July 11, 2022

The Financial Double Play: Inflation, Jobs, Higher Interest Rates

In billiards, it's the two cushion shot. The skilled player banks the cue ball off one cushion, then another, and finally, the cue ball strikes the target and sends it into the pocket. They are those wonderfully complicated strategies that we all like to watch.


In baseball, it's the double play. Where the second baseman fields the ball, tosses it to the shortstop, and on to first base for two outs. It's a marvel to behold.


Today we are in the middle of the financial double play. This double play will undoubtedly guide the course of the economy over the next year.


The first step in our unfolding double play occurred Friday when the Bureau of Labor Statistics reported that the latest Payroll Number was up by over 370k. More than 100k above Wall Street's best estimates.


Now, as even the lowest aid in Washington know, jobs are the life-blood of every politician's campaign. From dog catcher to President, every elected official promises that their policies will add more jobs.


So by having a Payrolls number that was this positive, all of Washington can now declare that no matter what comes next, they protected our jobs. The Payrolls Report showed that.


The first hurdle cleared, and on to the next.


The second stage in our three-part drama happens on Wednesday. It's then that we'll get the latest reading on Inflation. Inflation has to be sufficiently high that will compel the Fed to act. And like jobs, this too is critical.


But no worries here. Inflation has everyone's attention. Everyone thinks that Inflation is way too high. And there's not a soul in the country who feels that Inflation is under control.


This week's report is sure to confirm that. Wall Street expects that Inflation is currently running at well over 8%. I believe that there is a likelihood that this week's report could show Inflation at 9%. That would be stunning. It would take us back to a level last seen in the late 1970s—a time of economic stagflation.


However, no matter the level of Inflation, the Federal Reserve will no doubt have the go-ahead to move to the next level, the final step in our three-part financial double play.


On Wednesday, July 27th, at precisely 2 pm Washington time, the Federal Reserve Open Market Committee will report their latest interest rate decision. And like a well-coordinated baseball double play, all the moving parts will have come together—first jobs, then Inflation, and now for the finale: interest rates.


If Inflation unfolds like we think it will, it will come in at a level of about 8%. Against this background of a special payrolls report, in other works jobs. It's hard to see how the Fed won't complete their double play.


I expect they will finish with a flourish and raise rates by 75 basis points, the high end of expectations.


Like a well-oiled machine, the pieces will have all come together: jobs plus Inflation will make way for the entirely predictable interest rate hike.


It's all purely financial, by which we mean political.


Because if there is one thing that this Federal Reserve has proven over the years, they are perhaps the most politically sensitive of all the Washington Bureaus. The predicate of jobs and Inflation will compel the Fed to conclude with higher interest rates.


To the seasoned observer, you see this from a mile away. It is jobs, Inflation, to higher interest rates, as seamless as a double play.


Post Script


What concerns me is that all these inputs, these reports are now history. Jobs are, after all, a notoriously lagging indicator. Additionally, what the Financial Press and Wall Street failed to report, was that jobs for June were 12K lower than the month before. While hours worked and the participation rate is still well below the Pre-Pandemic levels.


While Inflation remains a significant issue, the report the Fed is looking at was for the month-end of June. Since then, we've seen lower gasoline prices, an indication that this inflation report may be stale.


Finally, one last thing, on Friday, the Atlanta Federal Reserve reported that by their up-to-the-minute measure, GDP is currently underwater. GDP Now reports a negative 1.2%. Implying, at least, that we may already be in a recession.


So when all is said and done, do I believe we will get a rate hike? Yes, absolutely.


Should we get a rate hike now? That's an entirely different question.


Economic News



The big economic news overnight is the continued slide in the price of oil. West Texas Intermediate, the benchmark US Oil, is trading at roughly $102 a barrel. That’s down $20 a barrel in less than a month. And a sure sign that we’ll see continued relief at the gas pump.


Over the weekend, Barron’s Magazine had an interesting article reporting that Auto Repossessions are seeing a big jump. Indicating that car buyers are facing a real cash crunch. Yet another sign the American consumer is facing challenging times.

This week marks the beginning of the earnings season. Companies around the country will line up to report their results for the Second Quarter. Leading the way today will be discount stores, Pricesmart, software company Camtek Ltd, and rail car maker Greenbrier.

Have a great day!