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Sunday, July 14, 2024 | Back issues
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As markets stability endures, sticky inflation frustrates investors anew

Inflation continues to stupefy investors, who are now beginning to fear the Federal Reserve may return to higher interest rate hikes, though markets themselves haven’t tumbled yet.

MANHATTAN (CN) — Two new reports showed that prices are still high, but indices suffered only moderate losses for the week, even after hawkish comments by Federal Reserve members spooked Wall Street initially.

By the closing bell on Friday, the Dow Jones Industrial Average dropped just 43 points since last week, while the S&P 500 declined 11 points. The Nasdaq managed to pick up 69 points since last Friday.

On Wednesday, another key inflation report showed price increases have remained sticky — perhaps too sticky for Wall Street.

According to the consumer price index, annualized inflation dipped from 6.5% last month to just 6.4%, driven by a 2% increase in energy prices in January but mostly by an increase in housing costs, which accounted for nearly half of the total increase to consumer price index. Only a few items — used cars, medical services and fuel oil — saw price decreases last month.

“The January U.S. consumer price index came in stronger than we anticipated, and this coupled with the tight labor market and net easing in financial market conditions may warrant a change to our forecast for the [federal funds] rate,” Ryan Sweet, chief U.S. economist at Oxford Economics, wrote in an investor’s note.

While that is bad news for the early part of 2023, Sweet still thinks inflation may shake out by 2024. “All told, risks are weighted toward inflation being higher in the first half of this year than we anticipated,” he wrote. “Still, inflation should moderate more noticeably in the second half of this year as goods disinflation intensifies and services inflation peaks.”

Other price data also dismayed investors. The producer price index released on Thursday showed inflation on the supply side rose more than expected over the last year, gaining 6% over the last year compared with the 5.4% many had forecast. Prices in January alone gained 0.7%, with core items excluding food, energy and trade services gaining 0.6%, the biggest monthly gain since March 2022, according to the report by the U.S. Bureau of Labor Statistics.

On the plus side, most of the gains in prices were due to increased loan services. Further, since rates for air and ocean cargo rates declined 6.9%, many experts predict that consumers should expect price easing to trickle down to them in the months ahead.

Since prices came in higher than expected, however, it also compounds worries the Federal Reserve is not yet done with policy tightening — something that could depress equity markets further. Most experts predict at least two more interest rate hikes by the central bank of 0.25% each, though the Fed could hedge higher if its concern about lingering inflation persists.

“Considering these pricing developments with pressure on profit margins and interest rates, investors should prepare for a retest of the October lows,” said John Lynch, chief investment officer at Comerica Wealth Management. He added that the PPI report, when taken with the CPI data, “suggests that the easy battles against price pressures have been won.”

There has been chatter this week from that the Fed may actually return to hiking rates by 0.5%, after Federal Reserve Bank of St. Louis President James Bullard said he was open to such an increase and had actually pushed for one during the Fed’s last meeting.

“The Fed’s rate decisions this year would be more complicated if labor market data started falling off a cliff, but if anything the opposite is the case,” Comerica chief economist Bill Adams said. “The headline-grabbing layoff announcements of the last few months do not seem representative of broader economic trends.”

Adams pointed to the small business survey released earlier this week by the National Federation of Independent Business, which showed 45% of small business owners had hard-to-fill job openings, a historically high percentage. Nine out of 10 businesses that said they tried to hire last month reported few or no qualified applicants, the survey found.

“As long as the economy isn’t falling off a cliff and stock prices are holding up, the Fed’s focus is squarely on America’s stubbornly high inflation,” Adams said. “The unemployment rate will likely move higher in coming quarters, but not enough to make the Fed abandon its singular focus on controlling inflation.”

Follow @NickRummell
Categories / Financial, Securities

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