The rhetoric was the same after today’s meeting of the Federal Reserve’s Open Market Committee: “Inflation has risen, largely reflecting transitory factors.” But the Dot Plot that tracks projections by the committee’s 18 members told a very different story: There’s more reason to expect an earlier increase in interest rates than back in March.
The Fed edges closer to losing control over the inflation narrative ahead of tomorrow’s Open Market Committee meeting
The Federal Reserve is facing a “can’t win” situation on inflation as chair Jerome Powell prepares his post-meeting statement for tomorrow.
Retail sales fell by 1.3% in May from April, the Commerce Department reported this morning. Economists surveyed by Bloomberg had projected a 0.8% month over month drop. The month to month drop in retail sales was the first drop in month to month sales since February. Retail sales still grew a very solid 23% year over year as the economy continued its recovery from the pandemic recession of 2020.
Today, Monday June 14, JPMorgan Chase (JPM) CEO Jamie Dimon said that the bank is holding around $500 billion in cash in order to benefit from higher interest rates. Dimon told a Morgan Stanley virtual conference that he expects rising inflation will result in higher interest rates over the next 9 months.
Yesterday the Standard & Poor’s 500 hit its first new all-time high since early May as investors and traders bought into the reassurance from the Federal Reserve that the 5% year over year increase in the Consumer Price Index was merely a temporary jump in inflation. Today, with the weekend immediately ahead and the June 16 meeting of the Fed’s interest-rate setting Open Market Committee looming on Wednesday, June 16, nobody wanted to get much further ahead of actual news from the central bank.
Prices rise by at 5% year over year rate in May, market continues to buy Fed argument that inflation is temporary
Inflation, as measured by the Consumer Price Index (CPI), rose by 5 percent in May from May 2020. That’s the fastest rate of increase since the Great Recession that followed on the Global Financial Crisis. Both the Federal Reserve and the Biden White House continue to say that the recent high rate of inflation is only temporary and that the rate will all as companies work glitches out of their supply chains and recalculate post-pandemic consumer demand. Today the stock market agreed with that view. At the close the Standard & Poor’s 500 was up 0.47% and the Dow Jones Industrial Average had gained 0.06%. The NASDAQ Composite was ahead 0.78% and the BIG TECH heavy NASDAQ 100 was higher by 1.05%. The small cap Russell 200 was off 0.68%. The locus of the biggest price increases does support the Fed’s view.
I expect Treasury Secretary Janet Yellen’s 3% inflation in 2021 comment to keep the market in a relatively tight trading range this week as we approach the June 16 meeting of the Federal Reserve’s rate-setting body, the Open Market Committee. After the end of the meeting of G7 finance ministers, Yellen noted that the Biden administration’s spending plans plus an anticipated recovery from the depths of the pandemic recession could produce an inflation rate of 3% in 2021 That would be above the 2% inflation target at the Fed. The Federal Reserve’s current inflation stance is that a “temporary” increase in inflation to above that 2% target would be okay since it would help balance out years of sub-2% inflation and since it would be temporary. Yellen’s take on a potential 3% rate is in line with the Fed’s approach. The rise in inflation will be temporary and its a result of a rebound from falling prices during the pandemic recession in 2020 (and severe glitches in the supply chain for everything from computer chips to oat like to tin.)The two big questions for the next 10 days are 1. Will the financial markets continue to believe the Fed/Yellen “it’s temporary” take on inflation? 2. Will the Fed change its language on inflation and its projections for inflation at the June 16 meeting, which is due to produce an update of the Fed’s projections on things like GDP growth, employment, and inflation?
Special Report 5 Picks and 5 Hedges for a Falling Market–Thank you market for one more (#2) cheap hedge and one more (#4) stock pick
Today’s installment includes one hedge (on the ViX) and one stock pick (Lam Research.) Now if you’ve been following along with the logic that I’ve laid out in this Special Report, you know that stocks face months of potential volatility around the Fed’s June 16 meeting (What will the Fed say about ending its $120 billion in monthly bond purchases?), the August global central bankers confab in Jackson Hole (Will the Fed use the occasion, as it has done in the past, to indicate a coming change in interest rate policy?), the Fed’s September 22 meeting (Will the Fed be content to say nothing with the next “important” meeting not until December?) and then the central bank’s December 15 meeting.) That’s a large number of occasions that could set the stock market to worrying again. And then, of course, there’s OPEC and the price of oil, the battle over the recently announced Biden budget, the continued logjam on infrastructure spending, and fact that the pandemic is still running at full speed in countries such as India (and who knows what the return of cold weather and forced winter “togetherness” will do to infection rates in the developed economies of the northern hemisphere.) At 16.74 on the VIX, you don’t need a panic to produce a profit on higher volatility. The VIX was at 22.18 on May 19. And then there are the even higher VIX levels of 27.59 on May 12, 28.57 on Marcy 4, and 28.89 on February 25.
Inflation as measured by the Personal Consumption Expenditures index, the Federal Reserve’s preferred inflation gauge, rose at a year over year rate of 3.6% in April. Prices rose 0.6% in April from March, the Bureau of Economic Analysis announced this morning. The inflation rate was in line with projections from economists ahead of the data. The Federal Reserve has been arguing that the inflation spike to well above the central bank’s 2% inflation target is only temporary, a result of the collapse of prices a year ago during the quick but deep pandemic recession and glitches in the supply chain as the economy regains speed. For the day, at least, the financial markets agreed.
Gold closed up today, May 24, by 0.27% to $1884.00 an ounce for August delivery on the COMEX. That took the metal to its highest price since its January 5 high for 2021 at $1954. The rally in gold from a March 8 low at $1678 an ounce, has not only brought gold near breakeven for 2021, but is pressing against resistance near $1900 an ounce. Gold has posted three straight weekly gains. No secret what’s been driving gold higher: fears of rising inflation.
This week financial markets will be focused on Friday’s release personal consumption expenditures (PCE) index for April on Friday by the Bureau of Economic Analysis will release. The PCE is the Federal Reserve’s preferred inflation gage. It tends to run a bit lower than the Consumer Price Index which slowed inflation running at a 4.2% annual rate in April. Economists surveyed by Bloomberg are expecting that the PCE will show a 3.5% year over year increase in inflation. That would be the biggest increase since 2008. It would also be a huge acceleration from the 2.3% year over year increases recorded in March. On a month-over-month basis, the PCE likely increased by 0.6%. That would be a slight increase from the 0.5% month-over-month increase in March.
The Wall Street adage “Sell in May and go away” looks to be spot on this year. At the close yesterday on May 18, the Invesco QQQ Trust ETF (QQQ), which tracks the NASDAQ 100, was still p 2.83% for 2021, but down 2.96% for the last three months and off 5.79% for the last month. But the full saying in its original form runs “Sell in May and go away; Don’t come back until St. Leger’s Day.” St. Leger’s Day marked the running of the third race in the British Triple Crown, which took place in September. The advice was to sell ahead of the quiet summer London social season. The adage as I learned it (not in England between the wars, mind you, since I’m not either that old or that patrician) advised to “Buy on NEA,” the big technology and venture capital conference usually held in November. That seasonal timing strategy let investors reap the gains from, historically, the six best months of the yer (November through April) and avoid the sluggish performance of May through October. From 1950 through 2019 the November through April period of each year saw the Standard & Poor’s 500 gain 2283.7 points, according to calculations by Jeffrey Hirsch in the Stock Trader’s Almanach. That’s against gains of just 610.79 points in the worst six months during that period. But this year? When should an investor or trader who has sold in May think about coming back?