Good morning contrarians!
Stock futures are dropping precipitously this morning. Tech is leading the drop, with the Nasdaq down 1.5%, more than giving up its gains yesterday. S&P 500 futures are down 1.3% and Dow Industrials off 1.1%. Bonds are selling off as well, with the yield on the 10-year up to 1.54%. Those numbers as of 0650.
Heightened concerns about inflation-fueled energy prices and higher costs for companies appear to be behind the selling. It looks like the market is coming to terms with the idea that inflation is not transitory and that it will have non transitory effects.
Ray Dalio is widely ridiculed these days, perhaps for good reason given some of his comments about wealth inequality. But a statement he made last month about the differences between transitory and real inflation does as good a job as any as putting this issue into perspective: Inflation is transitory until it works its way into contracts. Well, it’s working its way into contracts. Higher wages are causing margin pressure at grocery companies for example. Ergo it’s no longer transitory.
Interest rate hikes by the Fed would probably go a long way toward fixing higher energy prices. First of all, these are almost all traded in U.S. dollars, the prime beneficiary of higher Fed rates. Secondly it would in time work its way through the global economy in the form of decreased demand. But this would bring a host of other issues.
Tech Sell Off
The ‘energy prices’ narrative doesn’t quite explain what’s going on with tech stocks, for example. These are now close to 8% off of their highs (if you factor in this morning’s drop in futures). Tech companies don’t have all that much in terms of inputs of raw materials, so one would think they should be able to stomach inflation. Their malaise is instead justified by rising yields and the fact that higher interest rates increases their cost of borrowing money.
A wall of worry for investors then? The rise commodities prices and fear of rising rates are part of the same coin. Interest rate hikes fix this issue. The question is how much worse things get — and whether the Fed then overreacts, as it is prone to do. Remember that this is what brought a nasty end to past business cycles, in 2000 and 2007/08. Where higher energy costs are concerned, investors may want to get on board with oil companies, as our guest on this week’s podcast (now live for you but not yet for regular subscribers) points out.
The Fed
Where the Fed is concerned, we have an important gauge of employment health out today at 0815 in the form of the ADP employment survey. This is kind of a preview of Friday’s non-payroll report. Expectations are for an increase of 428,000 jobs. An improvement over last month’s 374,000. Fed Chair Jerome Powell said employment is the only thing keeping the Fed from tapering bond purchases (different from raising interest rates, though certainly a precursor).Atlanta Fed President Raphael Bostic is due to speak twice today, from the looks of it. He seems to be one of the more hawkish members of the FOMC, so it will be interesting to see what he has to say about all of this.
Cryptos Supply a Bright Side
A final note of positivity comes virtue of crypto currencies. Cryptos are up this morning, with bitcoin moving past 52,000. This tells us that all is not lost yet when it comes to risk appetite. In fact, it tells us that there is still some appetite for risk. Whatever the use-case scenario for cryptos turns out to be (or if there even is one), these digital currencies can be a gauge of risk appetite.
Non-Transitory Inflation: Daily Contrarian, Oct. 6