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The Last Rate Hike

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Louis Navellier is hoping for just one more rate hike … are Fed members misleading us? … more signs of consumer weakness … another warning from Jeff Bezos

On Monday, Federal Reserve Vice Chair Lael Brainard told Wall Street what it wanted to hear:

I think it will probably be appropriate soon to move to a slower pace of rate increases.

As to that additional work, she echoed the idea that it will be dependent upon the data:

It’s really going to be an exercise on watching the data carefully and trying to assess how much restraint there is and how much additional restraint is going to be necessary, and sustained for how long, and those are the kinds of judgments that lie ahead for us.

Well, yesterday’s cooler producer price index (PPI) number would appear to be the exact data that Brainard is watching. And sure enough, Wall Street connected the dots and climbed on the day.

The softer inflation print increases the odds that the Fed’s next rate hike in December will be a smaller 50-basis-point increase.

Legendary investor Louis Navellier is now wondering if that will be the last rate hike we’ll see.

From yesterday’s Platinum Growth Club Market Update podcast:

[Yesterday’s PPI] was wonderful…

Service costs fell one-tenth of a percent. It’s the first time service costs have fallen since November 2020.

So, it looks like inflation is starting to decelerate on a wholesale level although we do have food and energy inflation…

Everybody is expecting a 50-basis-point rate increase in December. And that will get the Fed very close to what we call “neutral” or “parity.”

We hope and pray that that’s the last Fed rate-hike and then the market rallies from there.

While I hope Louis is correct, if the Fed does end its rate-hike campaign in December, then several Fed members have been skillfully misleading us

I write this based on the difference between “slowing rate hikes” and “the eventual rate at which the Fed will stop hiking rates.”

These things aren’t mutually exclusive. Clearly, the Fed can slow rate hikes, while continuing to hike rates to levels that are higher than previously anticipated.

In recent weeks, various Fed members have spoken directly to these related-yet-different outcomes.

We just heard Lael Brainard discussing slowing down rate hikes. As to their eventual high-point, here’s Federal Reserve Chairman Jerome Powell from his press conference earlier this month:

We may ultimately move to higher levels than we thought at the time of the September meeting.

The incoming data since our last meeting suggests the ultimate level of interest rates will be higher than previously expected.

More recently, Federal Reserve Governor Christopher Waller had this to say on Monday:

These rates are going to stay — keep going up — and they’re going to stay high for a while until we see this inflation get down closer to our target.

We’ve still got a ways to go. This isn’t ending in the next meeting or two.

So, if the Fed will, in fact, be done with hikes after December, we’re seeing some very convincing poker-faces.

But perhaps that’s the point. As our hypergrowth expert Luke Lango has recently suggested, the Fed has to remain hawkish in appearance otherwise no one would take them at their word – which would undercut the Fed’s efforts.

So, perhaps this is all part of the Fed’s chess match with investors. In any case, only a 50-basis-point increase in December is appearing increasingly likely.

But as we applaud softer PPI data, let’s remember that the same tailwind in the fight to curb inflation is a headwind for U.S. consumers

And yesterday, we received another piece of data illustrating the impact of this headwind.

Household debt is climbing at the fastest pace in 15 years.

From CNBC:

Total debt jumped by $351 billion for the July-to-September period, the largest nominal quarterly increase since 2007, bringing the collective household IOU in the U.S. to a fresh record $16.5 trillion, up 2.2% from the previous quarter and 8.3% from a year ago.

The increase follows a $310 billion jump in the second quarter and represents a $1.27 trillion annual increase.

Part of this debt increase comes from mortgages. Now, one can argue that mortgage debt is “good” debt because it shows a consumer healthy enough to buy a home. Plus, a home mortgage is a sort of “forced savings account” because the homeowner is building equity as opposed to renting.

So, when looking at this overall debt number, let’s focus on credit card debt, which is more representative of consumer health and monthly family budget spending.

Back to CNBC:

The credit card balance collectively rose more than 15% from the same period in 2021, the largest annual jump in more than 20 years, according to the New York Fed, which released the report.

The increase “towers over the last eighteen years of data,” a group of Fed researchers said in a blog post on the central bank site.

New York Fed researchers attributed the credit card growth to “very robust” consumption, rising prices and consumers using substantial levels of savings that remain on accounts.

Along with the rise in balances has come an increase in delinquencies.

The description of “very robust” consumption catches my eye

On one hand, this is good news. After all, a U.S. consumer who remains willing to open their wallet is a positive for our economy.

And in fact, additional news this morning reveals the U.S. consumer is all-too-happy to continue buying today. (Even if that buying is done with credit cards, which is not all that healthy.)

According to the Census Bureau, U.S. retail sales rose 1.3% in October from September. Economists had expected a gain of just 1%.

But this good news for consumer spending is bad news for the Fed’s efforts on inflation. After all, the more that shoppers buy at today’s inflation-elevated prices, the more support there is underneath those inflationary prices.

This leaves investors in a predicament…

Should we root for strong consumer spending…at the risk of elevated, persistent inflation?

Or do we want lower prices and softer inflation…at the expense of a U.S. consumer who no longer has the economic might to prop up the economy?

Now, you can argue that these options aren’t mutually exclusive. I saw a headline a few days ago claiming that a “soft landing” was back on the table. In other words, the Fed would be able to kill inflation without causing a recession. The best of both worlds.

While anything is possible, even Powell isn’t giving that outcome generous odds.

Speaking to the window of opportunity for an economic soft landing at his post-FOMC press conference, Powell said:

Has it narrowed? Yes.

Is it still possible? Yes.

Meanwhile, Jeff Bezos is betting on that window being closed.

If the Amazon founder is right, consumers need to put away their wallets right now to prepare for tougher economic conditions in the coming months

From CNN Business:

Amazon founder Jeff Bezos recently warned consumers and businesses they should consider postponing large purchases in the coming months as the global economy contends with a downturn and faces a possible recession…

Bezos urged people to put off expenditures for big-ticket items such as new cars, televisions and appliances, noting that delaying big purchases is the surest way to keep some “dry powder” in the event of a prolonged economic downturn.

Meanwhile, small businesses may want to avoid making large capital expenditures or acquisitions during this uncertain time, Bezos added.

You may recall that last month, Bezos tweeted that his followers should “batten down the hatches.”

On a related note, Amazon announced Monday that it is laying off 10,000 workers, the largest reduction in the company’s history.

So, where does all of this leave us?

Well, big picture, yesterday’s inflation data was good news. As we assemble all the various pieces of data into a collage to get a broad sense of the economy and investment environment, yesterday’s PPI number is exactly what we’re looking for.

But we’d be wise to be even-tempered and not declare victory too soon. After all, there’s still “more work to do.”

On that note, here’s Reuters:

Atlanta Federal Reserve President Raphael Bostic said on Tuesday he sees little evidence that the U.S. central bank’s aggressive monetary policy tightening is slowing inflation, and borrowing costs will have to rise further for that to happen.

“Tighter money has not yet constrained business activity enough to seriously dent inflation,” Bostic said in an essay posted on the Atlanta Fed’s website.

“I anticipate that more rate hikes will be needed” to get policy sufficiently restrictive to return inflation to the Fed’s 2% target, he said.

But even if this is just a masterful poker face from Bostic and a rate pause is right around the corner, remember, the real issue is the economy and earnings. And we’re only beginning to experience the first few waves of economic pain that are headed our way – that’s due to the lag time between rate-hikes and when they’re felt in the economy.

Economically, things will get worse before they get better. As we noted in the Digest last week, some analysts are now calling for zero earnings growth for the S&P in 2023.

To what extent are Wall Street bulls ignoring this, or simply looking beyond it? That’s what we’ll be tracking here in the Digest.

The level of interest rates is one of the main drivers in how this unknown will play out. We’ll get the next puzzle piece about one month from today when the Fed convenes its December meeting on the 14th.

We’ll keep you updated.

Have a good evening,

Jeff Remsburg