Some investors think the Fed should ignore this scorching inflation print: Morning Brief

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Friday, October 14, 2022

Today’s newsletter is from Julie Hyman, presenter and correspondent at Yahoo Finance. Follow Julie on Twitter @juleshyman. Read this and other market news wherever you are with Yahoo Finance app.

Inflation turned red again on Thursday, meaning the Federal Reserve will almost certainly raise interest rates by at least 75 basis points at its next meeting, and possibly in December as well.

That is now the base case on Wall Street after Thursday’s reading of core consumer inflation showed the biggest year-over-year increase since 1982 in September.

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

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

Cathie Wood, Managing Director and Chief Investment Officer, Ark Invest gestures as she speaks 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 betting on innovative investments like Tesla (TSLA) and bitcoin (BTC), she has a background in macroeconomic analysis. She thinks the Fed is on the wrong track.

This week, the maverick investor penned an open letter to the Fed signaling concern that the central bank was making a “policy error” by raising rates. The Fed aims to dampen inflation, but it argues that its actions could overtake and spur deflation.

Michael Darda, chief economist and chief strategist at MKM Partners, also cautions the Fed against continuing its hawkish course.

“They’re about to go too far, way too fast,” he told Yahoo Finance Live. “They should be really slowing the pace of the upside now, not reacting, in a panicked fashion, to deeply lagging indicators. It’s a prescription for an accident.

Among the various lagging indicators, Darda says rent may linger more than others.

“Core inflation measures like rents will tend to track the economy five quarters,” he said. “That means the strength here could just be a reflection of where the economy was 15 months ago.”

And what are the forward-looking inflation indicators we should watch?

Both Wood and Darda point to falling commodity prices, with Wood pointing to falling gold in particular as a good indicator of inflation. “Gold is a leading indicator of inflation,” she said. “And it didn’t burst. It’s breaking down. »

Breakdown also: used car prices. Additionally, companies from retailers (Nike) to chipmakers (Micron, Intel) that ran out of supply during the pandemic are now routinely reporting a glut of inventory.

“Everything that was at the peak of the boom in the inflation process reversed very sharply and yet the Fed is acting aggressively, looking in the rear view mirror,” Darda said.

He is not optimistic that the Fed’s retrospective policy will change anytime soon. So while consumers might see lower prices, investors won’t be relieved by the Fed until the lagging indicators catch up.

That said, stocks have shown incredible resilience against the inflation report. Jared Blikre of Yahoo Finance wrote about what this means.

What to watch today

Economy

  • 8:30 a.m. ET: Advance on retail salesmonth-over-month, September (0.2% expected, 0.3% in prior month)

  • 8:30 a.m. ET: Retail sales excluding autosmonth-over-month, September (-0.1% expected, -0.3% in prior month)

  • 8:30 a.m. ET: Retail sales excluding automobiles and gasolinemonth-over-month, September (0.3% in prior month)

  • 8:30 a.m. ET: Retail Control GroupSeptember (0.0% in previous month)

  • 8:30 a.m. ET: Import price indexmonth-over-month, September (-1.1% expected, -1.0% in prior month)

  • 8:30 a.m. ET: Non-oil import price indexmonth-over-month, September (-0.2% in the prior month)

  • 8:30 a.m. ET: Import price indexyear-over-year, September (7.8% in prior month)

  • 8:30 a.m. ET: Export price indexmonth-over-month, September (-1.2% expected, -1.6% in prior month)

  • 8:30 a.m. ET: Export price indexyear-on-year, September (10.8% in prior month)

  • 10:00 a.m. ET: Business inventoriesAugust (0.9% expected, 0.6% in previous reading)

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

Earnings

  • JP Morgan (JMP), Citigroup (VS), Morgan Stanley (MRS), ANC (PNC), American bank (USB), UnitedHealth (A H), Wells Fargo (WFC)

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Where inflation improves and worsens

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