A fantastic result on the inflation front set the stage for a perfect stock rally and collapse.
As the now typical cycle unfolds of the market being excited about peaking inflation then recalling the reality of continued aggressive Fed hikes to come.
Why? Because inflation remains at through-the-roof extreme levels.
Something many seem to be missing at the moment is that as year-on-year inflation cools, the absolute value of consumer prices remains highly elevated regardless. It is this sustained higher prices period that will continue to eat away at the foundations of the US consumer and economy alike.
Furthermore, while goods are cooling, services are only just beginning to run red hot. As is the cost of housing.
There is plenty more to come on the inflation front which could generate another move higher if not to new highs.
Investors should be feeling a little more confident that the peak in inflation, in the US at least, has been seen.
However, the peak in the Fed Funds Rate remains a long way off. My end rate forecast remains somewhere in the 5.75% to 6.5% area. With a real possibility of stretching to the unsightly level of 7.5%.
This last higher-risk target would be seen should the Oil and gas markets rally substantially again. This is looking less likely at the moment, but anything can happen in energy markets and we should remain watchful on that front.
The USA is already in the grip of an upward wages/inflation spiral.
While the peak in inflation is welcome, it has the clear and present danger of remaining extremely high through 2023. Even 2024. Hence, the Federal Reserve will continue hiking rates aggressively. Not despite a leaking economic outlook, but indeed, because it desires a weakening economy.
The stock market was fantastic on the day, doing exactly what it should have. An immediate sharp rally followed by the setting in of reality.
That reality, in a nutshell, get ready for further interest rate shocks and a new sustained high interest rate environment medium to long term. Interest rates are unlikely to ever return to where they were just a year ago. Higher rates will continue to drive both the economy and earnings ever lower.
Investors, should really stand up and take note of this momentary euphoria over the inflation number, and hopefully a 50-point rate hike to boot, to afford them the opportunity to hedge their portfolios.
There is even a chance the Fed could do one last hike of 75 points, but 50, still aggressive, seems more likely.
We could see a similar re-run of yesterday’s type of price action on the day, but the dominant risk is returning ever so forcefully to the downside now.
Market analysis from Clifford Bennett, chief economist at ACY Securities
