive surprise when I open my 401k statement at the end of the quarter, but unfortunately, as you may already know, there was indeed a surprise, and it was… um, less than positive. That is due, in large part, to those very hackneyed topics which have dominated my recent notes. So, with that, let’s begin today’s missive.
The market is hoping for a so-called Fed Pivot, à la the late-2018 Christmas gift pivot which rescued the oxygen starved stock market. A pivot would mean that some prominent Fed official, probably the Chair, would say something like “it may be appropriate to become more accommodative at some point.” Accommodative as in “rate cuts”. Rate cuts? Really? Is it realistic to assume that the Fed will cut rates in the near term? Of course, we would all hope that the Fed would cut rates but using hope as an investment thesis is “not recommended by experts.” Ask yourself “why would the Fed cut interest rates in the near term?” The best answer might be that the Fed is concerned that the stock market is down nearly -25% for the year, leaving us in an almost yearlong bear market. While I am sure that Fed officials are concerned about it (they have 401ks too), it is not likely to affect their policy making decisions. If you don’t believe me, just ask them… or maybe, read the minutes from their last meeting. They were released yesterday. In those minutes we note that officials believed that there was a “broad-based and unacceptably high level of inflation,” with risks of higher inflation increasing. That means that the Fed’s good work, according to them, is not yet over. In other words, the Fed cannot let up until it absolutely must. What about the increasing risk of a recession and the junky (I try to keep this note PG-rated) stock market? Well, according to the minutes, officials noted that the cost of taking less action against inflation would be outweighed by the risks of taking too much action. That can simply be interpreted as the risks of more pain are less than the risk of letting inflation run higher.
Still, there were some signs of hope that Fed officials are not completely insensitive to the effects of their actions. They did discuss the importance of calibrating their future actions with the economic outlook. Some members also expressed that rates are sufficiently in the restrictive zone (meaning, that they will have a slowing effect on GDP), and that it may be appropriate to keep rates at these levels until inflation headed back to the Fed’s +2% target. That can be interpreted as some members believing that the bulk of the hikes are already working, so the bigger future hikes may be less likely. HOWEVER, we can expect those rates to STAY on the higher side until inflation is back on course to the Fed target. We will get Consumer Price Index / CPI this morning and it is likely to show a month over month gain of +0.2%, but the annual CPI is expected to have come down to +8.1% from +8.3%. If those numbers come in as expected, the slight decline in the annual growth would surely not meet the high bar set by the FOMC, according to the minutes. With Fed Funds futures placing a 96% chance of another +75 basis-point hike in November, it would be hard to imagine, at this point, a Fed Pivot. I don’t want you to lose hope for the pivot, just don’t make any investment decisions based on it… the odds would be against you.
YESTERDAY’S MARKETS
Stocks wavered in yesterday’s up-and-down session, closing slightly lower ahead of today’s important inflation figure and the start of earnings season. The S&P500 fell by -0.33%, the Dow Jones Industrial Average slipped by -0.10%, the Nasdaq Composite was off by -0.09%, and the Russell 2000 Index declined by -0.30%. Bonds gained and 10-year Treasury Note yields fell by -5 basis points to 3.89%. Cryptos added +0.55% and Bitcoin advanced by +0.79%.
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