Stocks traded slightly higher this morning as the market’s recent choppiness continued. Dow companies enjoyed the largest gains while tech shares lagged as inflation concerns lingered among traders and institutions alike.
“We’re seeing major supply disruptions around the world that are also feeding inflationary pressures, which are quite high and financial risk taking also is increasing, which poses an additional risk to the outlook,” said International Monetary Fund (IMF) economist Gita Gopinath in a press release.
The IMF then went on to say that central banks (like the Federal Reserve) need to watch inflation closely and tighten monetary policy if it gets “too hot.” European Central Bank President Christine Lagarde formerly served as the managing director of the IMF.
She said in September that the ECB’s coming taper wasn’t going to be a form of monetary tightening. It was a convenient spin on the truth intended to keep European bulls happy. Now, the IMF is saying that Lagarde needs to get serious about tightening in response to rising inflation.
The jury’s out on whether she’ll take the IMF’s advice. Fed Chairman Jerome Powell certainly doesn’t seem interested in it, either.
Both the ECB and Fed had ample opportunity to prevent the coming inflationary surge earlier in the year. Had they started tapering much sooner, we wouldn’t have witnessed landmark increases in recent price index readings. The Consumer Price Index (CPI) cooled slightly last month, but the Producer Price Index (PPI) roared higher once more.
Eventually, those increased producer costs will be passed on to consumers. Corporations could alternatively “eat” those costs and let them slash into their bottom line, harming shareholders instead.
Investors will soon find out how damaging rising input costs truly were as the next batch of corporate earnings approach.
“There are a lot of headwinds out there as we embark on corporate earnings, and traders will be looking for any and all indications of guidance — especially as the threat of slower growth looms large,” explained E-Trade Financial’s managing director of trading, Chris Larkin.
This has caused Wall Street to revise its Q3 earnings predictions downward.
“Expectations for third quarter earnings have been coming down in recent weeks and that should create some room for upside surprises, which is good for overall market sentiment,” said UBS Private Wealth Management’s Rod von Lipsey.
On the other hand, if companies fall short of their reduced estimates, the resulting disappointment could set stocks up for a sharp correction.
Making matters worse is US crude oil, which remains elevated after weeks of consistent price gains.
“We’re definitely freaked out about crude oil prices […] [and] slightly higher interest rates,” said David Bailin, Citi Private Bank chief investment officer.
“But we have to put all of this in context. First of all, interest rates have been abnormally low. Energy prices are high due to excessive demand right now and delivery shortages across Europe and now in China […] These things will abate. We think it’ll take somewhere between three and nine months for energy supplies and for the shipping issues to abate.”
Between three and nine months? Does the stock market have that long before another crisis emerges?
Probably not. If rising crude prices and supply chain issues persist for even one more month, a much-feared economic slowdown could smash equities at a particularly bad time. Three more months would be potentially ruinous for bulls, especially if the Fed decides to actually taper asset purchases in November as Wall Street believes it will.