The Inflation Crystal Ball

Last week’s consumer price & producer price inflation readings are causing many to look deep inside their crystal ball for predictions.

I hope we can all agree there is NO playbook that definitively leads us to a soft economic landing, and back to a healthy, growing economy

The recent surge of the stock market suggests either an oversold bear market bounce, or the possible beginning of the moderation of inflation.  I would like to believe that inflation has truly peaked and will now subside in an orderly manner.  Frankly, it may be a little early for that call!

Listening to CNBC, it was said that prices increase like a rocket and fall like a feather.

I wish I could take credit!!  If costs to producers of goods begins to decline, do you believe producers (businesses) will automatically pass that reduction to us (the end users)?  Prices are typically reduced because of excess inventory (too much supply to meet demand), or the actual demand for the product decreases.  At least at this time, we have plenty of demand as jobs continue to be created, and unemployment staying low @ 3.5%.  Price decreases could be very slow to materialize, or perhaps they don’t with any significance.  When is the last time you purchased a bag of potato chips and you noticed the bag had less air??

It’s certainly possible that prices do stabilize from here, and going forward we have more “normal” inflation.  Or on the other hand, current price levels could fall if we have a spike in unemployment as a result of demand falling. This would depend if the Fed tightens too aggressively, or for too long.

The Federal Reserve’s crystal ball was cracked months ago, however how they proceed is of significant consequence.  We’ll hear the Fed speak during the annual Jackson Hole Economic Symposium later this month, followed by August CPI numbers in early September.  The next Fed meeting on interest rates is scheduled for September 20th and 21st.  Will the Fed hike interest rates .50%, .75% or .25%?  Will the Fed alter the verbiage on the course of interest rates?  Keep in mind, many investors believe the Fed will have to lower rates beginning sometime in 2023.

I personally believe, as of now, the Fed is determined to break inflation at all costs. The Fed is looking for the unemployment rate to rise, the stock market to go down, and overall economic activity to slow with some significance.  Just as the Fed was late to put on the brakes on stopping last year’s rounds of stimulus,  they may be just as late to stop tightening.  I’m concerned the Fed may need to see several months of inflation close to 2% before they truly stop raising rates.  Hey, you don’t suddenly wake up and grow wisdom!!

The US Bond Market yield curve remains inverted with the 6-month, 1,2,3,5 and 7-year notes all yielding more than the 10-Year bond. The 10-Year closed Friday @ 2.842% and the 2-Year closed @ 3.25%.  What’s the bond market crystal ball telling us?

This morning we’re seeing the price of oil drop by approximately 5% on the heels of China announcing their economic activity has been weaker than anticipated. China also lowered a couple of key interest rates. 

So, whose crystal ball is correct?  The stock market, the Fed, or the bond market?

Markets and Profits

Stocks gained ground for the 4th week in a row, with the Dow rising 2.92%, the S&P 500 3.26%, the Nasdaq Composite 3.08% and the Russell 2000 Small Cap 4.93%.  Both Foreign and Emerging market stocks increased by over 2%.

The markets have now gained back about half of the losses so far this year.

Profit reports for the 2nd quarter are mostly in the rear-view mirror, with expectations exceeded.  Very good news!!

Now we need to dissect the new “Inflation Reduction Act.”  Perhaps our government has the solution to our inflation problem? 

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