Inflation is up, stocks are down. And bulls are worried that the Fed may finally “sound the alarm.”
It was another rough morning for investors as all three major indexes endured significant losses. The tech-heavy Nasdaq Composite led the way, driven lower by rising Treasury yields. The 10-year rate resumed its uptrend by eclipsing 1.68% shortly before noon.
Now, it’s just a short distance from the yearly high at 1.74%.
And all over Wall Street, analysts reacted to a massive spike in the Consumer Price Index (CPI). Inflation accelerated 0.8% month-over-month – the highest monthly increase since 1981 – and 4.2% year-over-year.
Economists expected just a 0.2% month-over-month CPI increase by comparison.
“The question remains as to if it is transitory or not, the base effect, i.e. the rebound due solely to last year’s deflation is about 70% of the number printed today,” said Michael Mullaney, director of global markets research at Boston Partners.
“If it is not transitory, then that high of a print breaches the 3.5% limit to where P/E multiples get hit (contract). It will be good for value and bad for growth, especially if it feeds into a higher interest-rate structure.”
Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell have insisted in the past that any jump in inflation would be transitory (or temporary). CFRA Research chief investment strategist Sam Stovall believes that investors may need an update from the Fed before they start buying again.
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“Powell does need to come out and give a confidence boost to remind investors that ‘No, we still think this is transitory and we don’t think this is going to be the beginning of a new sharply higher trend,’” Stovall explained.
“Maybe the Fed also says that this is going to be the high point and all subsequent readings will be on the leeward side of this CPI mountain.”
Neither Powell nor Yellen have released any comments on today’s landmark CPI print. Don’t forget that the last time Yellen spoke about rates, stocks sharply sold off before she recanted her initial statement, encouraging equities to recover in a series of wild intra-day moves.
Will Powell attempt to “right the ship,” too?
If he does, investors may not believe what Powell has to say. Recent trading activity in bonds, swaps, and money markets indicates that the inflation spike is anything but transitory.
DoubleLine’s Jeff Gundlach perhaps put it best when he said:
“It’s not clear to me that inflation is going to go back down to around 2 to 2.5%. We don’t know, nobody knows […] but we’re most concerned with the fact that the Fed thinks they know.”
Surely, Powell & Co. understand the weight of what’s happening. It depends on when (not if) they reveal their inflation worries to the public.
Powell isn’t expected to tip his hand following Yellen’s gaffe. But when he does, look out below.
Because not even stubborn Dow components will be able to avoid a rate-induced sell-off, all while growth stocks (primarily tech) drag down the broader market, kicking and screaming.