"We're Feeling Inflation Everywhere:" Why CPI Ignited Selloff, Ups Rate Hike Chances

[00:00:00] Speaker 1: As we talk about the CPI print, I want to bring in our watchlist panel. We're discussing this print from September, the long-awaited CPI print. We know the Fed's watching, everybody's watching. And when it comes in even just a bit hotter than expected, it really turned the market. Scott Nations, President of Nations Indexes, and Brian Jacobson, Chief Economic Strategist at Annex Wealth Management, really changed the picture here today. You know, whether it's a tenth of a percent higher, you know, I guess that really makes a big difference. I mean, let's start this conversation and get it going. Brian? [00:00:36] Speaker 2: Yeah, it really does. That 0.1% move or difference you wouldn't think would be that big of a deal. But it really is, especially since I think when we look at the nearer term changes, right, the month over month as opposed to the year over year numbers, it does show that inflation is continuing to be on an uptrend. That 0.6% month over month for the headline, very large, but even core. And what we were really hoping for was to see that core cooling as opposed to heating up. So without evidence of core inflation cooling, at least on a three-month run rate basis, it really, I think, paints the Fed into a little bit of a corner in terms of what they've been talking about. They want to focus on inflation. They say that they're singularly focused on that. And if that is indeed the case, it makes the argument that they really should keep doing the job that they started once again back in September. [00:01:29] Speaker 1: And even in the Fed-beige book this afternoon, firms remained relatively positive on the economy, but so little to no change when it came to jobs, right? So that gives the Fed the green light to move ahead, right, unless you had a terrible jobs picture. So that gives them the green light if they would like to move ahead. And also just the fact that there are inflationary pressures and wage pressures, and so people are noticing, and that's something that we have to keep in mind. What say you here, Scott, to the big picture on the CPI print? [00:01:59] Speaker 3: You're right, that it was only one-tenth above the consensus estimate. But now we're talking 3.7 percent year over year, almost double the Fed's 2 percent mandate. Couple that with the fact that unemployment is well below the 5 percent level generally considered full employment. I think the Federal Reserve has no choice here. They have to raise rates. If there's a problem, it's that too many people, I think, are looking at the stock market and equating it with the economy. Yes, some AI names have done really well, but the breadth in the S&P has been horrible. The average drawdown from the 52-week high for all of the names in the S&P is 19.7 percent. So the average stock in the S&P is nearly in a bear market. So gasoline, if you want to talk specifically about energy and the inflation picture, gasoline up 9 percent last month, fuel oil up 74 percent year over year. So, yeah, it was only one-tenth, but we can put our finger on precisely where it came from. And we know, Nicole, that energy prices are not isolated. They work through every portion of the economy. People are feeling the pain at the pump. It's not just long-distance, over-the-road truck drivers. Everybody who has to fill up with gas is feeling the pain. And inflation is working its way through the entire economy. You pointed out just a few minutes ago which three names in the stock market are higher today, or not names, but sectors. Energy, you would expect, because crude oil is up another 1 percent today, back above $95 a barrel. The other two names, consumer staples and health care, are incredibly defensive sectors. So we should worry about the stock market with the S&P down 100 handles, just over 1 percent, and the NASDAQ 100 down 2 percent, because, yep, we're feeling inflation everywhere. [00:03:56] Speaker 1: Understood. Within that report, I mean, you had even just a mixed bag. For example, food at home went down, food away from home went up. And travel, for example, there was still airlines were up 1 percent, et cetera. Give us a look ahead here, Brian. As we take a look, what do you think could change? Because, in theory, could the energy pop that we're seeing and the pressures be transitory? Is the Fed jumping the gun by hiking rates? [00:04:29] Speaker 2: Well, that is the argument for them not to hike rates, is the idea that this is a supply-side shock. But if they do feel as though they need to bring demand back in line with supply, they only have a certain number of tools at their disposal, right? They're not going to be able to increase refining capacity or anything like that. And so if the only tool that they have is rate hikes to deal with demand, right, and the interest rate-sensitive parts of the economy, housing, autos, which, if you look at the Beige Book, right, I mean, the Beige Book was actually quite the bummer when I was reading through that. Not a lot of breadth in terms of economic strength, a lot of diversity in terms of districts that were experiencing growth that were actually flatlining, saying that we have really some in manufacturing but not a lot in consumer spending. So I don't think that there's actually quite as much breadth to the economic resilience as what some of the headline numbers might suggest with a low unemployment rate. I mean, keep in mind, recessions begin at the peak of an economic cycle, not at the trough. And some of the indicators, at least if you look at the Beige Book, take that as more forward-looking. It does suggest that there's reasons to be cautious, that if the Fed is going to try to reduce demand, maybe they don't actually have to do it. Maybe high oil prices are going to do the economic slowing for them. [00:05:51] Speaker 1: Right. Sometimes, right? Isn't the cure for inflation inflation or something like that? You know, Scott, let's just, as a final thought here, we have the PPI tomorrow. Is there anything that you're looking for in particular there as we've spoken of the inflationary pressures? And while the 1 10th doesn't seem like that big of a deal, it's a big deal only because, this is what they tell me, right, is because we've had five years above the Fed's target. And it's another month above the target. So even though things have come down, we're well off the highs, and we've gone in the right direction, it's just not happening fast enough, for example. What about the PPI tomorrow, Scott? [00:06:27] Speaker 3: Yeah. People are going to look at the core. Brian mentioned the CPI core that everybody was hopeful for. That didn't come out as we would have hoped. So people will look at core PPI, but the problem with that is that if it just mimics what we saw in CPI, then people are going to be disappointed. They're going to be looking for some better news, and they may kind of gin it up out of thin air if they don't get it. I think the concern now is that, at least in the interest rate field, is that, as you pointed out, inflation has been above 2% for five years. Federal Reserve, with more than one leader, Mr. Warsh is not the only leader of the Federal Reserve we've had in that time, have just not shown any interest in attacking inflation before it gets out of control, and now they're still seen as a little wishy-washy. And so I think the real concern is that they just won't step in. Now, you might say the way to battle inflation is more inflation, but that doesn't help if it means that everybody races out, borrows money, and invests it in some way that will take advantage of higher inflation. That just fuels the problem. So, direct question, we're going to look at core PPI. We're going to look for some good news. We may gin it up out of thin air if it's not everything we hope for. But breadth in the S&P is still a problem, and the fact that energy prices are up so much is a huge problem. [00:08:02] Speaker 1: And I'm surprised even to see that the 10-year bond yield is now below 5.2. We were as high as 5.34%. So, it's not 5.3, it's not 5.2, it's actually 5.19% right now, which I think is very interesting, and a pretty fast move lower. So, we'll have to comb through what that means, too. Scott Nations, President, Nations Indexes. Brian Jacobson, Chief Economic Strategist, Annex Wealth Management. Thank you both very much.