Some investors think the Fed should disregard that hot inflation print: Morning Brief

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Friday 14 October 2022

Today’s newsletter is here Julia Hyman, Moderator and Correspondent at Yahoo Finance. Follow Julia on Twitter @Juleshyman. Read this and other market news along on the go Yahoo Finance app.

Inflation spiked again on Thursday, meaning the Federal Reserve is almost certain to hike rates by at least 75 basis points at its next meeting and possibly in December as well.

That’s now Wall Street’s baseline scenario after Thursday’s core consumer inflation showed the largest year-on-year rise since 1982 in September.

But a growing chorus of investors say the Fed shouldn’t base its rate-hike decisions on lagging indicators like the consumer price index (CPI) and the unemployment rate. Instead, these investors say, the Fed should be looking at forward-looking indicators, such as the prices of commodities like gold, which show declining inflation.

“The CPI we got is a lagging indicator. It’s always a lagging indicator,” Ark Invest founder and CEO Cathie Wood told Yahoo Finance on Thursday. “And we see a lot of prices in the pipeline falling.”

MIAMI, FLORIDA - APRIL 7: Cathie Wood, Chief Executive Officer and Chief Investment Officer, Ark Invest, gestures while speaking during the Bitcoin 2022 Conference at the Miami Beach Convention Center on April 7, 2022 in Miami, Florida.  The world's largest Bitcoin conference will take place from April 6th to 9th and expects over 30,000 visitors and over 7 million live stream viewers worldwide.  (Photo by Marco Bello/Getty Images)

Cathie Wood, Chief Executive Officer and Chief Investment Officer, Ark Invest, gestures during her speech during the Bitcoin 2022 conference at the Miami Beach Convention Center on April 7, 2022 in Miami, Florida. (Photo by Marco Bello/Getty Images)

While Wood has made a name for herself by betting on innovative investments like Tesla (TSLA) and Bitcoin (BTC), she has a background in macroeconomic analysis. She believes the Fed is on the wrong track.

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This week, the wayward investor wrote an open letter to the Fed, expressing concern that the central bank was making a “political error” by raising interest rates. The Fed aims to ease inflation, but claims its actions could overshoot and fuel deflation.

Michael Darda, chief economist and chief strategist at MKM Partners, also warns the Fed against continuing its dovish stance.

“You’re about to go too far and way too fast,” he told Yahoo Finance Live. “They really should slow down the pace of rate hikes now and not panic over severely lagging indicators. This is a recipe for an accident.”

Of the various lagging indicators, Darda says rent can lag more than others.

“Sticky core inflation measures like rents will tend to lag the economy by five quarters,” he said. “That means the strength here could simply be a reflection of how the economy was doing 15 months ago.”

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And what are the forward-looking indicators of inflation to keep an eye on?

Both Wood and Darda point to the fall in commodity prices, with Wood citing gold’s fall in particular as a good indicator of inflation. “Gold is a leading indicator of inflation,” she said. “And it didn’t break out. It’s collapsing.”

Also breaking down: used car prices. Also, companies from retailers (Nike) to chipmakers (Micron, Intel) that have been short of supply during the pandemic are now regularly reporting inventory overflow.

“Everything that was at the leading edge of the boom in the inflation process has turned around very sharply, and yet the Fed is acting aggressively and looking in the rear-view mirror,” Darda said.

He’s not optimistic that the Fed’s backward-looking hawkishness will change any time soon. Although consumers may see lower prices, investors won’t get any relief from the Fed until lagging indicators catch up.

All of that said, stocks showed incredible resilience in the face of the hot inflation report. Jared Blikre from Yahoo Finance wrote about what that means.

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What to see today

Business

  • 8:30 a.m. ET: Sales advance in retailMoM, September (0.2% expected, 0.3% mom)

  • 8:30 a.m. ET: Retail sale without carsMoM, September (-0.1% expected, -0.3% mom)

  • 8:30 a.m. ET: Retail sales excluding cars and gasolineMoM, September (0.3% MoM)

  • 8:30 a.m. ET: retail sales control groupSeptember (0.0% in previous month)

  • 8:30 a.m. ET: import price indexMoM, September (-1.1% expected, -1.0% mom)

  • 8:30 a.m. ET: Import price index excluding oilMoM, September (-0.2% MoM)

  • 8:30 a.m. ET: import price indexYoY, September (7.8% MoM)

  • 8:30 a.m. ET: export price indexMoM, September (-1.2% expected, -1.6% mom)

  • 8:30 a.m. ET: export price indexYoY, September (10.8% MoM)

  • 10:00 a.m. ET: business suppliesAugust (0.9% expected, 0.6% during previous reading)

  • 10:00 a.m. ET: University of Michigan Consumer SentimentOctober preliminary (58.8 expected, 58.6 in previous month)

merits

  • JP Morgan (JPM), Citigroup (c), MorganStanley (MRS), pnc (PNC), U.S. Bancorp (USB), UnitedHealth (UNH), Wells Fargo (WFC)

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Where inflation gets better and worse

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