The Fed has no choice but to punish the stock market: Morning Brief
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Monday, July 25, 2022
It cost me $58 to get my car cleaned on Saturday.
And before you pummel me on Twitter, no, this did not include a hand wax and a voucher for a free appetizer at the local steakhouse. This was just a straight wash with a shine-up of the interior and a tip.
As I drove away, I laughed knowing that the experience was going in the Morning Brief newsletter.
This wash followed my road trip to DC last week to cover the Goldman Sachs 10,000 Small Businesses Summit — where it cost Yahoo Finance $502.34 to put me up for a one-night stay in a zero-frills Hilton.
I had a bed, a TV, a bathroom, a place to sit, and paid separately for Wifi. No mints on the pillow or free water bottles — apparently the water bottles are for Hilton rewards members.
My takeaway from all this is that inflation remains out of control and is not being captured effectively in CPI/PPI releases. Which is a terrible state for the economy to be in if you are a stock market bull.
And I am not alone in sensing the unrelenting nature of this major economic headwind, either.
“I’ve really seen, watched, and experienced through the eyes of our clients the growing imprint of inflation on economic activity around the world,” Goldman Sachs chairman and CEO David Solomon told me at the aforementioned event. “And [inflation is] a big headwind. And so I think that headwind creates caution. I said this yesterday on my earnings call that inflation is deeply entrenched.”
When I look at the markets right now, investors appear to be forgetting this state of affairs.
The Nasdaq Composite and S&P 500 are up a hearty 7.3% and 4.5%, respectively, so far in July as traders place bets on a less hawkish Federal Reserve and no recession in 2023. Shares of meme stock darlings GameStop (GME) and AMC (AMC) have jumped 17% and 14.5%, respectively, so far this month.
Sure, the Fed isn’t likely to lift rates by 100 basis points this Wednesday, as was speculated a few weeks ago. But a 75 basis point rate hike this week is nothing to sneeze at — especially if it comes with a presser from Fed Chair Jerome Powell that strongly signals another 75 basis point increase at the Fed’s September meeting.
“We think the Fed judges that activity is resilient and remains focused on upside inflation risk management,” Evercore ISI strategist Krishna Guha wrote in a note to clients. “We expect something of a disconnect between the abruptly more optimistic tone in markets on the inflation outlook and the posture the Fed will take at the meeting.”
Guha adds: “We think Powell will strike a stern tone on recent price developments and – while acknowledging some more positive forward-looking developments – will pour cold water on the notion that we are anywhere close to accumulating clear and convincing evidence that inflation is moderating.”
Powell knows I am paying $58 for a basic car wash and $500 for a no frills stay at a Hilton. He knows folks like Solomon are saying inflation has become deeply entrenched.
And it doesn’t seem like these facts will move the Fed chair to change course.
All of which leaves me feeling like the market isn’t prepared for the medicine the Fed is poised to deliver.
What to Watch Today
8:30 a.m. ET: Chicago Fed national activity index, June (0.01 during prior month)
8:30 a.m. ET: Dallas Fed manufacturing business index, July (17.7 during prior month)