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

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Monday, July 25, 2022

Today’s newsletter is from Brian Sozzieditor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

It cost me $58 to have my car cleaned on Saturday.

And before you hit me on Twitter, no, that didn’t include a hand wax and a voucher for a free appetizer at the local steakhouse. It was just a direct wash with a shine from within and a tip.

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

This wash followed my road trip to DC last week to cover the Goldman Sachs 10,000 Small Businesses Summit – where it cost Yahoo Finance $502.34 to put me up for a one-night stay at a no-frills Hilton. .

I had a bed, TV, bathroom, place to sit and paid separately for Wifi. No pillow mints or free bottled water — apparently bottled water is for Hilton Rewards members.

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

Nor am I the only one sensing the relentless nature of this major economic headwind.

“I have truly seen, observed and experienced through the eyes of our clients the growing imprint of inflation on economic activity around the world,” Goldman Sachs Chairman and CEO David Solomon told me. at the aforementioned event. “And [inflation is] a strong headwind. And so I think the headwind calls for caution. I said yesterday on my earnings call that inflation is deeply entrenched.”

When I look at the markets right now, investors seem to forget about this state of affairs.

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 Federal Reserve and no recession in 2023. meme shares of GameStop (GME) and AMC (AMC) have jumped 17% and 14.5%, respectively, so far this month.

Of course, the Fed is unlikely to raise rates by 100 basis points on Wednesday, as was speculated a few weeks ago. But a 75 basis point rate hike this week is not to be overlooked, especially if it comes with a presser from Fed Chairman Jerome Powell, who is strongly signaling another 75 basis point hike during of the Fed’s September meeting.

“We believe the Fed judges activity to be resilient and remains focused on managing upside inflation risk,” Evercore ISI strategist Krishna Guha wrote in a note to clients. “We expect some sort of disconnect between the markets’ sharply more bullish tone on the inflation outlook and the stance the Fed will take at the meeting.”

Guha adds: “We believe Powell will take a tough tone on recent price action and – while acknowledging some more positive forward-looking developments – will pour cold water on the idea that we are on the verge of accumulating clear and convincing evidence that inflation is moderating.”

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

And it doesn’t look like these facts will cause the Fed Chairman to change course.

All of this makes me feel like the market is unprepared for the medicine the Fed is about to deliver.

Good negotiation!

What to watch today

Economic calendar

  • 8:30 a.m. ET: Chicago Fed National Activity IndexJune (0.01 over previous month)

  • 8:30 a.m. ET: Dallas Fed Manufacturing IndexJuly (17.7 in previous month)

Earnings

  • Tourbillon (WHR), square space (SQSP), true blue (CCT), F5 (FFIV), Alexandria Real Estate Stocks (ARE), Ryanair (RYAAY), NXP Semiconductor (NXPI), Newmont Corporation (NEM)

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