Inflation, An Economic Winter Is Approaching

Inflation Is Out Of Control, And It’s Not Getting Fixed 

It doesn’t matter if the May CPI data is hot or not, if it shows a peak or not, because high inflation is here to stay for a while and it may even accelerate in the back half of the year. The FOMC, the agency in charge of economic conditions ie inflation has been wrong about it from the get-go and is so far behind the curve it scares us to think about what may happen over the next few years. As it is, the FOMC is expected to hike rates by 50 basis points per meeting going into next year. That will put the base rate at the highest level in well over a decade and that’s not the end of the story. Now that stimulus and easy money is gone, the underpinning factor for inflation will be oil prices (NYSEARCA: USO) and oil prices are on the rise. 

The ECB Raises Its Target For Inflation, The FOMC Will Follow 

The issue with inflation is not limited to the US, either, consumer-level inflation hit a fresh record-high of 8.1% YOY last month and it is expected to accelerate. The ECB declined to raise its interest rate, however, fearing a negative impact on economic growth, but the growth is all smoke and mirrors. The ECB lowered its target for 2022 GDP growth to 2.8% which is all inflation. Their inflation target, on the other hand, was increased to 6.8% for the year which indicates to us activity is slowing in the face of rising prices. As for the future of ECB interest rate hikes, the committee indicated a meager 25 basis hike at the next meeting and another in September. Beyond that, the ECB is forecasting a “sustained” series of rate hikes that should bring inflation down to reasonable levels sometime in 2023. 

And there’s oil. Oil prices are rising above $120 right now and are on track to hit an all-time high very soon. The market is so constrained that a single event is all that it will take to send prices through the roof, and we know one is on the way. Somewhere, a terrorist or a separatist is waiting to take over an oil field or pipeline, or, heaven forbid, one of those Hurricane things rips through the Gulf again. In that scenario, the price of WTI could easily move into the $150 region.  NOAA is predicting an above-normal hurricane season and that is saying something. This will be the 7th consecutive above-normal season so the bar is moving higher. NOAA is expecting 6-10 hurricane strength storms with 3-6 major hurricanes and you know at least one is going to hit the Gulf of Mexico. 

The takeaway here is that gasoline and diesel prices are going to move higher over the summer and drive inflation at all levels of the economic system. Gasoline will probably top $6 at its peak and that will spur an acceleration in inflation in the back half of the year. That is troubling not only because inflation will rise again, but because this is opposite to the expectations of only a month or two ago and it is hawkish for the FOMC. That means an even more aggressive stance. And there is the supply chain to consider as well. All those back orders are about to catch up with the S&P 500 (NYSEARCA: SPY) and in the face of declining demand for consumer goods. Soon, warehouses will be flush with goods no one wants to buy and they where will the market be? 

The Technical Outlook: The S&P 500 Is Facing A Tough Few Years 

Our outlook for the S&P 500 is unchanged in all this. We think the market has confirmed a reversal and has only to prove this reversal is from Up to Sideways or from Up to Down. Based on the new inflation data, we think the market is going to move lower but there is good news too. Investors with a time horizon greater than 2-3 years will find the long-term secular bull market is still intact. The S&P 500 may move sideways within a Rolling Bear Market or it may move lower but, in both cases, a return to support is a time to buy. Assuming the market moves lower from here, our target is the secular up trend line that was established in 2009, way down near the 2,800 level.