Some investors think the Fed should ignore that impression of hot inflation: Morning Brief

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Friday, October 14, 2022

Today’s newsletter is from Julie Hyman, presenter and correspondent for Yahoo Finance. Follow Julia on Twitter @juleshyman. Read this and more market news on the go with Yahoo finance app.

Inflation was red hot again on Thursday, meaning the Federal Reserve is certain to 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 for Wall Street after Thursday’s consumer core inflation reading showed the biggest year-on-year rise 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 the unemployment rate. Instead, these investors say, the Fed should pay attention to forward-looking indicators, such as commodity prices like gold, that show lower inflation.

“The CPI that we obtained is a lagging indicator. It’s always a lagging indicator,” Ark Invest founder and CEO Cathie Wood told Yahoo Finance on Thursday. “And we’re seeing a lot of prices on the way that are falling.”

Ark Invest CEO and Chief Investment Officer Cathie Wood gestures as she speaks during the Bitcoin Conference 2022 at the Miami Beach Convention Center on April 7, 2022 in Miami, Florida. (Photo by Marco Bello/Getty Images)

While Wood made a name for himself betting on innovative investments like Tesla (TSLA) and bitcoin (BTC), he has a background in macroeconomic analysis. She thinks the Fed is on the wrong track.

This week, the maverick investor wrote an open letter to the Fed outlining her concern that the central bank is making a “policy mistake” by raising rates. The Fed aims to ease inflation, but says its actions could go overboard and spur deflation.

Michael Darda, chief economist and chief strategist at MKM Partners, also warns the Fed not to continue down its aggressive path.

“They are about to go too far too fast,” he told Yahoo Finance Live. “They really should be slowing the pace of the upside now, not reacting in a scary way to the deeply lagging indicators. That is a recipe for an accident.”

Of the various lagging indicators, Darda says that renting may be more time-wasting than others.

“Stiff core inflation measures, such as rents, will tend to follow the economy over five quarters,” he said. “That means the strength here could simply be a reflection of where the economy was 15 months ago.”

And what are the forward-looking inflation indicators to watch?

Both Wood and Darda point to falling commodity prices, with Wood highlighting the drop in gold in particular as a good indicator of inflation. “Gold is a leading indicator of inflation,” he said. “And it hasn’t exploded. It’s falling apart.”

Also breaking down: used car prices. Furthermore, corporations, from retailers (Nike) to chipmakers (Micron, Intel), which were short of supply during the pandemic, are now regularly reporting excess inventory.

“Everything that has been at the forefront of the boom in the inflation process has reversed very sharply, and yet the Fed is acting aggressively, looking in the rearview mirror,” Darda said.

He’s not optimistic that the Fed’s retrograde hawkish stance will change any time soon. So while consumers may see lower prices, investors won’t get relief from the Fed until lagging indicators catch up.

All that said, stocks showed incredible resilience in the face of the hot inflation report. Jared Blikre of Yahoo Finance wrote about what that means.

what to see today

Economy

  • 8:30 a.m. Eastern Time: Retail Sales Advancemonth over month, September (0.2% expected, 0.3% over the previous month)

  • 8:30 a.m. Eastern Time: Retail sales excluding automobilesmonth over month, September (-0.1% expected, -0.3% over the previous month)

  • 8:30 a.m. Eastern Time: Retail sales excluding automobiles and gasolinemonth over month, September (0.3% over the previous month)

  • 8:30 a.m. Eastern Time: Retail Sales Control GroupSeptember (0.0% over the previous month)

  • 8:30 a.m. Eastern Time: Import Price Indexmonth over month, September (-1.1% expected, -1.0% over the previous month)

  • 8:30 a.m. Eastern Time: Non-Oil Import Price Indexmonth over month, September (-0.2% over the previous month)

  • 8:30 a.m. Eastern Time: Import Price Indexyear over year, September (7.8% over the previous month)

  • 8:30 a.m. Eastern Time: Export Price Indexmonth over month, September (-1.2% expected, -1.6% over the previous month)

  • 8:30 a.m. Eastern Time: Export Price Indexyear over year, September (10.8% over the previous month)

  • 10:00 a.m. Eastern Time: commercial inventoriesAugust (0.9% expected, 0.6% during previous reading)

  • 10:00 a.m. Eastern Time: Consumer Sentiment from the University of MichiganOctober preliminary (58.8 expected, 58.6 during the previous month)

Profits

  • JPMorgan (JPM), Citi Group (C), Morgan Stanley (MS), PNC (PNC), US Bank (usb), United Health (UNH), fargo wells (WFC)

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