The Fed has no choice but to punish the stock market: Morning Brief

Markets / July 25, 2022 / DRPhillF / 0

This article first appeared in the Morning Brief. Get your morning feed sent straight to your inbox every Monday through Friday by 6:30 a.m. ET. Subscription

Monday 25 July 2022

Today’s newsletter by Brian Suzyitinerant editor and Announcer at Yahoo Finance. Follow Suzy on Twitter Tweet embed and on LinkedIn.

It cost me $58 to clean my car on Saturday.

And before you hit me on Twitter, no, that didn’t include a hand-wax and a free appetizer voucher at your local steakhouse. This was just a straight wash with shine on the inside and a tip.

As I drove away, I laughed knowing the experiment was going for the Morning Brief newsletter.

This laundry followed my road trip to D.C. last week to cover the $10,000 Goldman Sachs Small Business Summit—which cost Yahoo Finance $502.34 to put me on a one-night stay at a no-frills Hilton.

I had a bed, tv, bathroom and a place to sit and paid for the wifi separately. No mints on the pillow or complimentary water bottles – the water bottles appear to be for Hilton Rewards members.

My conclusion from all this is that inflation remains out of control and is not effectively captured in CPI/PPI releases. It’s a terrible state for the economy if you’re a stock market handler.

I am not alone in sensing the harsh nature of these economic headwinds.

“I have really seen, seen, and experienced through the eyes of our clients the rising footprint of inflation in economic activity around the world,” David Solomon, Chairman and CEO of Goldman Sachs, told me at the aforementioned event. “And the [inflation is] Big headwind. And so I think headwinds create caution. I said this yesterday on my earnings call that inflation is deeply entrenched.”

When I look at the markets now, investors seem to forget about this situation.

The Nasdaq Composite and S&P 500 are up 7.3% and 4.5% respectively so far in July as traders bet on a less hawkish Fed and no recession in 2023. Shares of meme darlings GameStop (GME) and AMC (AMC) jump 17 % and 14.5% respectively this month so far.

Certainly, the Fed is unlikely to raise interest rates by 100 basis points this Wednesday, as it was expected a few weeks ago. But a 75 basis point rate hike this week isn’t something to sneeze at — especially if it comes with pressure from Fed Chairman Jerome Powell pointing strongly to another 75 basis point increase at the Fed’s September meeting.

“We believe the Fed judges activity to be resilient and remains focused on managing bullish inflation risks,” Krishna Guha, a strategist at Evercore ISI, wrote in a note to clients. “We expect something of a disconnect between the markets’ surprisingly more optimistic tone on inflation expectations and the position the Fed will take at the meeting.”

Guha adds: “We believe that Powell will strike a hard tone on recent price developments – while acknowledging some of the more positive future developments – that he will pour cold water on the notion that we are nowhere close to accumulating clear and compelling evidence that inflation is moderate.”

Powell knows I pay $58 for a basic car wash and $500 for a no-frills stay at the Hilton. He knows that people like Solomon say that inflation has become deeply entrenched.

It does not appear that these facts will prompt the Chairman of the Federal Reserve to change course.

All this makes me feel that the market is not ready for the drugs that the Fed is preparing to provide.

Happy trading!

What are you watching today

Economic calendar

8:30 a.m. ET: Chicago Fed National Activity IndexJune (0.01 over the previous month)
8:30 a.m. ET: Dallas Fed Manufacturing Business IndexJul (17.7 over the previous month)

earnings

whirlpool (WHR), Square Space (SQSP), true blue (TBI), F5 (FFIV), Alexandria Real Estate Stock (to be), Ryan Air (Ray), NXP Semiconductor (NXPI), Newmont Company (number)