Some investors think the Fed should disregard that hot inflation print: Morning Brief

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Friday, October 14, 2022

Today's newsletter is by Julie Hyman, anchor and correspondent at Yahoo Finance. Follow Julie on Twitter @juleshyman. Read this and more market news on the go with Yahoo Finance App.

Inflation came in red-hot again on Thursday, meaning the Federal Reserve will almost certainly raise interest rates by at least 75 basis points at its next meeting, and possibly also in December.

That’s now the base case from Wall Street after the core consumer inflation reading Thursday showed the biggest year-over-year increase since 1982 in September.

But a growing chorus of investors says the Fed should not base its rate hike decisions on lagging indicators like the Consumer Price Index (CPI) and the unemployment rate. Instead, these investors say, the Fed should heed forward-looking indicators such as the prices of commodities like gold, which show easing inflation.

“The CPI that we got is a lagging indicator. It always is a lagging indicator," Ark Invest founder and CEO Cathie Wood told Yahoo Finance on Thursday. "And we’re seeing a lot of prices in the pipeline that are falling."

MIAMI, FLORIDA - APRIL 7: Cathie Wood, chief executive officer and chief investment officer, Ark Invest, gestures as she speaks during the Bitcoin 2022 Conference at Miami Beach Convention Center on April 7, 2022 in Miami, Florida. The world's largest bitcoin conference runs from April 6-9, expecting over 30,000 people in attendance and over 7 million live stream viewers worldwide.(Photo by Marco Bello/Getty Images) — Cathie Wood, chief executive officer and chief investment officer, Ark Invest, gestures as she speaks during the Bitcoin 2022 Conference at Miami Beach Convention Center on April 7, 2022 in Miami, Florida.(Photo by Marco Bello/Getty Images) (Marco Bello via Getty Images)

While Wood made her name by betting on innovative investments like Tesla (TSLA) and bitcoin (BTC), she has a background in macroeconomic analysis. She thinks the Fed is on the wrong track.

This week, the maverick investor wrote an open letter to the Fed flagging her concern that the central bank is making a “policy error” by raising rates. The Fed aims to ease inflation, but she contends that its actions might overshoot and spur deflation.

Michael Darda, chief economist and chief strategist at MKM Partners, also cautions the Fed against continuing down its hawkish path.

“They are on the cusp of going too far, and way too fast,” he told Yahoo Finance Live. “They should really be slowing down the pace of hikes now, not reacting, in a panicky fashion, to deeply lagging indicators. That is a prescription for an accident.”

Of the various lagging indicators, Darda says rent can dawdle more than others.

“Sticky core inflation measures like rents will tend to follow the economy by five quarters,” he said. “That means the strength here could simply be a reflection of how the economy was doing 15 months ago.”

And what are the forward-looking inflation indicators we should watch?

Both Wood and Darda point to the drop in commodity prices, with Wood flagging the decline in gold in particular as a good proxy for inflation. “Gold is a leading indicator of inflation,” she said. “And it has not broken out. It is breaking down.”

Also breaking down: used car prices. Plus, corporations from retailers (Nike) to chipmakers (Micron, Intel), which lacked supply during the pandemic, now regularly report a glut of inventory.

“Everything that has been on the front edge of the boom in the inflation process has rolled over very sharply and yet the Fed is acting in an aggressive manner, looking in the rearview mirror,” Darda said.

He’s not optimistic that the Fed’s backward-looking hawkishness will change anytime soon. So even though consumers might see lower prices, investors won’t get relief from the Fed until lagging indicators catch up.

All of this said, stocks showed incredible resilience in the face of the hot inflation report. Yahoo Finance's Jared Blikre wrote about what that means.

What to Watch Today

Economy

8:30 a.m. ET: Retail Sales Advance, month-over-month, September (0.2% expected, 0.3% during prior month)
8:30 a.m. ET: Retail Sales excluding autos, month-over-month, September (-0.1% expected, -0.3% during prior month)
8:30 a.m. ET: Retail Sales excluding autos and gas, month-over-month, September (0.3% during prior month)
8:30 a.m. ET: Retail Sales Control Group, September (0.0% during prior month)
8:30 a.m. ET: Import Price Index, month-over-month, September (-1.1% expected, -1.0% during prior month)
8:30 a.m. ET: Import Price Index excluding petroleum, month-over-month, September (-0.2% during prior month)
8:30 a.m. ET: Import Price Index, year-over-year, September (7.8% during prior month)
8:30 a.m. ET: Export Price Index, month-over-month, September (-1.2% expected, -1.6% during prior month)
8:30 a.m. ET: Export Price Index, year-over-year, September (10.8% during prior month)
10:00 a.m. ET: Business Inventories, August (0.9% expected, 0.6% during prior reading)
10:00 a.m. ET: University of Michigan Consumer Sentiment, October preliminary (58.8 expected, 58.6 during prior month)