Get Ready for Another 'Inflation Week'

A new habit worth trying... The latest read on inflation... Get ready for another 'inflation week'... Mr. Market cares about this stuff... Odds on what the Fed will do... Don't miss our free news resource...

It's about that time again...

"Inflation week" is almost here.

You might not have heard about it... or, at this point, perhaps maybe you feel like every week is inflation week.

Here's what we mean... The same way we monitor earnings season each quarter, I (Corey McLaughlin) have begun watching for the latest "official" inflation numbers each month.

Somebody has to do it, after all... and you might want to as well, because market volatility and interest have tended to ratchet up during the past few inflation weeks. And this one, which starts tomorrow morning, arrives at an interesting time...

The Dow Jones Industrial Average saw losses in eight straight weeks for the first time since 1923, then it – and the other major U.S. indexes – rode what looks like a bear market "relief rally." We've enjoyed a sideways trading market over the past two weeks – until today, when markets fell sharply into the close.

The tech-heavy Nasdaq led the tumble, down 2.7%, and the benchmark S&P 500 wasn't far behind, finishing off 2.3%. The Dow was down nearly 2%.

And it wouldn't surprise me to see some more wild days soon – in part because tomorrow kicks off another round of fresh inflation-related numbers for Mr. Market to digest...

The latest read on inflation comes tomorrow...

Before the market opens tomorrow, the U.S. Bureau of Labor Statistics ("BLS") will publish its latest Consumer Price Index ("CPI") numbers. And while we won't be hanging on every decimal point, we will be watching...

This widely used inflation gauge tracks prices of an identical basket of sectors – like housing, food, and medical care – month to month.

Last month, the CPI checked in at an 8.3% year-over-year gain for April, which was slightly down from March (8.5%), but also slightly above Wall Street expectations (8.1%). If you're interested in "peak inflation," this was a "not yet" or "inconclusive" outcome...

As I wrote in the May 11 Digest...

Probably the most important point is that one month of a 0.2% annual decline in one inflation report does not make for a trend that screams inflation is going down quickly. Though if you are interested in inflation going down, it's better than last month...

Here's a multiyear chart of CPI readings...

High inflation isn't going away tomorrow... nor is the Federal Reserve's policy agenda to attack inflation, at the expense of economic growth... nor are the realities that businesses and people are facing today, like higher costs.

The yin and yang of inflation-watching...

On Tuesday next week, we'll then learn the Producer Price Index ("PPI") numbers for last month. This index, also published by the BLS, measures the prices that producers of goods in various industries pay for raw materials to make finished products...

If CPI is inflation-watching's yin, PPI is its yang – enlightening us to what it's costing producers to do business, which typically translates into prices paid by clients, other businesses, and ultimately consumers.

Here's what Stansberry NewsWire editor C. Scott Garliss wrote last month about the most recent PPI report from April, an 11% annual gain, which was above Wall Street expectations...

The data tells us the rate of increase for manufacturers' costs is going up. And despite difficult comparisons versus last year, the acceleration isn't letting up. Take a look at the chart below...

Even if you think the situation is actually worse than these numbers indicate, they provide a general sense of costs throughout the economy.

We can and should also debate the total accuracy of BLS numbers – whether they really reflect "real life" inflation pressures for the entire population. My personal sense is they don't. Inflation affects everyone, but in personal ways.

For example, gasoline prices are up 60% on average nationally over the past year, but we're saying "inflation" is up 8.3%. That might not matter as much to people who work at home, but it matters a lot more to shipping companies...

As I've written before, consistently watching the official statistics can provide a good "directional" view on whether inflation is rising, cooling, or staying about the same... And we're not the only ones who do it.

Despite what we may think, Mr. Market cares about this stuff...

Personally, I'd rather be sitting on a beach drinking a margarita than parsing inflation data. But if I don't pay attention to inflation, I might not be able to afford the travel expenses of getting to the sand, or the drinks when I'm there.

The CPI number in particular matters for a whole lot of reasons... to Wall Street and Main Street.

While it's not the Federal Reserve's preferred inflation gauge – that's something called the core Personal Consumption Expenditures ("PCE") Index, which conveniently doesn't include food and energy prices – a lot of other people and government agencies, including the Fed, use or consider CPI figures to set policy.

The Social Security Administration uses a subset of the CPI to determine its annual Cost-of-Living Adjustment... And CPI is also used indirectly to determine today's "real" interest rate – which is inflation minus nominal rates, typically those of U.S. Treasury yields.

And that number tends to inform a lot of other decisions from professional investors, like whether they think it's worth buying certain stocks, bonds, or other assets like gold. They're watching how high inflation is running and weighing how much these other assets would potentially yield over safe, "risk free" government-backed bonds.

This is the concept you'll often hear described as the "discount rate." As Stansberry Research senior analyst Alan Gula wrote in the latest monthly issues of our Portfolio Solutions products, published on Tuesday...

The intrinsic value of a company is the present value of future free cash flows. And the rate used to discount those cash flows is determined by the bond market.

Even gold is dependent on interest rates via real yields.

Since March 2020, real interest rates had been in negative territory. But early last month, they turned positive again, as the CPI slowed a bit from April and the Fed's short-term lending rates – which correlate closely with short-term Treasury yields – rose.

As Alan said...

There are a few different ways to calculate real rates. I'll use expected inflation (or "breakevens") implied by Treasury inflation-protected securities ("TIPS"). TIPS are a special type of Treasury security that compensate holders for increases in the CPI. They're effectively indexed to inflation.

The next chart shows the 10-year Treasury rate and the 10-year real yield. You can see the dramatic rise in 10-year Treasury rates since late 2020. This rate increase has caused big losses for any portfolio with a lot of interest-rate risk (or "duration").

There has also been a rapid rise in real yields similar to the "taper tantrum" in 2013... This increase in real yields is one reason why gold hasn't performed as well as many investors had expected in an inflationary environment.

So, that's just one knock-on effect of CPI data... one that filters through to the bond market and into everything else...

The biggest deal might be what the Fed does with this data...

The central bank – which dictates monetary policy – insists its top priority is fighting inflation... however it can. That's usually by raising interest rates and making dollars more expensive.

As we've written before, it's critical to understand what the Fed can and cannot influence the most. It has an outsized influence on the housing market, for example, as mortgage rates track the direction of Fed short-term rates closely...

We've seen that already, with the average interest rate on a 30-year fixed-rate mortgage at 5.2% as of today, up from near 3% this time last year. That's a 73% increase... and it's having a real impact...

Because of more expensive loans, mortgage demand dropped to its lowest level in 22 years just last week, according to the Mortgage Bankers Association ("MBA"). As Stansberry NewsWire analyst Daniel Smoot reported yesterday...

Last week, mortgage applications to purchase a home fell 6.5% compared with the week prior. The MBA added that applications to refinance a home loan also declined 6% for the week – and were 75% lower versus the same period last year.

Talk about a congruent data point. Interest rates are up 73% year over year... and refinances are down 75%. That's the power of the Fed. And, of course, what happens in the housing market filters through basically every other sector of the economy.

But the Fed can't do much – and definitely not as directly – about skyrocketing oil and gasoline prices. (Maybe that's why it uses "core PCE" as its preferred inflation gauge, which doesn't account for them...) If the Fed could control those things, it would.

In any case, we'll learn more details about the Fed's next moves on Wednesday, when the central bank makes its latest policy decision and Fed Chair Jerome Powell holds another press conference to try to explain it...

Because it will matter for stocks, bonds, and plenty of other assets with dollar signs attached to them.

Here's what the pros expect to happen...

Much like looking at odds-on favorites to win sporting events, you can see the consensus among pro traders about what they expect the Fed to do...

According to the FedWatch Tool from foreign-exchange company CME Group (CME) – which takes into account the prices of Fed futures contracts – traders are betting with a 92% probability that the Fed will raise its benchmark lending rates by another 0.5% next week...

And then they think there's an almost 80% chance they'll do the same thing at the next Fed policy meeting in July, which would put the benchmark lending rate at 2%. From there, bets are a bit more mixed...

Traders are currently baking in a 60% chance of another 0.5% rate hike at the Fed's mid-September meeting... and roughly 50-50 odds for a 0.25% rise in its final two meetings to end the year, putting the consensus view at a benchmark rate of 3% at year-end.

What the "official" inflation numbers say over the next several months will have a lot to do with what happens...

Listen, we can lay blame at the feet of the Fed for being late to the inflation party and letting prices run wild probably six months too long, but we still listen when Powell tells the market about the central bank's plans moving ahead. For better or worse, it matters.

Last month, here's what the guy in charge of a nearly $9 trillion government balance sheet said...

Expectations are that we'll start to see inflation flattening out...

We've seen some evidence that core PCE inflation is perhaps either reaching a peak or flattening out. We'll want to know more than just some evidence. We'll want to really feel like we're making some progress there...

I just think we want to see that information as we get there. It's a very difficult environment to try to give forward guidance 60 or 90 days in advance. There are just so many things that can happen in the economy and around the world.

We're leaving ourselves room to look at the data and make a decision as we get there.

The most recent gas- and food-less core PCE year-over-year number came in at 4.9% for April, down from 5.2% in March and 5.3% in February. Core PCE also grew slightly (by 0.3%) from March 2022 to April 2022.

This shows inflation's gains are slowing – and may have peaked – compared with this same time last year but that prices are still rising. (Of course, the constant devaluation of dollars in the economy means there's always some inflation, but we digress...)

At the same time, economic growth and expectations are still slowing...

The Atlanta Fed's GDPNow estimate for the second quarter fell again this week, to 0.9%... And investors are expecting the Fed to say it's going to keep raising interest rates to fight inflation...

I can't stress this point enough... Interest rates are rising – dollars are getting more "expensive," relatively speaking – while economic growth is slowing. We just haven't seen this very often...

The question is how much inflation we have... and for how long... and whether the economy tips into a full-blown recession because of it and what the Fed does. The answer depends a lot on what inflation looks like today, tomorrow, and every day for the rest of the year.

All in all, we'll be watching tomorrow morning to see the latest inflation numbers. They will tell us how much more people are paying for goods compared with last month, and at what rate prices are going up versus this time last year...

Or at least we'll get a good approximation of these trends...

Then, early next week, we'll look at a similar set of numbers for what producers are paying for materials. And a day later, it'll be time to watch the Fed again to see what those string-pullers think about all of this.

We'll keep you posted on what happens... and what it means...

If you're interested in what we said today at all, I have just one recommendation for you...

To get analysis in your inbox almost immediately after the inflation numbers publish, be sure you're signed up to receive our 100%-free Stansberry NewsWire service, headed by editor C. Scott Garliss, who I quoted today. He'll have the latest update posted soon after the news breaks. You can subscribe here.

And, as always, Scott and his team of analysts will post updates throughout the day on the other numbers and news moving the markets, beyond this one story. I said a few weeks ago sometimes I don't know how it's humanly possible that they cover as much as they do.

But we're glad they do, and we hear from subscribers who are, too... Seriously, if you don't follow this resource, which is totally free, you're missing out on keeping tabs on the markets... in between Digests, of course.

Then tomorrow in this space, Dan will be back in his usual Friday slot... Over the weekend, stay tuned for a pair of Masters Series essays from our colleague Joel Litman, founder of our corporate affiliate Altimetry... and I'll be back with you on Monday...

The Fed Put Is Simply Not Here

"The Fed put is not here," says Alfonso Peccatiello, author of the Macro Compass newsletter. In an interview with our editor-at-large Daniela Cambone, Alf details the contrary reality – what the Fed is doing to slow the economy...

Click here to watch this video right now... And for more videos and podcasts from Daniela, Matt McCall, Dan Ferris, and the Stansberry Research team, be sure to visit the "Media" page on StansberryResearch.com.

New 52-week highs (as of 6/8/22): Black Stone Minerals (BSM), ProShares Ultra Oil & Gas Fund (DIG), Suncor Energy (SU), United States Commodity Index Fund (USCI), and Energy Select Sector SPDR Fund (XLE).

In today's mailbag, more feedback on drought in California... and a thought on rising credit-card spending, which we wrote about yesterday... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Mike K. suggested we build more dams in California. Wouldn't do much good considering we can't even fill the reservoirs we have most years. [I'm a] 68-year resident of California." – Paid-up subscriber Brad C.

"I believe you have to take into account that fewer vendors are allowing customers to pay with cash, forcing the consumer to use credit cards." – Paid-up subscriber Tom K.

All the best,

Corey McLaughlin
Baltimore, Maryland
June 9, 2022