Consumers and Investors Hope for Peak Inflation

It was a busy news week for the financial markets as earnings season kicked off and interest rates continued to march higher. But the release of March’s inflation numbers was the most anticipated by investors. The CPI (Consumer Price Index) continued to climb, hitting a 40-year high of 8.54%. Topping that was the PPI (Producer Price Index), which measures prices paid by businesses, coming in at an all time high of a whopping 11.18%. Upon the release of these numbers, economists began discussing if this was peak inflation. Consensus seemed to be that the likely answer to that question is no and that peak inflation is more likely to occur in May or June. We agree with this sentiment as the increase in inflation was broad-based covering important categories like energy, gasoline, food and shelter.

Another key story is the continued rise in interest rates, as members of the Fed try to convince investors that they are serious about tackling inflation after their major policy error in 2021. We said at the time that it made no sense that the Fed continued to print $120 billion per month and buy mortgage-backed securities and Treasury bonds, along with keeping short-term interest rates at near 0%. Interest rates have risen across the board in 2022 with the 10-year Treasury bond now yielding 2.82% and the rate on a 30-year mortgage hitting 5.15%, up from 3% just six months ago. The Fed Futures market currently is pricing in a 50% chance that the Fed hikes the equivalent of 11 moves of a quarter-point (.25%). This includes expectations that the Fed will hike by .50% in May and then again in June. Also of importance is the reduction of their $9 trillion balance sheet. Minutes released from their last meeting show a plan to decrease the balance sheet by $95 billion per month beginning in May or June.

The University of Michigan Consumer Sentiment report was released this week and it showed an increase to 65.70 from the 10-year low of 59.4 in March. The main driver of this increase was the decline in gas prices seen over the last month. Given that spending by the U.S. consumer is such a large part of the economy we would like to see this number continue to increase as consumers spend more when they are optimistic about the economy.

Earnings season kicked off with many of the mega-banks reporting their first-quarter numbers. But the report that stuck out to us was by Delta. CEO Ed Bastian was extremely upbeat as he said Delta had the highest bookings in their history in March and that the company expects to return to making a profit in the second-quarter. With the unemployment rate so low and with wages increasing at a healthy clip, consumers didn’t blink even with airfares up significantly from 2021. Consumer spending remaining resilient will be important in order for the U.S. economy to avoid a recession in the next year due to the Fed’s hiking cycle.

As earnings season kicks into high gear we will report back in a few weeks on the outlook companies provide. We also will check back in on the level of interest rates as rates stabilizing should be good for stocks. Lastly, we want to wish everyone a Happy Easter.