Refinitiv Newscasts - Inflation will cool later this year -Hogan

CPI SA

12/08/2021 21:08

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Source: Reuters

Description: Despite the biggest jump in producer prices in over a decade,
National Securities' Art Hogan tells Reuters' Fred Katayama inflation is
moderating. He explains why he sees the Federal Reserve announcing its plans
to taper bond purchases in September, not August.
Short Link: https://refini.tv/3fYFOMF

Video Transcript:


The S&P 500 inching to a record high, the Dow down after the latest set of
economic data. Well, let's get inside the markets and take a look at that data
with Art Hogan. He's Chief Market Strategist at National Securities, coming to
us today from Nantucket, Massachusetts. Good afternoon, Art.

Good afternoon. Thanks so much for having me today.

Always great to have you, Art. Well, we've got weekly jobless claims and they
fell again last week, this time to 375,000. That seems to suggest that the
economic recovery is gaining momentum. But why then are economically sensitive
cyclical stocks and the Dow down and tech stocks up?

Yeah, such a great question. And I think the dynamic really is, if you back
the lens up and say, what are the economically sensitive cyclicals done over
the last five days? And then look at today's reaction and say, okay, this
makes sense, right? So, we've had a significant run up in energy, financials,
materials, and industrials. Some of that had to do with the yield on the
10-year moving off of that 112 low from last Wednesday. And some of it has to
do with the fact that we actually passed the infrastructure bill in the
Senate. And it looks like that's going to work its way into reality. So, I
think that when you take a step back and say, what has performed the best in
both post the lows of March 2020 and what does work the best on a yearly
basis? Not surprisingly, materials, industrials, financials, energy, and oh,
by the way, technology. Those are your top five performing sectors. They just
happen to rotate in and out of popularity. Often when we get concerned about
things like inflation or we get concerned about higher rates in the yield on
the 10-year.

Well, let’s talk about inflation. We got producer price data today,
producer prices posting their biggest annual gain in more than a decade. This
coming just one day after consumer prices, the gain in consumer prices, seem
to have eased somewhat slowed a bit or moderated. So, Art, which presents the
true picture on inflation? Is it the PPI, the CPI, both together? What does it
mean?

Well, I would say this. The CPI came in about where we expected and that's
good news. I can tell you the PPI came in a bit hotter than expected, and
that's been the case for the last five reports. I can also almost guarantee
you that next month's PPI is going to be lower on a year over year basis
because the low base effect from last year is starting to wear off. So,
remember last year when we're in the middle of the pandemic and had closed the
economy down, inflation fell through a trap door. So, all of the year over
year numbers look much larger because the numbers were so low a year ago.
What's more important to us is how things are moving sequentially on a month
over month basis. And even that was a bit hotter than we'd like to see. And a
lot of the components in both the CPI and PPI appear to be things that likely
will find a supply response that brings down the pricing pressure. So, yes,
we're still in an inflationary environment. We feel that it's moderating. We
feel that in the months ahead it's going to moderate more, but it's going to
take us a while to get back down to what the Fed would target as an inflation
rate, which is 2%. Were likely see inflation trend down to the 3% level on a
year over year basis, but not until the fourth quarter of this year. So,
expect inflation numbers that are going to moderate and become slightly lower,
but nowhere close to what we're used to. And it will be well into 2022 before
we get them closer to 2%.

So, the numbers that we got yesterday and today, CPI and PPI, does this affect
the Fed's timetable to tapering at all? Or do they wait until that personal
consumption index comes out?

Well, it's certainly part of the mosaic they will put together along with the
better jobs’ numbers. So that non-farm payroll number last week
represented a significant change in the job creation in the United States.
Coming into that report, the three-month average was about 539,000 jobs being
created, including last month's report and the two months before that that
were revised higher. Our average job creation number is about 859,000 now. So
significant improvement. And that's exactly what the Fed wants to see,
significant progress towards their goals of full employment and stable
inflation. So I would guess that if you combine where the prints we've seen in
inflation and couple that with what we're seeing in jobs creation, which
likely gets even better in the August and September months, that will probably
drive the Fed into what is likely consensus that around their September
meeting, they will announce the cadence and size of what tapering looks like.
And they’ll probably put that into action at the end of the year or the
beginning of next year. So, December or January is when they actually do it.
September is likely when they talk about it.

Alright. Well, put all this together. We got this economic numbers, earnings
have been really good so far. And we got to Jackson Hole meeting coming up at
the end of this month. Where do stocks go in this volatile month of August
from here.

It's such a great question. So, it's amazing when you think about how the
history of August and September are not great for markets and there's no real
explanation for why. And I'd like to come up with the right theory and be able
to prove that, but I don't think you can. But if you look at what's happened
in August and we’ve had multiple new highs on both the Dow and the S&P.
We’re only up about 1%, month to date. So, it feels like we're grinding
higher. We actually are grinding higher. It's a very small trajectory higher.
As a matter of fact, if you look at the gains we've seen in the last three
months versus the gains we saw in the first three months, we’ve got an
S&P 500 that's up probably 18%, thereabouts. But we're only up about 4% in the
last three months. So, all of those gains really came front end loaded this
year and now we're kind of grinding higher. I think that path continues
through the month of August and September.

Alright. Thanks, Art, I heard you. Grinding higher. Thanks for your thoughts.

Thank you.

Our thanks to Art Hogan of National Securities. I'm Fred Katayama in New York.
This is Reuters