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Tuesday, November 9, 2021
Investors are more worried about inflation than the Fed seems to be
Amid the market’s debate over whether inflation will prove transitory or permanent, closely tracked indicators, such as bond yields, are sending us mixed signals about the future.
That in part is because the real economy is also fighting through competing impulses of its own. The supply chain crisis, and the upward pressure it’s putting on soaring inflation remain the two biggest themes of 2021.
COVID-19 of course, remains a force multiplier behind everything, with the pandemic doing little to curb insatiable demand. October’s jobs data, which blew the doors off the figurative barn and helped propel stocks to new record highs, did little to resolve the debate. And yields — which themselves should be true north of inflation and Federal Reserve policy expectations — are also sending mixed signals.
Still, evidence is growing that investors are getting really restive about the central bank’s ability to contain inflation. As Yahoo Finance’s Brian Cheung wrote on Monday, a “sharp rise in real interest rates” and “inflation surge” were the second and third most cited shocks cited by a New York Fed survey.
In the wake of the Fed’s decision to begin pulling back on its stimulus, the Morning Brief discussed the way in which interest rates on government debt should be a barometer of the Fed’s next moves (both its plans to taper bond purchases and upcoming rate hikes).
“Should” is the operative word here, given the topsy-turvy way in which the pandemic, the massive government response to mitigate its effects, and the lingering impact of bygone crises, is making a muddle of investors’ ability to read the financial tea leaves. Bond yields have also been whippy, telegraphing the market’s confusion about where things are headed.
But among Wall Street watchers, a clear picture is emerging about whether they think the Fed will be able to sit tight on rates — and it’s less than encouraging.
Sam Stovall, chief investment strategist at CFRA Research, suggested that trying to compare the Fed’s current plans to curtail stimulus to that of 2013-14 (the last time the central bank tried to unwind crisis-era policy) will “prove challenging, at best, since fundamentals are very different from that of eight years ago.”
For a bunch of reasons these days, the past isn’t necessarily prologue, but it can provide useful markers for where things are headed. In a research note, Stovall pointed out that at the time, headline consumer prices were below 2% (they’re now above 5%), and the benchmark 10-year yield was nearly double its current levels. Meanwhile, gold was trading at a substantial discount.
But as the Morning Brief pointed out last week, hotter-than-expected inflation is going to provide an acid test for the Fed’s willingness to delay liftoff of rates. And with jobs still being created at a healthy pace — and wages still on the rise — this week’s consumer data will amplify the debate.
According to Stovall, “the Fed started raising short-term rates in December 2015, or nearly 14 months after the end of the tapering period. This time around, we think the Fed could start hiking six months later, as we see the first quarter-point rate hike coming in Q4 2022 and proceeding into 2023 at a measured pace.”
He’s not the only one who sees the Fed moving sooner rather than later. Over the weekend, analysts at Goldman Sachs warned that the imbalance between supply and demand will drag on longer than expected, “and the inflation overshoot will likely get worse before it gets better.”
The bank warned that spiking goods inflation has become “the biggest surprise of 2021,” and prompted analysts to yank rate hikes forward by an entire year, to July 2022.
“Subsequently, we expect a funds rate hike every six months, a relatively gradual pace that assumes a normalization in goods prices and in overall inflation (albeit later and more partial than we previously thought),” Goldman wrote.
“Beyond the next few years, we expect nominal policy rates across most [developed] economies to rise well beyond the rock-bottom levels now priced in the bond market,” Goldman Sachs wrote.
Which brings us back to the point I made last week — watch bond yields, which aren’t likely to remain below 2% for much longer, given that price pressures will continue to assert themselves.
What to watch today
6:00 a.m. ET: NFIB Small Business Optimism index, October (99.5 expected, 99.1 in September)
8:30 a.m. ET: PPI Final Demand, month over month, October (0.6% expected, 0.5% in September)
8:30 a.m. ET: PPI excluding food and energy, month over month, October (0.5% expected, 0.2% in September)
8:30 a.m. ET: PPI Final Demand, year over year, October (8.6% expected, 8.6% in September)
8:30 a.m. ET: PPI excluding food and energy, year over year, October (6.8% expected, 6.8% in September)
7:00 a.m. ET: Palantir (PLTR) is expected to report adjusted earnings of 4 cents per share on revenue of $385.00 million
9:00 a.m. ET: Workhorse Group (WKHS) is expected to report adjusted losses of 19 cents per share on revenue of $883,286
Before market open: Blue Apron (APRN) is expected to report adjusted losses of 57 cents per share on revenue of $120 million
4:00 p.m. ET: Wynn Resorts (WYNN) is expected to report adjusted losses of $1.32 per share on revenue of $938.10 million
4:00 p.m. ET: Poshmark (POSH) is expected to report adjusted losses of 10 cents per share on revenue of $82.96 million
4:00 p.m. ET: Coinbase (COIN) is expected to report adjusted earnings of $1.71 per share on revenue of $1.57 billion
4:05 p.m. ET: Vroom Inc. (VRM) is expected to report adjusted losses of 73 cents per share on revenue of $890.08 million
4:05 p.m. ET: DoorDash (DASH) is expected to report adjusted earnings of 1 cent per share on revenue of $1.16 billion
4:05 p.m. ET: fuboTV (FUBO) is expected to report adjusted losses of 62 cents per share on revenue of $143.63 million
4:05 p.m. ET: Plug Power (PLUG) is expected to report adjusted losses of 8 cents per share on revenue of $144.81 million
5:30 p.m. ET: Nio (NIO) is expected to report adjusted losses of $3.64 per share on revenue of $36.26 billion
Federal Reserve Chair Jerome Powell will speak at 9:00 a.m. ET today alongside officials from the Bank of Canada, the International Monetary Fund, and the European Central Bank for a virtual conference on “Diversity and Inclusion in Economics, Finance, and Central Banking.”
Vice President Kamala Harris is off to Paris to begin a multi-day visit. In the coming days, she will meet with French President Emmanuel Macron, speak at the Paris Peace Forum, and mark Veterans Day at Suresnes American Cemetery among other stops.
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