June Inflation – For Better or Worse | Stock Talk Podcast

It’s summer in the markets and while many people are off enjoying a vacation with their spouse, family or friends, many investors, and short-term traders in particular, are focused on the specifics of government data releases, what they mean for future Federal Reserve monetary actions, and what that might mean for the markets the next 6 to 12 months.

I’m Chris Perras with Oak Harvest Financial in Houston, Texas, and welcome to our weekly stock talk podcast. Before we get into this week’s topic dissecting “last week’s high print government CPI figure,” Please take a moment to click on the subscribe button and click on the notification bell so you will be alerted when our team uploads our latest content.

The government data is in, and the Consumer Price Index jumped 1.3% in June, surpassing consensus calls of 1.1%. This was the largest monthly increase since 2005, and it spiked the yearly rate on the CPI to 9.1%, the highest since 1981. One would think, this, of course, is short-term bad news as it puts more and or larger Federal Reserve interest rate hikes on the table. With that dynamic in hand, this puts the hope for a soft economic landing more unlikely. On this report last Wednesday, pre-open, the S&P 500 futures “pajama traders,” as Jim Cramer calls them, took the S&P500 index down -1.7% and Nasdaq heavy with tech stocks, down -2.5% before the regular trading session opened. By lunch, tech stocks turned green and were up .5% on the day, and the S&P500 recovered back to 3830, up 80 points off its low or about 2%. In 4 hours. These are the moves that happen when future volatility is priced at 28-29.5. 80 to 100 intraday S&P500 points per day. Not fun for anyone except day traders.

The SP500 traded in By Friday? The Nasdaq was — and S&P500 was — by week’s end.
Look at the table from BMO summarizing the categories of inflation for the month.

Things in this report that are negative and slow to adjust to the downside? Number one is high and still rising housing costs. Housing costs are about 1/3rd of CPI. This number remains super high due to the lag effect of apartment rental rates trailing housing prices by months. Anyone whose apartment lease has expired recently and whose rent is up for renewal will tell you, rents are on fire much as they were pre the Covid shutdown, with tenant rates up 0.8% or almost 10% year over year, the most since 1986. This current number is probably understated versus true apples-to-apples comparison as the government has repeatedly changed its official methodology every 10 to 15 years since the 1980s. While the overall housing market has clearly slowed over the last three months with the spike in mortgage rates, the shelter component in CPI is slow to adjust downward to pricing.

The second hit to consumers’ pocketbooks that is slow to adjust are medical costs. They, too, are up substantially year over year as hospital procedure rates re-accelerate and insurance companies are trying to recoup higher Covid costs. These costs from 2020 and 2021 are being passed on to consumers in the form of higher healthcare insurance premiums and procedure costs.

While the headlines for the June CPI were bad, there are some positive signs behind the scenes that inflation rates are peaking, albeit slowly. Jim Cramer even did a 10-minute segment on his Wednesday show on the data. There’s a link in the description below to that video for those who are interested.

Soaring energy costs, including gasoline, accounted for over half of the month’s rise in the CPI. However, on a positive note, unleaded gasoline prices are already down over -27% in the 4 weeks since the beginning of June. In fact, gasoline prices now sit back where they were at the beginning of March and are approaching a 3-month low.

The price of Natural gas, a common component of summer air conditioning bills in the southern united states, and a point of massive hardship in Europe this summer, has dropped almost -45% in the last six weeks. This means it’s given up almost all its Russia-Ukraine war spike. Here’s that chart.

We’ve had a few prospects ask if living in Houston, if we are heavily overweight energy and commodity stocks this year due to the supply demand dynamics and all the positive media coverage on those groups? My answer has been, no, we aren’t. Why? Demand destruction and nothing cures high commodity prices like high prices. I’ve had a few others ask me if we directly trade commodities like natural gas for our client accounts! To which I answer, not on my life, or with your money. There is only one John Arnold in this world, and I’m not him. Folks, there is a reason they call trading natural gas as a speculator and not a hedger or producer, the “widowmaker.”

Almost all other commodity prices have crashed in the last 3 to 4 months. All of them have given up most, if not all, of their gains from the last 12 to 18 months, reopening demand price spikes. I can’t find a metal price that isn’t down 30% to more than 50% since their price highs in the late 1st quarter of the year. Copper? Down -35%. Iron Ore? -25% Steel rebar? -35%. Nickle, which had that massive, short squeeze a few months ago? Down -55% and now flat on the year. Here are a few of those metal charts.

Most of us shopping at the grocery store or dining out at restaurants will notice that Food costs are running high. The data says that year over year, those costs are up double digits. The good news? The components of our food cost, grains, and transportation? Those costs have started to head materially lower in the last 2 to 3 months. Wheat has gotten creamed and wilted -45% from its Russian high. If prices stabilize around here, that component will be immaterial come August to food inflation as it will be flat year to year. For what it’s worth? The price of both soybeans and corn are already up only 5% and 0%, respectively, year over year. Those price trends look much lower from here, which would send this component into the” deflation,” down year over year, zone in a few months.

Much was made in the press about the historic run-in freight shipping costs in the fourth quarter of 2021 and the first quarter of 2022. As recently as four weeks ago, President Biden called for the passage of new regulations to levy on the world’s top ocean shippers. He said the “rip-off is over.” He called on Congress to crack down on the foreign-owned shipping companies that raise their prices, while raking in (his words and data, not mine) “$190 billion in profit, a seven-fold increase in one year,” Biden said. Well, first, we all know the shipping companies did not make $190 billion in profit in 2021! $190 Billion in revenue for the year? Sure, but profit? Not a chance with marine diesel fuel running as high as it is.

And second, take a look at a chart of the widely followed Baltic Dry index. Called the BDI. The BDI index provides a benchmark for the price of moving major raw materials by sea. The index is a composite of three sub-indices that measure different sizes of dry bulk carriers. The largest ships move coal and Iron ore, and the smallest move grains like wheat. As you can see the index has fallen -65% since its peak in the fourth quarter of 2021 and now sits at the same level, it did pre-covid in 2019. That’s not inflationary. While still high, the cost to ship a 40-foot container from China to the port of Los Angeles is down -40% year to date. Even more telling, those costs are flat year over year and about to go negative versus its 12-month comparison. That is NOT inflation! That’s technically deflation.

With this higher-than-expected CPI print, the odds of a larger-than-75-basis point Fed rate hike on July 27rd went up materially. A 75-basis point move in July would put the overnight Fed Funds rate at 2.25%. Another 50 BPS hike is almost guaranteed for September. These moves sent short-term yields higher and long-term yields lower. The 10s-2/s the yield curve inverted further. This inversion has historically been an ominous sign for the economy and predicting recessions. I get it. We first previewed this yield curve dynamic over a year ago when almost no one else was.

But to me, as an investor, not trader, the question to me is, now what? Do I panic as an investor? Or do I try to look forward and think about where the economy and markets will be 6 to 12 months from now given valuations are now much lower, and the masses are finally talking about economic slowdowns or recessions? Do you skate to where the puck was? Or do you try to skate to where the puck will likely be in the first half of 2023?

History tells us that stocks do a lot of the repricing work in front of recessions because stocks anticipate slowdowns. They anticipate peak revenue growth. They anticipate peak margins. They anticipate, are things as good as they get? Is it the peak or marginal return on cash? Likewise, stocks also anticipate troughs in fundamentals and economic momentum in front of the worst of the data. If you look at recessionary contractions as the worst economic data we can have in the market, here’s, Ben Carlson’s work on what happened to the stock markets before, during and after every recession since World War II.

Where are things likely to settle down to, out in a few quarters? In the back half of 2022? Are things leading to bottoms in the economy and the markets slowly revealing themselves? The PPI excluding energy costs, or producer Price index, which measures prices received for final products, dropped from 6.8% in May to 6.4% in June. Recall that energy prices, as measured by unleaded gas prices, have fallen another 22% month to date as of this filming. Jobless claims jumped to 244,000 last week, the highest level since November 2021. This is a sign that the jobs market is weakening. Over the second half of 2022, this should slowly relieve some pressure flowing through to the wage and hours work data and pressure inflation lower, not higher.

Our thoughts? Later in 2022 and the first half of 2023, as we have thought all year, we can be back in that low growth, lower trending inflation, boring economy mode. Not too hot like the first half of 2021 and not too cold like the first half of 2022. Remember, opposite of those two time periods, both fiscal and monetary stimulus are now working against inflation. Wage pressure is likely to dissipate as the stimulus sugar high ends. This, along with the negative wealth effect of lower stock prices in the first half of 2022, should contribute to a reversal in one of the core inflation drivers in the US, the housing market. Combine lower commodity prices with a looser job market, and you get closer to just right and balanced. You “GBTG”/ You get back to Boring. And we all know financial markets love boring.

In that environment, the stock markets reward consistency and predictability, along with, for the first time since late 2021, this would be at the same time forward volatility peaks, and investors feel more comfortable about the prospects for 2023 for companies with less pristine balance sheets. You might consider flipping this year’s winners and being long or at least overweight the first half of 2022 losers. You should start searching for higher organic growth industries, including technology and consumer discretionary. While still searching for a balance, the markets could move away from “hiding out” solely in utilities, staples, and healthcare, and move back toward companies with more earnings leverage for every revenue dollar.

Remember, the market cares about marginal. Are things going to get marginally better or worse? Are energy costs going higher or lower? Is the dollar peaking? Or trending? Are shipping costs increasing or decreasing? Labor costs? Accelerating or topping out? Those are the questions to keep at the forefront of your mind as you review future government data reports or read up on our economy throughout the summer months.

Our team here at Oak Harvest knows that the first half of 2022 has been a trying time for those in the equity and bond markets who are not trading oriented. The Oak Harvest team knows that sharp market moves drive emotions and the urge to make changes to what are supposed to be longer term asset allocations worked through with your advisor.

If the ongoing market volatility is making you feel uneasy, give us a call, and schedule a meeting with an Oak Harvest advisor. Our team does have insurance-based tools that do not have the volatility of public markets. However, we remind you, that these investments may also have lower long-term expected returns.

At Oak harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.
Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at (877) 896-0040 and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.
I’m Chris Perras, and from everyone here at Oak Harvest Financial Group, have a blessed weekend.




June Inflation – For Better or Worse | Stock Talk Podcast
June Inflation – For Better or Worse | Stock Talk Podcast

It’s summer in the markets and while many people are off enjoying a vacation with their spouse, family or friends, many investors, and short-term traders in particular, are focused on the specifics of government data releases, what they mean for future Federal Reserve monetary actions, and what that might mean for the markets the next 6 to 12 months.