FED rate expectations and inflation data whipped the markets down and then back up to finish last week. Both will continue to dominate the market narrative until we get signs that the FED is seeing inflation calm down.
On Wednesday the CPI (consumer price index) was released and printed at 9.1% higher over the past 12 months. The key word here is “past.” The CPI is not a real-time representation of what is happening. Nevertheless, one FED official (Raphael Bostic) commented after the CPI report that a 1% rate hike is “on the table” for the FED meeting next week. The market went negatively nuts when it read Bostic’s remark. Then on Thursday a high PPI (producer price index) report showed further rear view looking data that was also inflationary and this seemed to solidify a 1% rate hike for next week would be the likely case and the market once again responded negatively for part of the day. Then the tide turned again on comment from FED Governor Chris Waller. The report noted that Bostic’s comments are his comments, but that Bostic is not a voting member of the Board. Waller (a voting member) stated that “a 1% rate hike is kind of getting ahead of itself.” The market turned the declines and the markets reversed for part of day on Thursday and a full day of green on Friday. On top of the Waller comments FED Governor Mary Daly stated, “we see inflation decreasing, the Michigan Consumer report on inflation is a positive thing, recession is not on my list of possible outcomes.” In short, the market is responding to headlines but at least 2 FED Governors (above) have stated that inflation is improving and as such, rate hikes suggest being measured rather than increasing beyond original expectations set at last month’s FED meeting. The markets liked the later commentary from FED Governors.
Rearview Headline CPI & PPI data is 30 days old. The CPI report +9.1% was increased by 3.0% due to energy (32% of the 9.1%). When crude oil is drawn to the surface it must be taken to storage tanks at a refinery, then the refinery draws from the tanks to turn the crude oil into as many as 9 different end products. One of those products is gasoline for our transportation. That gasoline must be loaded onto rail, trucks, pipes and then ultimately delivered to gas stations. That process takes 30 – 90 days to unfold. A broadly reported measure of how much crude oil costs is using the WTI index (west Texas intermediary crude). On 3/8/22 because of the Russian invasion of Ukraine WTI topped out at $119.65/barrel. Then the summer driving season, which always pushes prices up, arrived and they bounced down and up thru 6/8/22 peaking at $119.86/barrel. Hence the high CPI report. Now the real time data that is NOT in those CPI reports. WTI is now at $101.84/barrel. An $18.02 or 15% drop in price. This data will not factor into CPI until next month, but it will take 30 – 90 days to have its full impact purely because of how long it takes to draw crude from the ground and deliver it to pumps. Pump prices are falling, and this will drop the CPI. This data (along with other falling commodity prices…and there are lots of them shown in prior Market Moments) will lower the CPI reading. Gasoline futures are trading at pre-Russian invasion prices right now. A lower CPI reading is a significant piece of the data used by the FED to determine its interest rate policy. The rate policy should show signs of more clarity and a slowing of increases and some indications of ceasing the rate hikes. The financial markets will respond favorably to this clarity on rates as they did Thursday afternoon and all day Friday.
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