CPI Didn’t Give the Stock Market What it Believed it Wanted

stock market roller coaster sets up 2019 recession

Stocks soared at the tiny dip in inflation as if they had just been given aviation fuel. And then they didn’t. The climb quickly stalled and sailed back toward the ground with stocks ending modestly up. Look into today’s CPI numbers and even think about the headline for more than a flash, and it’s obvious why this was some pretty cheap fuel that petered out in less than a day.

Stocks were expected to soar if CPI came in below expectations, and, in fact, it came in below all expectations polled. So, the initial takeoff was not a surprise, but how the market took an engineless glide path down throughout the day thereafter was a bit unsettling for some. What CPI and the market’s quick lift at the start of the day MIGHT have given of more duration, however, was enough of a bump for Powell to give the market a little harder thump tomorrow to keep investors from foolishly thinking the inflation battle is ending soon.

Many were the articles, like this one in Zero Hedge, that claimed inflation was over:

“Stick A Fork In It, Inflation Is Done”; “Tomorrow Is The Last Hike In This Cycle”: A Stunned Wall Street Reacts To The CPI Miss

Well, it’s official: the inflation peak of the post-covid era is now behind us (that we will get another reflationary ascent is a question of when not if, but for now it’s over the horizon)

Or this one on CNBC that wasn’t quite as euphoric about the end of inflation but that did encapsulate the gist of all that happened in the market at the start of the day:

Dow surges 500 points at the open Tuesday as investors cheer light inflation report

The first one by ZH was certainly overoptimistic in what it claimed at the top. Inflation done because it went UP 0.1% this month over last but down 0.1% year on year?

Don’t get me wrong. I don’t think inflation has any more mojo left for climbing right now than Joe Biden’s poll numbers, but I think the drop in inflation was a joke after so much accelerated Fed tightening (now that they’re finally on the job) and I suspect Powell will find it a little disappointing, too, though he will try to make it sound like progress, but not as much as he’d hope. So, he’ll make it clear there is more battle to come.

Peter Tchir, chief strategist at Academy Securities, however, says he bets that tomorrow’s rate hike is the last in this cycle now that inflation is winding down. I’ll bet he’s wrong, but we’ll see what Powell has to say tomorrow.

Florian Ielpo, head of macro research at Lombard Odier Asset Management, said,

“This is the first time core inflation is showing a decline. This is consistent with a large cross-section of data in the US now: Inflation in the US is likely to be a problem of the past.”

Zero Hedge

It’s the very first time in this cycle that core inflation showed a decline, so he bets inflation is a problem of the past? We’ll see if Powell agrees. I doubt he does. And, as even ZH noted,

Of course, the question now is what does Powell make of all of this, and until we get the answer in a little over 24 hours

Indeed, that is all that matters to stocks because the only thing investors pay attention to anymore is free Fed funds and the hope that the addicts’ dope will be restored before their withdrawal gets any worse. It may well be that today’s attempt at a cross-Atlantic fight that landed just beyond the runway after takeoff will spur Pilot Powell to sterner speech, but who knows?

This should give Powell some confidence tomorrow if he had planned on signaling a further step down in the magnitude of rate hikes to 25 basis points in February, after the 50 basis points that’s expected on Wednesday….The one proviso for the Fed is that this risk-asset rally undercuts the Fed’s tightening campaign. And indeed they’re not finished yet, with multiple rate hikes yet to come. To the extent that financial conditions ease up, that would be counterproductive.

That was Chris Antsey, Fed reporter at Bloomberg News, and that’s exactly it. What Powell could get out of the market’s irrational exuberance is a signal that the still delirious market will rise on any hope he gives it. That would improve financial conditions and be counterproductive to his battle against inflation, which I am pretty certain Powell will not find anywhere near as close to the finish as the soup-for-brains market pundits do. However, we are talking Jerome Powell, so I wouldn’t bank any money on the Fed’s path, even as I say which way I think they’ll go.

Not everyone failed to read the tea leaves a little more carefully. Said Katherine Judge, economist at CIBC Capital Markets,

“The deceleration in price pressures was concentrated in a few components, and the labor market remains tight. The softer core reading was driven by an easing in core goods prices, specifically used cars, reflecting supply-chain improvements, and drops in medical care and transportation services. That masked price pressures in core services, with the shelter sub-index continuing to increase strongly, although the pace of monthly shelter increases subsided.”

Goods make up the smaller part of CPI, and services have the most exposure to wage increases, which continue to build. While they don’t keep up with inflation, they are adding to it.

So, I think the Fed is more likely to steer as Jason Pride of Glenmede said:

Investors should be careful not to over-extrapolate these results and temper their expectations for a premature pivot from the Fed. Consumer inflation is still far from the Fed’s price stability goals, and the 1970s provide case-in-point as to the risks of claiming victory on inflation too early.

Wiser words than many I read today.

The market is still delusional, believing in that Fed pivot. Powell has never been able to shake that out of the market’s hydra heads for more than a few days before the delusion returns. Maybe he doesn’t want to completely shake it off, lest it cause the irrational market to face the light of truth and crash hard. So, continued bait and switch between slightly dovish messages and messages that are harsh in terms of Fedpeak may be the way to keep jostling the market down without it becoming a disorganized all-out crash.

So, down, down, the stock market has gone in perfectly sized and extremely consistent bear market rallies followed by deeper falls as I pointed out in my Dec. 6 article: “The Bear is Uncaged … Again.”

The deeper truth about today’s CPI

I think Phoenix Capital summarized the CPI print best (and was the only one I saw to do so):

The markets have reached a new level of stupidity. [I could stop there.]

Stocks are exploding higher based on inflation coming in at 7.1% Year over Year. This is apparently great news because Wall Street expected the number to be somewhere between 7.2% and 7.6%. So, according to those buying stocks today,  a 0.1% “beat” on an inflation number that is still north of 7% despite the Fed implementing its most aggressive rate hike cycle in 40 years in is a reason to panic bid stocks higher.

Looking through the numbers, almost the entire drop came courtesy of falling energy prices and used cars. I might add that the drop in energy is not surprising given that the Biden administration drained the Strategic Petroleum Reserve (SPR) by ~180 million barrels of oil. Practically everything outside of energy and used car prices is still rising.

Zero Hedge

It’s also not surprising, given that used cars and energy were BY FAR the most overinflated items this year. So, naturally, some of the hot air is going to come out of those things that overshot the most to the upside. Plus, energy is not just literally volatile, but is volatile in price, too.

Phoenix provides the following chart that speaks for itself:

As you can see, all items combined took a 0.1% uptick from October to November, and who knows what was buried in those “seasonal adjustments” mentioned at the top of the chart.

Shelter is still coming in hot, and it is going to for a long time because it was under-reported for a year due to that lag I’ve talked about. Now some economists are saying the Fed should just ignore this because it is a lagging indicator. Of course, the Fed DID ignore it the whole time it was lagging and showing next to nothing, which was partially why the Fed believe inflation was “transitory.” Now the economic gurus like Jeremy Siegel would like you to believe the Fed should ignore it like it was ignored when it was not even included. Is there ever, then, a right time to pay attention to it as if housing mattered.

Siegel said,

If Fed stopped looking at stale housing data they’d realize inflation is over.


So, the Fed should stop looking at housing inflation now that it is finally coming through, just as it never looked at it when it wasn’t in CPI reports to look at because it takes so long to show up in CPI. Sure. Apparently, there is never a perfect time for the Fed to consider housing inflation — neither when it is happening nor when it shows up nearly a year later in CPI reports.

Core inflation has put in a top, but it hasn’t really fallen any:

So long as this measure of inflation which the Fed prefers versus overall inflation is just hovering up their in the rarified atmosphere, the Fed is not going to see its battle as over to where it can taper off the hikes and then revert to easing soon. The Fed’s hikes and QT appear to have lopped off the giant’s head (as has a year of the not-recession) but the giant is still standing strong.

Because there was less truly good news in CPI than the headline the market immediately fastened on, the market didn’t have legs to stand on. Now, will Powell kick its legs out from under it tomorrow or give it a little push? I would not bet that the Fed is inclined to give the market a lot of room to run here, and the declining rate of CPI barely delivered the boost it was expected to with an unknown path tomorrow until the Fed speaks after deciding where it wants the market to go.

(These articles were included in today’s The Daily Doom. Subscribe for free if you want it to survive.)

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