Halyard’s Weekly Wrap – 06/10/22

Inflation to the upside – Does the Fed roll a 75?

President Biden and the members of the Federal Reserve were hoping against hope that this morning’s CPI report would come in below expectations, but to no avail.  In fact, each and every one of the economic releases communicated bad news to our leaders.  The headline year-over-year CPI came in at 8.6% versus the consensus estimate of 8.3%, and the ex-food and energy tally came in at 6.0%, a touch above the survey estimate of 5.9%.  Later in the morning the University of Michigan consumer survey offered no better news.  The overall sentiment tally plunged to 50 versus last month 58, and the inflation component for the coming year ticked up to 5.4%.  That’s a clear message to Messrs. Biden and Powell of no confidence.  The reaction out of the markets was as expected with Stock indices getting crushed.  Several intrepid market analysts said earlier this week that the stock market could be close to a bottom, but they’re eating their words today as the S&P 500 is only 100 points away from its recent low.

In reaction to the inflation data economists are actively resetting their expectations for the path of Fed Funds. From the Halyard perspective, we think the Fed should have hiked rates today and forget about their only act at a scheduled meeting nonsense.  But that only happens when they need to cut rates as they did at the outbreak of COVID.  Nonetheless, several street economists have upped their rate hike expectation to 75 basis points at next week’s Open Market Committee meeting.  Similarly, the Fed Funds futures market now expects the overnight rate to peak at 3.60% by May 2023.  Given the Fed aversion to deviate from their public comments, we think the likely outcome is 50 basis point hikes at each of the next two meetings, and that will leave them with the entirety of August to see if inflation flattens out.

Next week, besides the FOMC meeting, the Producer Price Index (PPI) and Retail Sales will be the dominant headlines.  PPI is likely to be awful as it usually rhymes with CPI directionally, but Retails Sales could be a wild card.  The Retail Sales measure doesn’t have an inflation adjustment, therefore if consumers buy the same items at the higher prices, the measure will flash economic strength.  We’ll be digging through the subcomponents of the report to gauge if that is actually the case or if consumers are cutting back on some purchases to afford necessities.