Don't Count on a Powell Pivot to Save Growth Assets

Maggie Fitzgerald and Tanaya Macheel of CNBC report the S&P 500 rises to record close Friday despite inflation fears, posts best week since February:

The S&P 500 closed at a record on Friday, capping off Wall Street’s strong rally this week, despite inflation hitting a 39-year high.

The S&P 500 rose 0.95% to 4,712.02 to close at a record. The 500-stock average sits 0.7% from its all-time high. The Dow Jones Industrial Average gained 216.30 points, or 0.6%, to 35,970.99. The technology-focused Nasdaq Composite climbed 0.7% to 15,630.60.

The Dow Jones Industrial Average rose 4% since Monday, snapping a 4-week losing streak. The 30-stock index had its best weekly performance since March. The S&P 500 and Nasdaq Composite added 3.8% and 3.6%, respectively, this week — the best since February for both indexes.

Inflation soared 6.8% year-over-year in November to highest rate since 1982, the Labor Department said Friday. The print came in slightly higher than the 6.7% Dow Jones estimate. The consumer price index, which measures the cost of a wide-ranging basket of goods, rose 0.8% for the month.

Core CPI, which excludes food and energy prices, rose 0.5% for the month and 4.9% from a year ago, in line with estimates.

Some investors may have been anticipating an even hotter inflation reading than economists, leading to a relief rally following the number. DoubleLine’s Jeffrey Gundlach said in a call this week he fears inflation could soon top 7%.

Friday’s CPI “number might show the most inflation in decades, but it still came in right about as expected. This is actually a good thing, as the market has priced in higher inflation, so this could be viewed as a relief,” said Ryan Detrick, chief market strategist at LPL Financial.

A bright spot of the CPI report was that increases in used cars, lodging, and airfares were all lower than expected, said Detrick. These areas have been stubbornly high and this could be one of the first signs that inflation could be nearing a peak, he added.

Investors are also wary that a high inflation reading could lead the Federal Reserve to hasten the taper of its $120-billion monthly bond-buying program.

Oracle shares soared 15.6% on Friday, a day after the company posted better-than-expected quarterly results.

Airlines ticked lower on Friday. Southwest Airlines dropped nearly 3.8% following another downgrade on Wall Street, this time from Goldman Sachs.

Interactive fitness company Peloton added to its woes, slipping about 5.4% after tumbling 11.3% on Thursday. Credit Suisse cut its view on the company, saying a return to gyms and shifts in consumer spending will weigh on profitability.

Jeff Cox of CNBC also reports inflation surged 6.8% in November, even more than expected, to fastest rate since 1982:

Inflation accelerated at its fastest pace since 1982 in November, the Labor Department said Friday, putting pressure on the economic recovery and raising the stakes for the Federal Reserve.

The consumer price index, which measures the cost of a wide-ranging basket of goods and services, rose 0.8% for the month, good for a 6.8% pace on a year over year basis and the fastest rate since June 1982.

Excluding food and energy prices, so-called core CPI was up 0.5% for the month and 4.9% from a year ago, which itself was the sharpest pickup since mid-1991.

The Dow Jones estimate was for a 6.7% annual gain for headline CPI and 4.9% for core.

Price increases came from familiar culprits.

Energy prices have risen 33.3% since November 2020, including a 3.5% surge in November. Gasoline alone is up 58.1%.

Food prices have jumped 6.1% over the year, while used car and truck prices, a major contributor to the inflation burst, are up 31.4%, following a 2.5% increase last month.

The Labor Department said the increases for the food and energy components were the fastest 12-month gains in at least 13 years.

Shelter costs, which comprise about one-third of the CPI, increased 3.8% on the year, the highest since 2007 as the housing crisis accelerated.

Markets reacted positively to the report, with stock indexes on Wall Street rising, while government bond yields moved lower. Some economists thought Friday’s report could indicate even sharper inflation of greater than 7% for the headline number.

Fed officials have attributed the inflation jump to factors associated with the pandemic. Strong consumer demand for goods and supply chain bottlenecks have been major factors, though the price increases have been stronger and more persistent than policymakers had anticipated.

“There’s no question no matter how you look at it, even if you take out the extremes caused by the pandemic, it’s still very high inflation,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. “This is still supply chain disruption, semiconductor-related inflation.”

Central bank officials have indicated that will begin slowing the help they’re providing in an effort to tamp down inflation. Investors widely expect the Fed to double the tapering of its asset purchases to $30 billion a month, likely starting in January. That would enable the Fed to start raising interest rates as soon as next spring.

Inflationary pressures have been hitting workers hard.

Though gross pay has increased 4.8% over the past year, real average hourly earnings accounting for inflation declined another 0.4% for November and are down 1.9% for the 12-month period, the Labor Department said in a separate release.

While much of the pandemic-era inflation has come from soaring demand for products such as vehicles and other long-lasting goods, services inflation also has been on the rise. Excluding energy, services costs rose 0.4% in November and are up 3.4% for the 12 months, the quickest annual pace April 2007.

Apparel costs also were notably higher for the month, rising 1.3% for the month and 5% for the year, ahead of the holiday shopping season.

Some economists, however, think inflation is near its peak, particularly with energy prices declining in recent weeks. While West Texas Intermediate oil is up more than 52% in 2021, the price has come down about 14% from its most recent peak in November.

With unemployment claims running at their lowest pace since 1969 and gross domestic product expected to show strong gains to end 2021 after a lackluster third quarter, inflation remains the biggest problem for the recovery.

President Joe Biden has been paying a political price for surging prices: A recent CNBC survey showed his approval rating stuck at just 41%, due in large part to 56% of respondents who disapprove of his economic record, compared to just 37% who approve.

Emily McCormick of Yahoo Finance also reports US inflation jumps 6.8% in November, the fastest rate in 39 years:

U.S. consumer prices rose at the fastest clip in nearly four decades last month, underscoring the persistently elevated inflationary pressures in the recovering economy. 

The Labor Department's Consumer Price Index (CPI) climbed by 6.8% in November compared to last year, marking the fastest annual increase since June 1982. This rate matched consensus economists' estimates, according to Bloomberg data, but accelerated compared to the 6.2% year-over-year rate from the prior month. 

Even excluding more volatile food and energy prices, the so-called core CPI rose by 4.9% over last year for the fastest increase in about three decades. 

On a month-over-month basis, the CPI rose 0.8% in November, coming in ahead of the 0.7% rise anticipated. This also marked an eighteenth straight month of advances in the index. And excluding food and energy prices, the month-over-month CPI rose 0.5%, matching estimates and coming down by just a tick compared to October’s 0.6% increase.

“Inflation is outpacing increases in household income and weighing heavily on consumer confidence, which is at a decade low," Greg McBride, chief financial analyst at Bankrate, wrote in an email on Friday. "It is only a matter of time before it impacts consumer spending in a material way.”

Contributions to the CPI last month were broad-based, though price increases in gasoline, shelter, food and both new and used vehicles were some of the largest contributors.

Energy prices overall were up 3.5% in November over October for sixth consecutive monthly gain, as increasing consumer mobility during the reopening pushed up both demand and prices for fuel and other energy products. Gas prices alone were up 6.1% to match October’s increase, and the gasoline price index was up about 58% over last year for its largest 12-month increase since 1980. 

Meanwhile, used car and truck prices rose at a 2.5% clip to mark a back-to-back monthly advance, and new vehicle prices gained 1.1% to build on October’s 1.4%. rise.

Grocery stores prices also increased further during the month, with an index tracking food at home gaining 0.8% in November over October. Over the past 12 months, this index gained 6.4%, marking the fastest increase since Dec. 2008.

For investors, the marked jumps in prices suggest the Federal Reserve may need to step in more swiftly and forcefully than previously anticipated to rein in inflation. In the past few weeks, rhetoric from key monetary policymakers has already turned more hawkish, with Fed Chair Jerome Powell saying it may be appropriate to speed up the central bank's asset-purchase tapering program in the face of rising price pressures and firming economic conditions. This program, which began at the height of the pandemic last year and only just began to be tapered last month, had served as one tool providing support to the virus-stricken U.S. economy. 

"Inflationary pressures are building in the economy and that is going to force the Fed’s hand," Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, wrote in an email on Friday. "Specifically, the Fed is going to have to increase the pace of their tapering plans – potentially reducing their buying twice as quickly, down by $30 billion/month instead of $15 billion/month – and then look to either balance sheet reduction (i.e., outright selling of bonds that they’ve already purchased) or interest rate hikes, in order to combat inflation."

"The economy continues to grow at an above average pace, but inflation is also increasing much more quickly than we have experienced in decades, so we are at an inflection point," he added. 

Inflation is still the big story, I just spent an hour listening to Francois Trahan of Trahan Macro Research who had a great call titled "US Equities Meet Stagflation in 2022."

Here is an executive summary of his call which he posted on Linkedin:

I listened to the replay and it really is an excellent call (take the time to listen to it all) and while I agree with him on many points, I remain skeptical that inflation will continue being a problem next year.

In short, I see inflation peaking in Q1 and slowing down a little in the first half and a lot more in the latter half of next year. 

Why? I just don't see wage inflation picking up and for inflation to become a secular rather than a sticky story, you need to see wage inflation picking up considerably. 

Still, make no mistake, inflation is here and as I stated last month, it is hitting consumer sentiment hard

The great economist Milton Friedman once noted "inflation is taxation without representation."

He's right and inflation hits the poor and working poor a lot harder, exacerbating inequality.

Francois Trahan goes through some nice housing charts in his presentation where he shows a bifurcation going on right now in the US housing market, where expensive homes are still selling relatively well but they only make 20% of the housing market. 

Meanwhile, less expensive and average priced homes are seeing significant drops in their sales.

Again, that's all due to inflation which impacts affordability.

Citing a paper from the great econometrics professor Ed Leamer, Francois also explains why housing is a very important to gauge the risk of a US recession.

He sees a slowdown shaping and inflation persisting, thus the title of his outlook where he sees stagflation materializing next year and all sorts of problems in the stock market, especially for high beta sectors.

Last week, I discussed how hyper-growth stocks got "Powelled"

I went through a ton of charts to show how many hyper-growth stocks got obliterated over the last three months.

This week, we saw a bounce earlier this week but a lot of the hyper-growth Ark innovation type stocks gave up a lot of their gains in the latter half of the week:

For me, this is typical trading which reminds me a lot of 2001 when tech stocks got slammed hard and kept going lower but with a lot of volatility.

You'll see days where they pop 20% or more and then they get slammed hard the following days, going lower and lower.

That's how a real bear market feels like, something most millennials haven't experienced yet. 

When a chart of any stock (no matter what stock or sector) is broken on the weekly and monthly charts, be very wary of any pop, most of the time, use any countertrend rally to sell and get out!!

I'm dead serious, if the Ark Innovation ETF keeps dropping and heads below its 200-week exponential moving average, it's game over no matter how much 'soul-searching' Cathie Wood and her team do:

 These hyper-growth stocks should be shorted on any pop, especially in 2022 with the Fed lurking in the background.

I think far more important than the whole inflation story right now is how the Fed will react when they meet next week and in subsequent meetings.

A lot of investors are betting on a 'Powell pivot' but as Bloomberg's John Authers explains in this fantastic article, this isn’t 2018, when inflation wasn’t even a worry. The Fed can’t afford to back off meaningful rate hikes this time:

All this suggests that the Fed will need to work very hard to rein in liquidity and calm inflation down once more. So why would markets expect Jerome Powell and his colleagues to relent early? The most popular case is that they will be forced into a “Powell pivot” and step back if they find themselves triggering a fall in the stock market, or a sharp economic downturn. This blueprint is taken from what happened in late 2018. But it ignores the fact that there is plenty of room for assets to fall from the current dizzy levels, and that inflation is now a very serious problem while it wasn’t even an issue three years ago. If the Fed loses its nerve, we could expect a fall for the dollar, which would worsen inflation. 

I'm long US dollars and don't agree with Authers on that last point but he's right, the Fed might not pivot this time around, and this sets us up for a very interesting 2022.

Importantly, and I am not saying this will occur, if the Fed does start hiking rates, it has to tread lightly here or risk another financial crisis which will ultimately prove to be deflationary. 

Did you catch that last part? the biggest risk remains deflation, not inflation, which is why I don't believe the Fed will hike rates aggressively next year. 

The US dollar will gain more strength which is what the Fed wants because it lowers import prices, relieving inflationary pressures.

Interestingly, despite high inflation figures, the yield on the 10-year Treasury note remains close to historic lows (1.49%) and even though long bond prices got hit this week, they're still in an uptrend:

Why isn't the bond market worried about inflation run amok?

This is the single most important question I ask all inflationistas and they keep telling me it's because of central banks but what if the real reason is because deflation risks are very high here:

Anyway, by this time next year, I'll know for sure whether inflation or deflation is the real risk.

In the meantime, be wary here, the next recession might be where the "everything bubble" bursts:

And since it is Friday, some humor to end the week:

Alright, have a great weekend everyone.

Below, Jeremy Siegel, Wharton School at The University of Pennsylvania professor of finance, joins the 'Halftime Report' to talk about the impact of inflation on the stock market.

And Anik Sen, PineBridge Investments global head of equities and portfolio manager, joins 'Closing Bell' to discuss tech and semiconductor stocks.

Lastly, Carter Worth of Worth Charting joins the traders to discuss his strategy for making your portfolio inflation proof. With CNBC's Brian Sullivan and the Fast Money traders, Tim Seymour, Steve Grasso, Pete Najarian and Nadine Terman.