Janet Yellen Expects “Inflation to Remain High”

Treasury Secretary Janet Yellen

Stocks chopped every which way this morning as bulls reeled from an intraday reversal in the trading session prior. Yesterday, the market opened significantly higher before giving up most of its initial gains.

Analysts were concerned that additional selling would follow today.

And then, right before trading opened, Target (NYSE: TGT) released yet another stunning guidance revision, just a few weeks after the retailer previously announced reduced revenue projections. This time, though, Target warned shareholders that its current quarter profits are likely to miss estimates come next earnings season.

TGT shares plummeted as much as 9% in response.

“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest relevant with our assortment,” said Target CEO Brian Cornell in a CNBC interview.

Target cited the large number of goods that were set to hit the retailer’s clearance racks as the main cause for slimmed margins.

Cornell said that clearing out old inventory will make way for merchandise that has performed well recently, namely groceries, back-to-school supplies, and household essentials.

“We want to make sure that we continue to lean into those categories that are relevant today,” he added.

Target believes that already strong foot traffic and “a very resilient customer” will help the company get back on track. Many analysts agree that the American consumer remains strong despite rising inflation.

“I hear shifting spending, not stopping spending. So if you think about the past few years, you have had a move toward goods spending over services spending. That is now unwinding as we push further from the impact that Covid had on us,” said Brent Schutte from Northwestern Mutual Wealth Management.

Outside of retail, however, some stocks actually did quite well this morning. Tech shares advanced, led by Apple (NASDAQ: AAPL) as yields fell. The 10-year Treasury yield dipped below shortly before noon 3.00% after hitting 3.038% yesterday.

Growth stocks, which abhor high rates, enjoyed today’s pullback in long-term yields.

Wolfe Research’s Chris Senyek advised clients to not overly favor defensive stocks – ie, less rate-sensitive ones – as a result with yields expected to soften further.

“Overall positioning appears to be skewed only modestly toward defense. Our sense is that the shift toward non-cyclicals and high quality will accelerate as recession odds increase in the months ahead. That said, with many investors apparently trying to time recession, U.S. equity markets are likely to remain prone to big upside and downside rips,” Senyek said.

With Friday’s May Consumer Price Index (CPI) approaching, it’s unlikely that stocks will make any “big upside and downside rips” prior to the data release. A hotter-than-expected inflation report would likely dash bullish hopes, as it may force the Fed to lean more hawkish than the market anticipated.

US Treasury Secretary Janet Yellen made investors nervous with her remarks on inflation earlier today in a Senate Finance Committee hearing.

“I do expect inflation to remain high,” Yellen said.

“Although, I very much hope that it will be coming down now.”

Maybe Yellen’s “hopes and dreams” approach will work. Maybe inflation will just subside on its own as a recession hits.

We’ll find out whether that’s beginning to materialize this Friday. Until then, expect additional choppiness from the major indexes.


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