Stocks rose today, December 10, as a huge jump in CPI inflation exactly matched economists’ projections. As they say on the basketball court, “No surprise; no foul.” The Consumer Price Index (CPI) climbed at a 6.8% annual rate in November.
Tomorrow’s inflation report–the Consumer Price Index (CPI) flavor–has the potential to end the recent uptick in stocks and send prices back down and volatility back up. Right now economists surveyed by Bloomberg are expecting a year over year increase in inflation of 6.8% in November.
Expect the the debate to go on. Are we seeing a top for this extraordinary rally? Are stocks headed to their first correction since dinosaurs walked the earth? (Actually stocks had their last 10% correction in February 2020 but almost nobody remembers because it didn’t last very long and soon stocks were on their way to infinity and beyond.) And will this correction be led by technology stocks, the stars of the last rally? Or is the huge and very quick drop in technology stocks and the smaller but still significant fall in a wider index such as the Standard and Poor’s 500 merely a rotation from one sector into another? For the record, as of the close on Friday, December 3, the S&P 500 was down 3.47% from its November 24 high. The NASDAQ Composite, with its heavier weighting in technology, was down 6.05% from its November 11 high.
Federal Reserve Chair Jerome Powell retired the word “transitory” to describe stubbornly high inflation in testimony today in front of the Senate Banking Committee. And, Powell continued, the Fed might accelerate the pace at which it is winding down its purchase of Treasuries and mortgage-backed assets. “It is appropriate, I think, for us to discuss at our next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier.” The Fed is currently scheduled to complete its asset-purchase program in mid-2022
This morning President Joe Biden announced that he will renominate Jerome Powell to another four-year term as chairman of the Federal Reserve. Wall Street sounds like it’s generally happy with the move–continuity is usually seen as good by the financial markets–although bond yields are up as of 2:30 p.m. this afternoon with the 10-year Treasury yield climbing to 1.62%, a gain of 7 basis points. That’s a reflection, in my opinion, of a little bond market disappointment that Biden didn’t nominate Lael Brainard to replace Powell, She was seen as more likely to hold interest rates lower for longer than Powell. Powell’s nomination faces opposition from progressive Democrats who don’t like the financial deregulation that has continued during his term or who don’t think the U.S. central has done enough on global warming. Powell also faces opposition from conservative Republicans because they believe the Fed should be moving faster to stomp on inflation. My view is a little different than either Democratic or Republican objections. I think that if Biden had been more confident of the economy recovery he would have nominated Brainard. That would have put a Biden stamp on the U.S. central bank.
I’m look for a test of the Friday’s rotation into technology stocks and away from anything that depends on economies remaining relatively free of Pandemic restrictions. On Friday, the winners were technology shares–Apple, Amazon, Tesla, Nvidia, for example–that have in the past been able to show revenue and earnings growth despite any economic slowdown resulting from Covid shutdowns. And the losers were the stocks of companies–such as Six Flags, United Airlines, Macy’s, for example, that depend on the continued recovery in economic activity. The immediate impetus for this sentiment came from news that Austria would impose Pandemic economic lockdowns–again–in an effort to slow soaring rates of infection. The believe is that Germany, the Netherlands, France, and the United Kingdom aren’t far behind. And the fear is that the United States will follow some time this winter. Add that to worries of elevated and rising inflation–where technology companies are seen as one of the few sectors able to outgrow inflation–and you’ve got significant sentiment to push technology shares higher. Logically.
On November 15 in my post on what’s priced in and what’s not, I noted that an upsurge in Covid infections this winter wasn’t priced in. And that evidence of a new wave from Europe where infection rates have headed higher in what might be a preview for the winter in the United States could send stock prices lower. Well, yes indeedy. That exactly what happened today after the Austrian government announced a full lockdown starting on Monday, in response to surging cases of COVID-19. The lockdown will include both those vaccinated and unvaccinated, it will last for 10 days minimum, but could be extended for 10 days further. The fear is that Germany, which is battling its own higher rates of infection, is next.
With stocks trading at record highs, I’d argue that nothing is as important as what “news” is priced in–or not. If stocks have priced in all the likely good news, then there’s much less to drive prices higher–and much more expansive possibilities for drops on disappointments. If there’s likely good news that’s not yet priced in, then stocks have potential fuel to move high. And, on the other hand, if bad news is priced in and fails to materialize, then, hey, we’re going higher from here. And if bad news isn’t priced in, then current record prices aren’t sustainable.
I don’t care how you want to frame the number, yesterday’s (November 10) report that consumer inflation (as measured by the Consumer Price Index) rose at a 6.2% annualized rate in October was shockingly high. The number is the kind of shock that can derail a rally or reverse a prevailing upward trend. So far, though, the market action says the upward trend through the end of the year is intact.
China’s factory-gate prices, the Chinese equivalent of the U.S. Producer Price Index, grew at the fastest pace in 26 years in October. Factory inflation climbed 13.5% year over year, the National Bureau of Statistics reported Wednesday.(Economimsts had projected a 12.3% year over year increase.) Raw material costs continued to soar, with signs that producers are passing on higher costs to consumers. China’s consumer inflation rose by 1.5% in October, the fastest pace since September 20202.
After today’s meeting of the Federal Reserve’s Open Market Committee the U.S. central bank said it would start slowing the pace of its monthly $120 billion in asset purchases this month. The slowdown would take place at a rate of $15 billion a month, which implies an end to the program by the middle of 2022.
Consumers’ holiday spending intentions are a tad lower than in 2020, according to the latest survey from the Conference Board. On average, consumers intend to spend $648 on gifts this holiday season, according to the survey. That’s down from $673 in 2020. But it still leaves gift budgets at historically high levels.
