I expect that all eyes will be on the July CPI inflation (Consumer Price Index) report due on Wednesday, August 10, before the market open. The market hope is that we’ll see the first signs that inflation has peaked after the headline CPI inflation surged at a 9.1% annual rate in June.
Credit card debt rose in the United States from April through June by $46 billion, a 5.5% increase over the first quarter, as Americans borrowed billions of dollars to continue spending, according to a report on Tuesday, August 2, from the Federal Reserve Bank of New York. The increase of 13% from the second quarter of 2021 to the second quarter of 2022 was the biggest jump in more than 20 years.
This afternoon the Federal Reserve raised its benchmark interest rate by 75 basis points to a range of 2.25% to 2.50%. It was the second straight 75 basis don’t increase and the fourth increase in interest rates this year. Stocks soared. The Standard & Poor’s 500 closed up 2.62% and the Dow Jones Industrial Average ended up 1.37%. The NASDAQ Composite gained 4.06 and the NASDAQ 100 finished ahead by 4.26%. The small-cap Russell 2000 added 2.39% at the close. And why? you might well ask. Let me posit three reasons.
This is the way interest rate increases from the Federal Reserve work: Higher rates hit the housing market first as mortgages get more expensive and buyers figure they’ve been priced out of the market–for this cycle.
And that’s exactly what we’re seeing in the housing market right now. On Thursday D.R. Horton (DHI), the largest U.S. homebuilder, reported that in its most recent quarter cancellations of orders for new homes climbed to their highest level in three years. The company said its cancellation rate in its most recent quarter was 24%, up from 17% during the same quarter last year.
This week brings an interest rate decision from the Federal Reserve (75 basis point increase?), market reaction to the Russian attack on Ukraine’s major grain port, and earnings from Alphabet, Microsoft, Amazon, and Apple. Here’s my preview of what we might see–or at least what to look for–this week.
The dollar is likely to get another boost from the Bank of Japan and the European Central Bank this week. On Thursday, the European Central Bank is likely to report its first interest-rate increase in more than a decade. But the increase is likely to be just 25 basis points. That will be a stark reminder of how far behind the Federal Reserve, which raised interest rates 75 basis points in June and is expected to increase rates by another 75 basis points at its July 27 meeting. On Thursday the Bank of Japan is expected to keep its benchmark interest rates at its current low, low, low level.
My one-hundred-and-fifty-seventh YouTube video “Inflation isn’t about to get better” went up today. Yesterday, we had new CPI inflation numbers, and the bar keeps pushing higher with annual inflation reaching 9.1% in June. I think if you are making investing plans based on an expectation that inflation will be getting better soon, you’re flat out wrong. Here’s why: the Russian invasion of Ukraine continues to drive up commodity prices across the board, which will keep having a huge impact on inflation numbers. People are now expecting a 1% increase in interest rates from the Fed at the July meeting. The size of that move is an indication of exactly how difficult the Fed thinks it will be to get inflation under control.
After Wednesday’s report that CPI inflation hit an annual 9.1% rate in June, a 100-basis-point interest rate increase at the Federal Reserve’s July 27 meeting is on the table. (Which is literally what Atlanta Fed President Raphael Bostic told reporters yesterday: “Everything is in play,” he said. Asked if that included raising rates by a full percentage point, he replied, “It would mean everything.)
It’s not the kind of historical comparison you want to hear. Inflation, as measured by the Consumer Price Index (CPI rose at a 9.1% annual rate in June. That was the highest annual rate since November 1981. (Just as the Volcker Fed was raising interest rates to 14% to finally break inflation.) Economists had been expecting inflation of 8.8%. Which would still have been an increase from May’s 8.6% headline rate.
I expect a BIG week for inflation numbers. Investors and traders will get the June report on Consumer Price Index (CPI) inflation on Wednesday, July 13. The CPI isn’t the inflation index that the Federal Reserve tracks, but it is an indication of where inflation measures that the Fed does follow, such as the Personal Consumption Expenditures index are headed. The Fed next meets to set interest rates on Wednesday, July 27. The market is expecting the U.S. central bank to raise interest rates by 75 basis points at that meeting. On July 8, the CME’s FedWatch Tool put the odds of a 75 basis point increase at 93%. Economists surveyed by Bloomberg expect that headline CPI inflation–that is inflation that includes food and energy prices–climbed at a 9% rate in June. That would be above the 8.6% headline rate reported in May.
In my opinion, this was the most important statement in the minutes from the Federal Reserve’s June meeting released today: Fed officials “recognized that policy firming could slow the pace of economic growth for a time, but they saw the return of inflation to 2% as critical to achieving maximum employment on a sustained basis.” Nothing guaranteed but the Jerome Powell Fed, commonly regarded on Wall Street as having no stomach for a recession, was signaling that it would continue to increase interest rates until it brought inflation under control even at the cost of a recession. That’s important because the current market consensus is predicated on the Fed quickly backing off on interest rate increases face of a recession. Recession soon, perhaps this quarter or the next, but then interest rate cuts in early 2023, the current story goes.
The advice is sound, very sound. Move part (at least of your portfolio to cash and sit out the worst of this bear market on the sidelines. And since you have that cash in hand, you’ll be ready to snap up bargains when the market has put in a bottom (or near the bottom, or on the way up from the bottom…or something.) But right now that’s easier said than done.
