😱🏦 Fed May Reverse Rate Hikes!
Happy Hump Day everyone!
Last week we saw President Biden call for a 3-month suspension of gas a diesel taxes, potential big changes to 401(k) retirement plans, the Supreme Court overturned Roe v. Wade, Juul asked for a temporary block on FDA’s ban of its e-cigarettes, Airbnb permanently banned parties, and EY was fined $100 after auditors were caught cheating on an ethics exam.
Enjoy this week’s Hump Days!
- Humphrey, Rickie & Tim
In the Markets
Featured Story
After weeks of bad news in the markets, we’re here to deliver some potential good news. Retailers such as Target, Walmart, Best Buy and Urban Outfitters have said in recent weeks that they are sitting on too much inventory for some of their products and are planning to mark down prices and step up sales to clear some shelves.
Conditions have changed drastically since retailers ordered vast amounts of inventory from their manufacturers months ago with the expectation that consumer spending would still be red hot. However, in the face of the highest annual jump in inflation since the 1980s, consumer demand has softened and retailers are left with a mountain of inventory they need gone.
This brings light to an interesting phenomenon called the “Bullwhip Effect" most recently tweeted about by hedge fund manager Michael Burry, founder of Scion Asset Management made famous by the movie “The Big Short”. In the tweet issued on Monday, Burry suggested that the Fed may pause or even reverse its campaign of interest rate hikes.
The “Bullwhip Effect” Michael Burry is referring to is that because retailers are sitting on a ton of excess inventory and having to slash prices (a deflationary action), it will lead to disinflation in the CPI data later this year, and the Fed will choose to pause or reverse their stance on rates and quantitative tightening (QT).
Many signs point towards deflationary pulses such as commodity prices have all fallen significantly from their highs, the Fed of Atlanta is showing no growth for this quarter and the Dallas Fed’s survey of manufacturing intentions released on Monday dropped its lowest reading since May 2020. Come the CPI report for June (scheduled July 13), it seems likely that the data will come in well below the 8.6% recorded in May.
Surprising as it may be, current inflation may wind up actually being transitory since the drivers of our inflation (quantitative easing, government spending, pandemic hoarding) seem to be going in reverse, and thus, inflation may slow which would be very positive for both the stock and bond markets.
Ultimately, it comes down to the Fed seeing “progress” on slowing inflation before they pull back meaning lower CPI readings for a few consecutive months. It is possible that policy makers could pause as soon as their meeting in September. However, we’ll take the CPI data one month at a time and hopefully, June’s data shows that inflation has officially peaked.
Weekly News Roundup
Stores Are Sitting On Excess Inventory, Could Mean Big Bargains for Discount Shoppers (NBC)
Retailers are quickly finding out that consumer’s preferences have changed from the red hot purchasing days during the pandemic and are now facing mountains of excess inventory as delayed orders of goods start to pour in. To clear unwanted stock, Target, Walmart, Macy’s and other retailers have been slashing prices on thousands of products and offloading merchandise in bulk before it leaves the warehouse, often at substantial losses.
TC: Many retailers have way too much inventory and have to get rid of it somehow. Could mean some great deals, starting with Amazon Prime Day
HY: This is going to be super interesting come July 13th (when we get our CPI reading data) and beyond into the Fall, and is somewhat positive news considering the year so far.
23M Californians To Get Up To $1,050 in “Inflation Relief” Checks (CBS)
Under a new $17B budget deal reached by Governor Gavin Newsom on Sunday, ~23M California residents will receive checks of up to $1,050 in addition to the suspension of the sales tax on diesel fuel. The agreement comes as California drivers face the highest gasoline prices in the U.S., averaging $6.32, or 29% higher than the national average.
RH: Inflation relief in the form of more inflation?
TC: um… fighting inflation by increasing demand when supply is constrained… nice.
HY: A better move would have been to lower gasoline tax in the state of CA temporarily, although I don’t know how logistically easy that would have been.
Sanctions Push Russia to First Foreign Default Since Bolshevik Revolution (WSJ)
For the first time since 1918, Russia defaulted on its foreign debt. Russia missed payments of $100M in dollars and euros to bondholders. Global sanctions have effectively unplugged Russia from the global financial system, creating payment obstacles Moscow could not overcome. Russia has accused the West of manufacturing an artificial default and called the situation a farce. Russia has the money and intent to pay so their default is expected to pose unique legal challenges in the coming years.
RH: They have the money and the willingness to pay but have been blocked, and rightfully so, to the tools they need to pay their creditors. Will be interesting to see what comes of this.
Charts of the Week
Want to know how the S&P 500 will likely move in advance? Follow the 10-year real Treasury yield.
According to Goldman Sachs, the decline in the S&P 500 this year has been driven entirely by rising interest rates. In other words, the decline in the stock market isn’t due to reduction in earnings estimates or projected cash flows, but simply an increase in the risk-free discount rate (basically the opportunity cost of investing in stocks).