Thoughts From Last Week 10-17-2022

Damon Walker, AIF | October 17, 2022

A message from Edge Investment Solution's Damon Walker:

Thoughts From Last Week

For the Fed, September's CPI report, combined with hotter-than-expected PPI and a strong September Jobs report, gives them little reason to deviate from their hawkish forward guidance on rate hikes.

Following a string of upside surprises, the September CPI report dashed hopes for a deceleration in inflation. Strong services inflation offset declines in core goods and energy prices, with Core CPI inflation jumping 0.6% m/m and 6.6% y/y. Wage inflation and resilient demand have contributed to strong services inflation, while the lagged effect of rising rents continues to propel owners' equivalent rent higher. However, the report was not all bad news for investors as disinflationary forces are still contributing to a slowdown in core goods inflation. Softer commodity prices, lower shipping costs and improved supply chains should continue to reduce inflation pressure across a range of goods over the coming months. Importantly, the inventory crunch experienced last year has also reversed. Strong stockpiling in the first half of the year has allowed retail inventories to recover beyond pre-pandemic levels, while retail sales have flat-lined. While this may spell trouble for GDP growth as consumer spending and inventory spending are likely to be very modest going forward, it is good news for inflation as it relieves some of the upward pressure on goods’ prices.

For the Fed, the September CPI report, combined with hotter-than-expected wholesale price inflation (PPI) and a strong September Jobs report, gives them little reason to deviate from their recent hawkish forward guidance on rate hikes. We continue to expect the Fed to raise interest rates by 0.75% next month, followed by another 0.50% increase in December. Thereafter, while we may not hear the Fed talk about policy easing for some time, a shift to smaller hikes and then a pause may not be too far off if disinflationary forces continue to weigh more heavily on the data.

Source: Census Bureau, J.P. Morgan Asset Management.