‘This Isn’t 1980’: What Investors Look To As The Next U.S. inflation measure looms

Investors were nervous about their expectation that the Federal Reserve would adopt aggressive monetary policy measures to fight inflation by raising interest rates close to zero. Rate-sensitive, high-growth stocks have been hit particularly hard so far this year, with some investors worrying that the Fed will hurt the economy if interest rates are raised too much, too quickly.

“The Fed’s goal is not a recession,” said Schutte, who under chairman Jerome Powell expects monetary tightening to be more of a fine-tuning. “This is not 1980.”

Paul Volcker, who became Fed chairman in August 1979, helped curb rising inflation by aggressively raising the Fed’s benchmark interest rates in the 1980s, Nicholas Colas, co-founder of DataTrek Research, said in a Feb. 3 note. “Fed Funds ran much higher than CPI inflation throughout his tenure.”

“Particularly remarkable is the large gap in 1981 – 1982, when he kept the rates very high (10 – 19 percent), even while inflation was clearly declining,” Colas wrote. “These policies created a recession,” he said, “but it also quickly reduced inflationary pressures.”

The Consumer Price Index, or CPI, showed inflation rose 0.5% in December, bringing the annual rate to 7% at a 40-year high. The January CPI reading is scheduled for Thursday morning.

“The longer high inflation persists, the unnerving it will be for market participants,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott, by phone.

Prolonged inflation could “provoke a much more aggressive response from the Federal Reserve and, as a result, undermine high valuations for the market in general,” Luschini said, “particularly those long-term growth sectors like technology that have already suffered over the past few years.” month.”

Shelter, energy and wages are among the areas that are attracting the attention of investors and analysts as they monitor the rising cost of living during the pandemic, according to market strategists.

Barclays analysts expect “inflationary pressures to have eased slightly in January, mainly in the core commodity category,” according to their Feb. 3 research note. They predict that the CPI is up 0.40% last month and it is up 7.2% in the past year.

Turning to core CPI, which excludes food and energy, analysts expect prices to rise 0.46% in January at a 12-month pace of 5.9%, “led by continued steadfastness in inflation.” of core goods and strength in the CPI for shelter.”

Meanwhile, rising energy prices are part of the inflation framework that “we’re watching together with everyone,” Whitney Sweeney, investment strategist at Schroders, said in a telephone interview. High oil prices are worrisome as Americans feel like the gas pump is throttling, allowing those with less disposable income to spend in the economy, Sweeney said.

West Texas Intermediate Crude for March Delivery CLH22,
-0.41%
climbed 2.3% Friday to settle at $92.31 a barrel, the highest contract return in the first month since late September 2014, according to Dow Jones Market Data.

Read: US oil benchmark records highest result since September 2014

“Commodity prices in general show no signs of declining and instead continue to rise,” Deutsche Bank analysts said in a Feb. 2 research note. “It will be much harder to lower inflation rates if a number of key commodities continue to show significant year-over-year gains.”

DataTrek’s Colas delved into the role of energy during the inflation of the 1970s, writing in its note that former Fed Chairman Volcker “did not tame inflation and price volatility with interest rate policy single-handedly in the early 1980s.” He had help in two areas, including a sharp drop in oil prices and changes in the shelter’s calculation of inflation, Colas said.

Crude oil prices rose from $1-$2 a barrel in 1970 to $40 in 1980, but then saw a 75% drop between 1980 and 1986, the DataTrek note shows. After peaking in November 1980, oil “went pretty much straight to $10/barrel in 1986,” Colas wrote. “Gasoline prices followed the same trend.”

According to DataTrek, Volcker also had some help in taming inflation from the Bureau of Labor Statistics, changing the shelter’s calculation of inflation to take the effect of interest rates out. Lodging costs, such as rent, represent a significant portion of the CPI, and it is an area of ​​inflation that tends to be “stickier”. rise in the cost of living, Sweeney said.

“Monetary policy is important, but so are factors outside the Fed’s control,” Colas wrote in his note. “Maybe supply chain problems will disappear this year like oil prices did in the 1980s. If not, the Fed faces some tough choices.”

Market strategists, including Sweeney, Northwestern Mutual’s Schutte, Janney’s Luschini and Liz Ann Sonders of Charles Schwab, told MarketWatch they expect inflation to ease later this year as supply chain bottlenecks ease and consumers increase their spending on services as the pandemic continues. purchases instead of goods.

The rise in inflation since the end of the pandemic is related to goods, Sonders, chief investment strategist at Charles Schwab, said by phone. Increased consumer demand will ease as COVID-19 loosens its grip on the economy, she said, potentially leaving businesses with an abundance of goods as opposed to deficits that have fueled inflation.

Meanwhile, “the core CPI’s upside potential remains primarily driven by rising auto prices and, to a much lesser extent, clothing and furniture prices,” said Eric Liu, head of research at Vanda.

“The cost of transportation services — primarily in the form of volatile airfare — remains a source” of month-to-month variability, he wrote in an email note published in late January. “And housing prices continue to rise, albeit at a much slower pace than inflation in cars, furniture, etc.”

Liu estimates the CPI print could fall below consensus expectations next week, according to his note. That’s partly because used car prices appear to have peaked around mid-January, he said, citing data from CarGurus. Falling transportation costs, such as airfare and rental car fares, could also lower core CPI basis points in January, he said, citing US data from airfare website Hopper.

Looking more broadly at inflation, Charles Schwab’s Sonders said she pays a lot of attention to wage growth because it’s also “stickier.”

As wages rise, so does labor costs for companies. “Then they continue those higher costs to the end customer” to protect their profit margins, she said. When they see their cost of living rise, workers demand higher wages to compensate, potentially creating a ‘spiral’ of inflation.

A strong US jobs report on Friday showed average hourly wages rose 0.7% in January to $31.63. Over the past year, wages have increased by 5.7%, the largest increase in decades.

To see: US gets 467,000 jobs in January and recruitment was much stronger at the end of 2021, despite ommicron

Major US stock indices rose largely amid choppy trading Friday as investors weighed January’s unexpectedly strong jobs report against their expectations for Fed rate hikes. The S&P 500 SPX,
+0.52%,
Dow Jones Industrial Average DJIA,
-0.06%
and Nasdaq Composite COMP,
+1.58%
each scored a second straight week of gains, with the stock market looking up after a dismal January but still down for the year.