I’m a Little ‘Fed’ Up …
I’d like to respectfully disagree with the Cleveland Fed president, make a few points about inflation, and take a look at Iran.
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Fri-Yay! You’ve made it. What has been a long, but up until this point, rather successful week for stocks will come to its conclusion today. Unlike recent weeks, this week’s action has been driven more by macroeconomic data and less by earnings or geopolitical headline risk. Oh, those inputs are still factors and in fact, may matter most as this day evolves before us, but what transpired over the last couple of days has been pure gold. Pure gold to equity investors that is.
On Wednesday morning, we learned that consumer prices for July were no hotter than expected, or shall I say “feared.” On Thursday morning, we learned that producer prices for July were, in fact, cooler than expected and much cooler than feared. Incredibly, as core inflation at the consumer level dropped to annual growth of 2.5% in Wednesday’s release by the Bureau of Labor Statistics, Cleveland Fed Pres. Beth Hammack, a noted hawk, on Thursday said, “I think it’s really critical that we act now to make sure that we can bring inflation back down to target. The longer that inflation stays above our goal, the harder it is to bring it back down, and the more pain that’s experienced by individuals and businesses.”
Hammack, who holds policy voting rights for 2026, which I’m not wild about, stated that the U.S. labor market is “reasonably stable” but still added “It may not be as dynamic as we are used to historically. We have lower job creation; the headline payrolls number has been averaging 20K jobs per month over the past three to 12 months.” What? So, Hammack admits that job creation has been poor, but in order to promote a hawkish agenda, also states that labor markets are stable. Huh?
This drivel, and that’s what I think it is, doesn’t add up, friends. Over the two months spanning from June through July, according to the BLS Household survey, 984,000 people left the civilian labor force, while the number of employed persons contracted by 594,000 persons. That sounds “stable” to you, Beth? Think it’s time to increase short-term rates, restricting small employer access to less expensive credit at a time that labor market demand is just starting to crack?
Oh, great idea. So, because core inflation is running at growth of 2.5% and not your precious target of 2.0%, you are somehow willing to place increased pressure on demand for labor? (Core inflation has run above the Fed’s 2% target since March 2021, apexing at 6.6% in September of 2022, and has never looked back.) Beth, you do know that participation has dropped to 61.4% from 61.8% since May, right? Do you think all of those folks leaving the civilian labor force are probably just seeking more free time? Better raise short-term interest rates to make sure that filling their days with unnecessary hours worked doesn’t become some kind of silly distraction, right?
This Is Not Difficult
OK, for the benefit of the Cleveland Fed president and others, I’m going to try to explain this one more time. Slowly. Increasing short-term interest rates does work to tame both producer- and consumer-level inflation. It does this through the restriction of overall demand. This includes demand for credit and yes, demand for labor. Economic activity will slow. Perhaps sharply. This is something policy makers might legitimately consider were inflation to run far above target and continue to accelerate for an extended period.
This is not the case. Inflation is not far above target and is not accelerating. This current bout with inflation has been caused by a shock to supplies of energy commodities. Your beef may be with those making foreign policy? Leave monetary policy out of it. Understand this: Constricting demand does nothing to alleviate artificial shocks to supply. Nothing at all.
This would simply slow the economy at a time when labor markets are showing weakness and do so for no good reason at all. Oh, inflation may slow further, but it already is. So would demand for labor and the U.S. would stand at the precipice of economic recession. Is that what the hawks want right now, even as inflation looks very much to have already peaked?
Those horses have left the barn. If memory serves, Beth Hammack has been running the Cleveland Fed since August of 2024. During that time, core inflation had never printed below 3.1% until March of 2025, but now with core inflation running at 2.5%, we need to raise rates? Things that make you go, hmmm… Sounds like someone better retake freshman year economics classes. Just my opinion….
Marketplace
On Thursday, The S&P 500 managed to set a new all-time intraday record high as well as an all-time record closing high. That was also an inflation story. For July, headline producer price index printed at 0.0% m/m vs. the +0.2% consensus and at growth of 4.7% y/y vs. expectations for a 4.9% print. At the core, PPI hit the tape at +0.2% vs. the 0.3% consensus and at growth of 4.2% y/y. That met consensus but was still down from a 4.7% pace in June.
That made it abundantly clear to everyone, well, almost everyone, ahem, that it would now be impossible for the Federal Open Market Committee to raise short-term rates any time soon, at least not intelligently. That logic was reinforced by the fact that the yield paid by the U.S. 2-Year Treasury Note contracted by five basis points to 4.15%, and the yield on the U.S. 10-Year Note dropped four basis points to 4.65%. This also pushed equities higher. The benchmark S&P 500 closed +0.6%, as the Nasdaq Composite gained +0.8%. Eight of the 11 S&P sector SPDR ETFs closed in the green, led by communication services (XLC). Materials (XLB) led the losers.
As for individual names, Workday (WDAY) led the S&P 500 higher on takeover rumors. It was the memory trade that ruled the session on Thursday as Sandisk (SNDK), Micron (MU) and Western Digital (WDC) all had very nice days. Cisco Systems (CSCO) unfortunately took a beating after posting disappointing guidance along with what looked otherwise, to be a pretty decent earnings report.
Breadth
As eight of the 11 S&P sector SPDR ETFs ended the day in the green, I didn’t really love how the chips landed at the closing bell. Sure, growth led the way, which I like, because everyone knows I am something of a tech trader. That said, the defensives, for the most part, outperformed the cyclicals on Thursday. This was no serious outclassing, but it was noticeable. That could be taken as a somewhat cautionary signal. at least economically.
Winners beat losers at the NYSE by a rough margin of seven to four and by about three to two at the Nasdaq. Advancing volume took a 66.1% share of composite NYSE-listed trade for the session and a 64% share of composite Nasdaq-listed activity. That’s all positive. So is this…. Aggregate trading volume increased 5.7% on a day over day basis across NYSE-listings and by 6.4% across Nasdaq-listings.
Trading volume also ramped across the membership of the S&P 500 for the first time since Aug. 4. The increased trading volume is encouraging, but the truth is that trading volumes remain well below their 50-day simple moving averages. Hence, while this recent price discovery outcome is producing positive signals, the lack of activity does cause some reason to play it at least a little safe.
Continue to Watch Oil
Bloomberg News is reporting that the U.S. will soon announce new economic measures against Iran at an unprecedented scale. In an interview at Newsmax on Thursday, Treasury Sec. Scott Bessent said… “Watch this space for more announcements coming next week because we are going to apply measures like have never been seen in the history of economic isolation on a country.”
Elsewhere, Defense/War Sec. Pete Hegseth said that the U.S. naval blockade of Iranian ports can continue “indefinitely.” Bessent added, “I think the reason we are succeeding is because it is a one-two punch. It will be a combination of economic isolation like the world has never seen before and the continued blockade in the Strait of Hormuz that will keep anything from going in or out of the Iranian ports.”
The aircraft carrier USS George Washington is reported to be headed to relieve the USS Abraham Lincoln, which has been deployed to the Middle East for over 250 days now. There have been reports indicating that conditions aboard the Lincoln have deteriorated. Sec. Hegseth has stated that those reports “completely misrepresented” the situation. Sarge says, “Watch oil”
Economics (All Times Eastern)
08:30 – Retail Sales (July): Expecting 0.1% m/m, Last 0.2% m/m.
08:30 – Core Retail Sales (July): Expecting 0.2% m/m, Last -0.2% m/m.
10:00 – U of M Consumer Sentiment (Aug-adv): Expecting 54.3, Last 55.2.
10:00 – U of M One-Year Inflation Expectations (Aug-adv): Expecting 4.1%, Last 4.2%.
10:00 – U of M Five-Year Inflation Expectations (Aug-adv): Expecting 3.2%, Last 3.3%.
10:00 – Business Inventories (June): Expecting 0.2% m/m, Last 0.3% m/m.
1:00 p.m. – Baker Hughes Total Rig Count (Weekly): Last 588.
1:00 – Baker Hughes Oil Rig Count (Weekly): Last 454.
The Fed (All Times Eastern)
No public appearances scheduled.
Today’s Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled.
At the time of publication, Guilfoyle was long SNDK, MU equity.
