Will pesky inflation ever ease up?

Stocks traded higher yesterday, snapping a 3-day losing streak despite an economic release that showed consumer prices rose faster than expected.  The FOMC minutes suggested that the Fed may start tapering bond purchases next month, but the market was unfazed… because we already expected it.

N O T E W O R T H Y

Drink up!  An unnamed source told me once or twice that the government in an unnamed country aggressively regulates the price of vodka.  Not fuel, housing, or food… but vodka.  My friend explains that the reason for the regulation is to maintain peace, avoid anarchy, and prevent utter social chaos.  Now people from this unnamed country typically espouse allegories like these, some are close to the truth, and others are a passive way of protesting the government.  My friend is a very smart man and I respect him tremendously, but in the interest of intellectual integrity I did some poking around to see if his claim was true.  I couldn’t find much on the topic but to be fair, there isn’t really much on any topic in that unnamed country.  All that aside, people from that country are known for their love of the spirit, so it is reasonable to assume that keeping it readily available and cheap is a good way to keep the masses happy… and continue to get reelected… over and over.  Perhaps leadership in the country studied how the rising cost of bread in France was partially to blame for Marie Antoinette and her husband King Louis XVI losing not only the throne, but also their heads to the Guillotine.  Or perhaps the country’s leaders looked back to their very own revolution that took place in this very month over 100 years ago.  That revolution was sparked by women protesting the rising costs of food.  It didn’t end well for the royals in that revolution either.  While vodka can hardly be referred to as food, if properly consumed, it could certainly keep the masses… well happy if not sloppy.  What is this story all about?  

We like lots of things here in the US.  Though it is a wildly sweeping generalization, many around the world believe that we love our trucks and our beef.  Let’s assume that presumption is correct.  If so, then we must be quite unhappy as the price of our beloved steak has risen by +22.6% in the past 12 months, according to the latest Bureau of Labor Statistics CPI release.  If that isn’t bad enough, the same report revealed that New Trucks will cost +9.2% more, if you can even find one, as supply is thin.  If you want to buy a used one, you will have to pay +24.4% more than last October.  Making matters worse, our supposed predilection for big autos also comes with a healthy demand for… you guessed it, gasoline… which will cost you +42.1% more this year than last.  More broadly, the CPI reflected that prices, in general, have risen by +5.4% in the past year.  Price hikes can become a real problem because at some point, they will dissuade consumers from making purchases which, could derail the economic growth we now enjoy. Likewise, the hiking of interest rates, the tool used by the Fed to fight inflation, could also dissuade consumers from making purchases.  Think about the cost of financing that new truck going higher with higher interest rates. There is a very delicate balance that must be struck by the Fed in the months ahead.  It is clear that Fed Governors are increasingly concerned that inflation is becoming more persistent.  The Fed has opted to pull the reigns in slowly by tapering bond purchases over the next several months.  Beyond that, the Fed has made it clear that there is no link between tapering and rate hikes, though many Fed members predict that rates will probably start to inch up next December. The Fed has made its intentions clear in its public outreach, and yesterday’s FOMC meeting minutes confirmed it.  So, we can rest assured, that yes, indeed we are experiencing inflation, but the Government stands at the ready to tackle it with… a soft touch… eventually.  That appears to be good enough for now, and thankfully, there has not been any chaos or unlawful activity protesting run-away inflation.   In addition, and also thankfully, Americans’ other beloved food, doughnuts have only risen by +2.9% in the past year.  I suppose that 1 out 3 isn’t too bad.  For my unnamed friend, though it is not regulated here in the US, the price of vodka has only risen by +2.9% and olives, its famous accoutrement, have only risen by +0.9% in the past 12 months.

THE MARKETS

Stocks rose yesterday, erasing early session losses, as investors look to earnings season which officially kicked off yesterday with a beat by JPMorgan Chase and BlackRock.  The S&P500 rose by +0.30%, the Dow Jones Industrial Average broke even, the Nasdaq Composite Index added +0.73%, the Russell 2000 Index climbed by +0.34%, and the S&P500 ESG Index traded up by +0.30%. Bonds rose and 10-year Treasury yields eased by -4 basis points to 1.53%.  Cryptos added +3.1% and Bitcoin rose by +2.93%.

NXT UP

– Initial Jobless Claims (October 9) are expected to come in at 320k, slightly better than last week’s 326k print.

– Producer Price Index (September) may have risen by +0.6%, slightly less than August’s +0.7% rise.

– This morning UnitedHealth, US Bancorp, Walgreens, Wells Fargo, Bank of America and Morgan Stanley all beat on EPS and Revenue, while Dominos beat on EPS and missed on Revenue. After the close, we expect results from Alcoa.