Get Up, Get Up, Get Outta Here…
Bob Uecker, also known as “Mr. Baseball,” yells out his signature phrase whenever a player hits a home run, and that phrase is: “Get up, get up, get outta here, gone!” Yesterday, when the headline CPI print came in at +9.1% for June, that’s the phrase that played in my head.
Many have made the point that there are multiple ways to look at inflation data, and that the month-over-month numbers are actually more indicative of the trend. I agree. In fact, I think the Fed will be satisfied with their “front-loading” of hikes when they see three consecutive months of month-over-month declines in CPI, and will feel comfortable reducing the size of each hike.
Unfortunately for now, the monthly numbers are still hot, too. At this point, the earliest we will find out about a three month cooling in the data is October. That’s a long time for markets to wait-and-see. But I don’t think we have to wait that long as investors.
Who’s on First, What’s on Second, I Don’t Know’s on Third
No matter what, base runners have to cross home plate in order. In this situation, the market is on third base, followed by earnings on second base, and the economy on first.
The difference is, home plate is when they bottom, not score. In any event, the market bottoms first and we’ve already made a decent amount of progress in that direction. What I believe we’ll see now is a hit to earnings and the message from business leaders to take a decidedly cautious and less optimistic tone.
You could even argue that inflation data coming out right before the kick-off of earnings season gives companies air cover to be even more negative. And there is definitely a relationship between business confidence and CPI — they generally move in opposite directions.
Fed is at Bat, On Deck, AND in the Hole
Inflation has taken a bite out of stock and bond markets — and the bite may not be over quite yet. As we await the Q2 earnings data, we also await the Fed’s next move on July 28th, which could be a big one. I view these next two Fed meetings as the ones that will convince markets once and for all whether or not we could see a classic recession in the next 12 months. I’m not including the current possibility of a “technical” recession in the first half of this year, because it hasn’t come with enough economic cooling to stop inflation. I’m talking about a recession where unemployment rises, manufacturing data contracts, the consumer stops spending, and inflation consequently falls. In this case, the Fed would probably have to consider cutting rates, but that’s a different note for a different week.
Here’s the bottom line: If markets are going to be convinced soon that a recession is coming in the next 12 months, that means the third base runner is getting closer to home plate. Before the end of the month we could get negative earnings guidance, a 75-100bp hike from the Fed, and a negative Q2 GDP print. This scenario could prove to be bad news for markets, but good news for buyers. Don’t swing for the fences, but I do think we have to start swinging the bat before summer is over.
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