Inflation Data – What To Expect?

Inflation and Fed minutes

Most expect another slight gain in PPI for the month but see the annual rate pulling back to +8.4% from a previous 8.7%.

The more critical inflation test will be tomorrow’s Consumer Price Index (CPI) which will have a heavy influence on how big investors think the Fed’s upcoming rate hikes might be.

Keep in mind, the September jobs report last Friday showed a still very strong labor market with the unemployment rate actually declining and wage inflation still registering a +5% annual gain. Meaning even if CPI declines as expected, a Fed pivot to much lower hikes or a pause in tightening seems highly unlikely based on one month of inflation data moving the right direction.

Also today, the Fed’s September meeting “minutes” could provide clues as to what the Fed’s tolerance level might be, aka high unemployment or fallout in certain financial markets.

Bulls are hoping to see signs of division between members as they believe worries that the central bank’s aggressive actions could spark a serious recession are rising among the more “dovish” Fed ranks.

It’s worth noting that Federal Reserve Bank of Cleveland President Loretta Mester expressed her belief yesterday that the central bank hasn’t even begun to put a dent in inflation, echoing similar comments from other officials over the past couple of weeks. Mester, considered a Fed “hawk”, also anticipates the Fed’s benchmark rate moving higher than the median rate of +4.6% that officials currently forecast by the first half of next year.

As the Fed continues to tighten the screws, there are already signs of decreased credit availability happening. Notably, mortgage lenders have upped their lending qualification amid fears of rising default risks with rates on a 30-year loan now over +7%.

Fear Index

US Treasury yields also continue to climb with the 30-year yield near +4%, the highest in almost 9 years, and the 10-year yield now over +4% and close to last month’s high.

This is creating increasing competition for stocks as it also weighs on “high growth-low profit” companies, particularly in the technology sector.

Some Wall Street insiders are again nervously pointing to the CBOE Volatility Index (VIX), aka the “investor fear gauge”, and the fact that it indicates relatively mild levels of investor anxiety right now considering the high amount of uncertainty.

The VIX, which uses options activity as part of its methodology, typically shoots higher when stock prices are under pressure and dips lower when stocks are climbing. When stock are going up, big money is generally exiting hedges against a market decline, which tend to include a lot of long put positions.

Some insiders think a simultaneous unwinding of both stock positions and option hedges by institutional traders is currently causing the VIX to reflect a false sense of investor calm. It might also imply that big money is shifting out of the stock market, meaning less liquidity, weaker technical support, increased volatility, and perhaps even lower stock prices ahead.

US – Saudi Relations

Keeping Our Eye on US – Saudi Relations: President Biden on Tuesday said it’s time for the United States to rethink its relationship with Saudi Arabia and that he will “continue to re-evaluate”. National Security Council spokesperson John Kirby said, “Certainly in light of recent developments and OPEC+’s decision about oil production, the president believes that we should review the bilateral relationship with Saudi Arabia and to take a look to see if that relationship is where it needs to be and that it is serving our national security interests.”

He noted it appears the decision to support to OPEC+ production cut that Saudi Arabia is aligning with Russia. Kirby said there is no timeline for the policy review of the Saudi relationship. Just something to think about and keep our eye on as we move forward and try to best evaluate energy price risks.