This Week's Inflation Numbers Won't Likely 'Save' The Market

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Most of you will see these articles in your inboxes Tuesday morning, a few minutes before the latest Consumer Price Inflation (CPI) numbers are released.

Last month, better-than-expected inflation numbers fueled a surge in stock prices before Fed Chair Powell poured cold water on the excitement of the bulls with his most hawkish speech of the year from Jackson Hole, as he disavowed any coming “Fed pivot.”

I don’t know how the stock market will react this time, given that the odds are better than even that we will get some good news on the inflation front. Yes, inflation may come in better-than-expected again, and it may even be flat or down, month over month, but core inflation is still near 6% while headline inflation is near 8.5% on a year-over-year basis. In other words, we are not out of the woods yet.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Powell wants core inflation (pictured above, using the left-hand scale) to be near 2%, so the present core rate is still triple his target. Unless there is some exogenous event, I don’t think we get to 2% inflation in the next 12 months, under normal circumstances.

I don’t know what that means for monetary policy, but I am of the opinion that the last few 75-basis point rate hikes are not reflected in the economic numbers yet. They may show up in 3-6 months, but that raises serious questions as to how fast the Fed is going with the rate hikes and whether the Fed might overly tighten monetary policy.

Prior to this cycle, the Fed funds rate had not surpassed the high from the prior Fed tightening cycle in the past 40 years. After the coming September 21st Fed funds rate hike, the present cycle would be above the high reached in the Fed funds rate in 2018.

This dynamic also caused the 10-year Treasury yield to do the same and not exceed the high from the prior rate hiking cycle until June, when we traded to 3.50%.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I think the Treasury market is at a crossroads. The 10-year rate closed on Friday at 3.32%. If economic statistics deteriorate, we may have already seen the high in Treasury yields.

The 2-10 spread has already been inverted for a while and the way the Fed is going the 3M-10Y spread will be inverted within a week, and this is the only measure of the yield curve that has not been inverted yet. This would indicate that monetary policy is very tight, and some deterioration in economic statistics is to be expected soon.

The U.S. Dollar is at an All-Time High

The primary reason why gold bullion has largely been unable to be a good hedge against the present surge in inflation is the exchange rate of the U.S. dollar, which at present is at an all-time high, when adjusted for trade flows.

The Nominal Broad Dollar Index, which is the latest index reformulation the Fed uses to calculate the trade-weighted value of the dollar, has been making fresh all-time highs in 2022, courtesy of the more aggressive Fed tightening cycle.

When the Fed tightening cycle ends, the dollar will likely top out, but before then we have yet to see the end of this rally. This is unlikely to happen before 2023.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The euro, a major component of this index, is likely not done falling. I have trouble seeing what is going to happen this winter in Europe with Russian gas flow being turned down, or off. The ECB will have to be hiking rates going into a recession in Europe, which typically does not produce any benign outcomes.

The euro likely has more downside, which means further gains for the dollar in 2022.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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