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Friday, January 13, 2023
Today’s newsletter is Alexandra Semenova, markets reporter at Yahoo Finance. Follow Alexandra on Twitter @alexandraandnyc. Read this and more market news on the go with Yahoo Finance App.
Inflation slowed for the sixth straight month in December, data showed on Thursday.
This downtrend in price increases suggests that, finally, the Federal Reserve’s inflation-fighting interest rate hikes seem to be working.
But this tool is unlikely to be enough to lower inflation to a level consistent with the Fed’s 2% target. At least not in the eyes of many investors.
At an event hosted by Wilmington Trust earlier this week at Electric Lemon – a beautiful restaurant atop the Equinox Hotel in Hudson Yards, New York City – the company’s CIO Tony Roth opened the evening’s discussions by arguing that “3% is the new 2%,” referring to the Fed’s inflation target.
“As inflation goes down — and it’s going down, it’s going down — it’s going to stop,” Roth said.
“And it’s going to be stuck as a result of the real drop in labor participation and the impact on wages, it’s going to be stuck because of the lack of unlimited cheap manufacturing supplies from China, and it’s going to be stuck because because Energy prices will not retreat to previous levels.”
The Consumer Price Index (CPI) for December released Thursday showed that inflation increased at an annual clip of 6.5% and decreased 0.1% last month. Core CPI, which underpins food and energy, rose 5.7% last year and 0.3% on a monthly basis – reflecting underlying inflationary pressures.
The Fed now targets inflation of 2% over the longer run as measured by the annual change in the price index for personal consumption expenditures.
But Wall Street increasingly sees this goal as unrealistic in a post-pandemic world. A world where the labor force is still 3 million workers short of pre-COVID levels, companies are moving overseas to manufacture closer to home to prevent supply chain disruptions, and energy prices remain steadily rising.
“What will happen is, as the year goes on, this debate – ‘Is 3 the new 2?’ — that’s exactly what’s ahead,” Roth said, adding that the Fed’s options to raise rates or cut rates will be more consequential as headline inflation approaches the 4% level.
And in this view that “3% is the new 2%,” Roth is not alone.
Hedge fund manager Bill Ackman is among other voices on Wall Street who have questioned the credibility of the Fed’s 2% inflation target in recent months.
In December, Ackman tweeted that the target would not be met without a “deep, job-destroying recession.” And in a call with investors last month, he said it was the company’s view that the central bank could not achieve that goal.
Rising wages around the world, the transition to alternative energy, de-globalization, and the shift to domestic sourcing and production will weigh on the Fed’s ability to lower inflation, in Ackman’s view, in addition to risks. of production “which has enabled almost every US CEO rethinks outsourced or remote supply chains.”
“A lot of that is coming closer to home, and it’s more expensive to do business here,” he said.
Billionaire investor Leon Cooperman, chairman and founder of family office Omega Advisors, said in a televised interview with CNBC earlier this month that if the Fed tries to hit 2% inflation than settle for 3% or 4%, the S&P 500 could fall into the low 3,000s.
And BlackRock chief executive Larry Fink shared the same sentiment at the New York Times Dealbook Summit in New York City last month, warning that investors will likely have to live with inflation around 3-4%. and interest rates of 2-3% – leading to what he called a period of “malaise” for the economy.
What to Watch Now
8:30 am ET: Import Price Indexmonth-over-month, December (-0.9% expected, -0.6% last month)
8:30 am ET: Import Price Index does not include petroleummonth-over-month, December (-0.3% expected, -0.3% last month)
8:30 am ET: Import Price Indexyear-on-year, December (2.2% expected, 2.7% last month)
8:30 am ET: Export Price Indexmonth-over-month, December (-0.7% expected, -0.3% last month)
8:30 am ET: Export Price Indexyear-over-year, December (7.3% expected, 6.3% last month)
10:00 am ET: University of Michigan SentimentJanuary Preliminary (60.7 expected, 59.7 first reading)
Delta Air Lines (DAL), JPMorgan (JPM), Citigroup (C), Bank of America (BAC), BlackRock (BLK), First Republic Bank (FRC), Wells Fargo (WFC), UnitedHealth (UNH)
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