Investors buy the dip, but can’t say bye-bye to inflation

MANHATTAN (CN) — Many Wall Street experts had hoped this would be the week that inflation finally began to drop, but data showing persistent price increases caused investors to pull away from early-week gains.

Investors also were kept on edge late Friday by worsening Russia-Ukraine tensions, which has caused oil prices to skyrocket over the last few weeks to about $94 a barrel, the highest price in years. Some analysts fear that if any military action actually occurs, that price could shoot up to higher than $150 a barrel.

By the week’s end the Dow Jones Industrial Average shed the gains made from Monday and Tuesday, losing 352 points. The S&P 500 and Nasdaq similarly gave up their own increases to fall 82 points and 307 points, respectively.

The biggest news of the week, yet again, was headline-grabbing inflation numbers from the U.S. Bureau of Labor Statistics, which reported that a 0.6% month-over-month rise in consumer prices last month. All told, inflation has risen to 7.5%, the highest yearly increase since 1982.

The price increases were mostly across the board, but some items stuck out like sore thumbs. Gasoline prices, for example, actually dropped 0.8% in January but are up a whopping 40% since early 2021. Used cars and trucks, a persistent culprit in inflation reports, gained 1.5% last month and now cost 40% more than they did in January 2021.

“There are some who will say that the problem is supply-chain related or demand-related and they aren’t entirely wrong, just as they weren’t wrong about certain parts of the inflation problem being transitory,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. “But just as that transitory analysis missed the big picture, so does relying purely on the logic that supply-chains and demand issues aren’t strictly interest rate related.”

While analysts combed through the report and found a few encouraging signs — such as hints that pressure from supply-chain problems are easing — overall the report dampened optimism on the Street.

Just as worrying to many investors, St. Louis Federal Reserve President James Bullard said following the release of the inflation data that he had become “dramatically” more hawkish and now supports a 1% jump in the federal funds interest rate by the summer, a quicker increase than many investors had forecast.

Tom Essaye of the Sevens Report wrote in an investor’s note that hot inflation and hawkish sentiment from members of the Fed will continue to cause volatility in markets, but that “until we get more evidence growth is slowing or the Fed makes that policy mistake (which it hasn’t yet) then the lows from January should continue to hold.” (Parentheses in original.)

Others predict the Fed will act quickly to raise rates, but that ultimately the only voice that matters is that of Chair Jerome Powell.

“I do think that 50 [basis points] in March is likely a done deal, especially now that the market has just about priced it in, thus providing the Fed with cover,” Peter Boockvar, chief investment officer at Bleakley Advisory Services, told investors in a note.

“I’ll tell you this, the decision to hike 50 bps and any need of ‘convincing’ will have to come from Jay Powell himself,” continued Boockvar, a critic of the Fed’s approach to inflation over the past year. “It is Powell’s damaged reputation that is predominantly on the line here as Fed Chair. He is their leader and dreams or nightmares of Arthur Burns, Richard Nixon, Gerald Ford, and Jimmy Carter are likely in his head as inflation tarred their tenures.”

All the negativity has been reflected in recent business and consumer-sentiment indexes. According to the National Federation of Independent Business, the group’s optimism index fell 1.8 points last month to hit 97.1, with 22% of small businesses reporting inflation as a major problem, unchanged from the month before.

“More small business owners started the new year raising prices in an attempt to pass on higher inventory, supplies, and labor costs,” NFIB Chief Economist Bill Dunkelberg said in a statement. “In addition to inflation issues, owners are also raising compensation at record high rates to attract qualified employees to their open positions.”

Half of the small businesses surveyed reported they had raised wages for workers, the highest amount in the survey’s nearly five decades in existence, according to NFIB, and 47% of respondents said they had job openings that could not be filled.

The preliminary consumer confidence index from the University of Michigan also dropped from 67.2 to 61.7, much worse than many analysts had forecast and as low as it has been since October 2011. The survey noted that “recent declines have been driven by weakening personal financial prospects, largely due to rising inflation, less confidence in the government’s economic policies, and the least favorable long-term economic outlook in a decade.”

About half of the respondents in the consumer survey said they expect their inflation-adjusted incomes to fall in the next year, and those who expect their family income to outpace inflation dropped slightly to 36.4%.

“Consumers are really unhappy with the economy, and early 2022’s economy has something for everyone to dislike: omicron, ongoing shortages of consumer goods, bad consumer experiences due to labor scarcity, the return of stock market volatility, inflation at the highest since 1982, jumping mortgage rates, and the phase-out of a variety of social programs that were extremely popular with their beneficiaries,” Bill Adams, Comerica Bank’s chief economist, said in a statement.

“Perceptions of the economy will likely improve in coming months as the omicron wave and supply chain problems fade and inflation begins to moderate,” Adams said, noting, though, that GDP growth is likely to slow sharply in the first quarter of 2022.

Follow @NickRummell

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