Inflation Outlook Unclear

US stock market indexes spun their wheels briefly at the open, then took off. At the moment, the Dow is up 224 points, the S&P 500 is up .7% and the Nasdaq is up .5%. Energy stocks surged over 3% in early trading as oil prices rose over $72/barrel. Hurricane Ida production shutdowns are the culprit. Financials and industrials are up 1%. Technology, internet and consumer discretionary groups are up somewhat less. The bond market is punishing Treasuries and high-grade corporates. Only junk bonds, which tend to follow the stock market, are rising in price today.

Yesterday, we learned that consumer price inflation cooled off a bit in August. The headline Consumer Price Index (CPI) decelerated to 5.25% from 5.36% in the prior month. So-called Core CPI, which excludes food & energy, also came in below expectations at 4.0%. Prices for used cars, airfare, hotel stays and auto insurance retreated. But rent, furniture and freight prices continue to rise. Clearly, rising Covid-Delta cases were felt in re-opening categories of the report. In addition, there were distortions caused by Hurricane Ida. So it’s hard to pick out anything conclusive regarding the outlook for inflation. Bloomberg’s Cameron Wise says this report offers something for everyone, both “Team Transitory” and “Team Inflation Is Real,” and concludes that the “outlook is legitimately murky.” A monthly survey from the New York Federal Reserve Bank shows consumers expect inflation to hover around 4% for the next three years. That’s fairly high compared with recent historical data, but of course nothing like the late 1970s. On the other hand, current prices for inflation-protected Treasury bonds suggest inflation will decelerate to around 2.6% over the next three years.

JP Morgan’s Dubravko Lakos acknowledges weaker investor & consumer sentiment as well as softer economic activity in recent weeks. But he doesn’t expect it to persist. He believes this is a temporary trend driven by the fourth Covid wave. Pessimism is overdone because Covid will ease in coming weeks, making possible a trend of reacceleration. He sees a “pretty decent set-up for the first part of 2022.” Indeed, there’s room for improvement—cross-border economic activity hasn’t really picked up yet, and neither have corporate capital spending and business inventory levels. So although the “easy money” has already been made during the early part of the stock market recovery from the Covid recession, there’s “no need to get negative” on the cycle or on the consumer.

Microsoft (MSFT) announced an 11% increase in its quarterly dividend. In addition, the company’s board approved a $60 billion stock buy-back program. That is, they’ve earmarked $60 billion cash to repurchase and retire outstanding shares over an unspecified number of years. Buy-backs are common among larger publicly traded companies because they tend increase the value of each remaining share. For whatever reason, they’ve become a political lightning rod, with some politicians like Elizabeth Warren attacking these programs as a waste of money or market manipulation. Neither is true, of course. Recently, two senators proposed levying a tax on corporate stock buy-backs, brushing aside the double taxation issue.