Is the Inflation Genie Back in the Bottle? – Halyard’s Weekly Wrap – 11/11/22

Finally, a downward bias to the Consumer Price Index!  That’s not to say that prices are contracting.  In fact, taking it at face value, the inflation numbers are still too high.  But the rate of increase is falling, which is welcome news for consumers.  Core CPI, the measure that excludes food and energy, rose 6.3% year-over-year, falling from a year-over-year increase of 6.6% last month.  On a month-over-month basis the measure rose 0.3%, down from 0.6% last month.  That’s a welcome improvement and comes just in time for the Fed.

Coincidently, the tightening of monetary policy has seen the “rising tide floats all boats” adage play out in reverse.  Before todays’ post-CPI melt up, equities have been under selling pressure for most of this year and the selling has been most apparent in the darlings of the retail market, namely FANG stocks.  All are down double-digits in 2023, with META, the parent of Facebook down 69% from its peak.  The best performing of the group is Apple with a year-to-date loss of only 27%.  Topping the FANG losses, Bitcoin, the darling of the more “sophisticated” retail traders has lost 75% of its value since last December.  With the cryptocurrencies printing new lows as we write, we wonder what’s stopping XBT from plumbing the depths below 10,000.  It’s certainly not valuation, because it lacks any intrinsic value.

That abysmal performance is significant in that it’s becoming a drag on discretionary spending.  Rate hikes have all but stalled the housing and automobile industries and the trickledown effect is starting to reverberate through the economy.  Initial claims for unemployment insurance have risen from the low touched last month, but so far has not really caused a worry.  But what is worrying is the recently announced layoffs in the tech sector.  Meta is immediately cutting 11,000 jobs, Twitter is cutting 3,700 jobs, and Microsoft is cutting 1,000 jobs, just to name a few.  Taken in aggregate, the handful of tech firms firing workers does not in itself signal a recession.  But considering the headline effect on consumers and business leaders, the trend is troubling.

The impact of the better than expected CPI to the markets was swift.  Since the hawkish FOMC meeting, there has been substantial selling pressure on the front end of the Treasury curve.  The two-year note touched 4.72% on Monday as traders were braced for another 75 basis point rate hike in December.  Within minutes of the CPI print that bearishness evaporated, and the 2-year note is settling in around 4.32% as traders recalibrate their rate hike trajectory.

Attention next week will focus on Retail Sales for October.  Economists are looking for a big bounce higher after the report for September disappointed.  It will be the first look at Q4 activity and a precursor of how the holiday selling season is going.  Also garnering attention will be Federal Reserve official’s public statements.  There are ten different Fed Officials speaking between today and next Friday and they are likely to herald the CPI as a waypoint in their endeavor to put the inflation genie back in the bottle.