The markets responded angrily this week to unexpected outcomes of the Consumer (CPI) and Producer (PPI) data, missing the consensus expectations. Other mixed data was released over the week and the continued decline in the broad indexes has now erased much of he rally that begin in June. The reason is simple, inflation is still a problem, and the market is listening too closely to the bullish narratives. Basically, no matter how much insight and understanding there exists, in my opinion, the rational brain is too often impotent to taking the emotional brain out of the conversation. What’s missing from the narrative, everything?
The current decline is predicting the action of the Fed next week as they are expected to increase interest rates .75%. But some interpret the derivative (Federal Funds futures contract) that track the same rate and suggest the possibility of 1.00%. The outcome of the Fed meeting is less important to me than the fact that they are raising rates and have stated in numerous interviews that they will continue to do so. The general reaction from the body of players is the Pindudes are day trading, the Algochums sell aggressively and the investors are sitting on their cash. This is because the stock market will eventually find a bottom and begin the first stage of its future rise, but first has to see the proof to buy. In the interim, the markets will go down, the markets will go up and only a defined buying strategy is worth pursuing.
The economy is definitely slowing, and the deeper economic moderation of Europe and China are adding to the problem. Retail Sales data this week showed a slight increase (+.3%) for the month of August. But customary activity slows into the early fall as consumers build cash for the holiday season. So just as Manufacturing is showed a slight rebound as the consumer slows, the reverse is likely in the late fall, all in keeping the economy at odds with itself. All this will have some impact on the inflation data, even as one overlooked aspect of the data was that CPI and PPI didn’t go lower as expected, but they didn’t go higher either. Therefore, in my opinion, it’s worth standing by to see if inflation may have already peaked. I admit it’s a huge call, but if the economy slows, and the consumer becomes more watchful, the part of inflation that I refer to as the greed component will also slow down and a more natural level of prices will likely stick around, even when the index’s finally decrease. This is when economies, like the US, move on.
I’ve spent little time over the last few weeks addressing the ongoing external events, unending China lockdowns, continuing war in Ukraine, with some light on the horizon, and the recent challenges faced by the EU regarding their inflation and the contribution made to it from their energy consumption and troubling reliance on unreliable resources. Although the EU appears to be using its problems to better navigate its ambition to manage consumption of fossil fuels in total, the UK on the other hand has moved in a countering direction. This, in my opinion, doesn’t ignore the need to discipline the consumption of fossil fuels but introduces a picture that will be better viewed through a transitional lens. The uncertainties will have to take shape as well as take on resolve, this way the future can become something the markets can predict.