by Bryan Perry

December 21, 2021

Investors are having to deal with a whipsaw market, where huge price swings and fierce sector rotation are making it very difficult to get a sense of sustainable direction – where everything isn’t just a short-term trade. Eye-popping November inflation numbers rattled even the most ardent bulls, as this news finally led the Fed to a hawkish stance, triggering a rolling correction that complicates asset allocation.

With inflation now near a 40-year high, economists are scrambling to provide forecasts that take into account factors that will curb inflation and those that continue to stoke inflation next year and possibly beyond. Because the highly transmissible Omicron variant is not nearly as deadly as prior variants, hopes are high this strain could be the wave that expands herd immunity, leading to relaxing stringent Covid-19 protocols that are the primary reason why ports and key distribution hubs are congested.

The Wall Street Journal reported on November 21 that supply-chain problems were showing signs of easing, but the current labor shortages could persist. Any level of progress in this area will contribute greatly to helping to alleviate upward pressure on inflation of goods, shipping, and logistics costs.

Two areas of concern are rising – employment and housing costs. Rents make up nearly one-third of the Consumer Price Index (CPI) and wages and salaries along with rents are typically indexed to the CPI, so they are expected to be adjusted higher in 2022. How much higher is anyone’s guess at this point, but already there are reports of employers not willing to raise pay to levels that match the hot inflation data.

Another positive setup for those claiming that peak inflation is here is that prices of many commodities are starting to decline. Looking at key commodities futures this week, as reported by Investor’s Business Daily, prices for cattle, chicken, lean hogs, wheat, soybeans, sugar, cocoa, oil, natural gas, cotton, and copper are all coming down from their late October or early November highs. Prices of corn, coffee, and lumber remain elevated, but by most measures, food and raw material inflation is ebbing.

The CRB Index is down about 6% from its late October peak. The CRB consists of 19 commodities, namely: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, RBOB Gasoline, Silver, Soybeans, Sugar, and Wheat.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Seeing the price of WTI crude pull back is a major plus for consumers. Even though gas prices on the national level are still near their recent highs, they too will start to fall into January as there is always a one-month lag effect for gas prices to pull back following falling oil prices.

This is an encouraging development that should favor consumer discretionary spending patterns.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If the chain reaction of the pandemic that agitated the supply chain chaos starts to reverse itself, as is currently being evidenced by some falling commodity prices and reports of goods getting to markets on improved timelines, then the November CPI and PPI numbers might just mark “peak inflation” – just as the Fed is addressing the issue with newfound conviction. But their timing has a lot to be desired.

“My concern is that we’re going to go from a patient to a panicked Fed on inflation,” said Diane Swonk, chief economist at accounting firm Grant Thornton, and a longtime Fed watcher.

Even though Omicron-related cases are surging, hospitalizations related solely to Omicron are very few, so far. Most current hospitalizations are related to unvaccinated patients infected with the Delta variant. Wider usage of antibodies, Ivermectin, Remdesivir, the Pfizer pill, and other novel drugs to treat Covid symptoms at the onset of infection are also proving to be effective treatment.

The bond market is taking its cue from soft consumer sentiment, the winding down of QE, and the curtailment of further government stimulus that fueled both business and consumer spending for 2021, resulting in strong stock market gains. Retail sales for November were up by only 0.3%, missing forecasts of 0.8% and well below the 1.8% gain reported in October. Granted, supply chain concerns prompted early holiday shopping in October, but economists worry spending will really slow in January, but I’d say consumers should start to see lower prices at the pump and the grocery store beginning in January.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It’s too early in the Omicron cycle to know the full extent of its impact on the economy. If protocols, mandates, and restrictions are tightened again, then inflation could fester at higher levels. At the same time, Sen. Joe Manchin (D-WV) just put the Biden Build Back Better (BBB) plan on ice this past weekend, saying he won’t support it, stating funding for the $2 trillion bill is inadequate, pushes the national debt higher, and may exacerbate inflation further. So… no new Congressional spending.

What is evident is that the Fed reacted to the latest inflation data with hawkish talons fully on display, and they intend to do what is in their power to dampen the easy money enthusiasm that defined their dovish “transitory” inflation policy to date. If bond yields continue to trend lower into year-end, then it might serve the Fed well to dial back the need for speed on tapering – and 2022’s three proposed rate increases.

Raising the Fed Funds Rate can be a weapon against inflation, but it can also slow economic growth by increasing the cost of borrowing for everything from mortgages to all other goods and services.

The yield curve is flattening, which by definition is a sign of rising concern over future economic growth and uncertainty about monetary policy. The Fed won’t vote on policy until the next FOMC meeting, slated for January 26, but the bond market votes every day – and it is telegraphing slower growth ahead.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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