Equity week ahead: What if the Fed can’t get inflation under control?
Members of the Federal Reserve, the central bank responsible for pushing inflation from 8.3% to its target of around 2%, are now raising interest rates in an attempt to cool the economy.
“These are uncharted waters for all of us,” said Liz Young, head of investment strategy at SoFi. “Inflation hasn’t been this high since the year I was born.” The economy will recover, she said, but it will be a “slow burn”. Markets will continue to fall and prices will stay high for a while, she added: “I think we might have to stay there for a little while. I don’t know if we’ll bounce back very quickly.”
Some of the lack of trust stems from the rise of social media and wide-ranging, fast-paced communications –—and has nothing to do with what’s happening at the central bank, said Howard Silverblatt, senior analyst at indices at S&P Dow Jones Indices. A continuous, real-time feed of news and analysts makes it easier to judge Fed actions, not results.
“You know them so much better now,” Silverblatt said. “You see every nook and cranny.”
Timing is everything: Inflation rates don’t always come down. Just look at the 1970s when the US economy suffered three recessions in which the underlying inflation problem never went away.
“Stagflation is probably the worst word in the vocabulary for financial markets because it’s the worst of both worlds. Inflation remains high and the economy is slowing down,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. “I think we’re feeling a whiff of stagflation now.”
But the ghost of the 1970s lingers in the minds of all Fed governors, and they’ve said they’ll increase their hawkishness — no matter what that means for markets and the economy.
Grohowski says he sees inflation persisting for the rest of this year and part of next, but is not yet entrenched in the economy and will decline by 2023.
Yet the sentiment is not the same for investors and consumers. Among economists and analysts, Grohowski said, “it is expected that there will be some relief and that we are most likely experiencing a spike in inflation right now.” But consumers fear that current inflation rates will not hold for much longer.
They may not be wrong. While prices for some goods will fall rapidly, energy and housing prices will likely remain high for some time, the Fed said.
We don’t think inflation is entrenched,” Grohowski said. “But we admit there are concerns because parts of inflation are more rigid than most economists and even the Fed does. had planned.”
Davos is back and the world has changed
The World Economic Forum – which combines high-level panels and flashy parties – is back in person in Davos, Switzerland, for the first time in two years. The conference aims to bring together important people to tackle pressing issues such as inequality, climate change, the future of technology and geopolitical conflict. But the logic behind inviting some of the richest people on the planet to solve these problems from a beach resort seems even more fragile these days.
The event takes place against the backdrop of the worst cost of living crisis in decades in developed economies and in many developing economies. Soaring food and fuel prices are already causing hunger and hardship, stoking instability, triggering protests and emboldening political insurgents.
The main event is likely to be a speech on Monday by Ukrainian President Volodymyr Zelensky, who is expected to participate via video conference. German Chancellor Olaf Scholz and European Commission President Ursula von der Leyen are also expected to deliver speeches later in the week, which will be considered as EU countries struggle to agree on a formal oil embargo. against Russia.
Monday: Federal Reserve Bank of Kansas City President Esther George speaks; Zoom Video Communications Earnings,
Tuesday: April new home sales; Earnings from Intuit, AutoZone, Best Buy, Toll Brothers, Petco and Nordstrom
Wednesday: April Core Durable Goods Orders, FOMC Minutes, Weekly Crude Oil Inventories; Profits from NVIDIA Corporation, Williams-Sonoma and Dick’s Sporting Goods
Thusday: Q1 GDP (second estimate), initial UI claims, April pending home sales; Earnings from Alibaba, Costco, Dollar General and Dollar Tree
Friday: Federal Reserve Bank of St. Louis President and FOMC Voting Member James Bullard speaks