Last week brought some welcome news as it concerns inflation.
Both the Consumer Price Index and Producer Price Index came in at lower levels than predicted.
That is not to say that inflation of just below 9% is anything to get excited about, but at least the path seems to have topped out last month.
That sent the markets north, with the thought that the Federal Reserve wouldn’t need to hike rates as much.
There was even talk that the Fed in September might only hike by 50 basis points.
The yields on Treasuries reflected this attitude as they came down.
What is important to note is the fact that crude prices and inflation have been correlated inversely this year.
We had crude prices higher than $110 per barrel in June and the Standard & Poor’s 550 stock-index dropping to a trading day low of 3636.
Since that time the S&P index has climbed back and reclaimed half of the losses it has sustained since January.
Most would stipulate that this is as it should be as far as bull and bear market performance.
It seems to me that the level of crude prices is much more of a factor than anyone had contemplated.
It does appear that crude prices have topped out for the foreseeable future and that should be of great help in lowering inflation.
My thought is that though the inflation measure has stopped out, it will come very slowly.
We are a long way away from the Fed’s goal of 2% inflation.
But we are also not in any kind of recession that I have lived through before.
Consumer demand is still strong.
Of concern though is the rise in consumer debt as the savings rate drops.
Moreover, the housing market is really starting to feel the impact of rising mortgage rates.
I’m not convinced the labor shortage has come to an end even though more reports come out about cuts in hiring.
There are still far too many openings that go unfilled.
What may be more important is the apparent concern in China that their economy is stalling.
The Chinese government just cut rates this week to stimulate growth.
It would seem a much simpler solution would be to cut back on Covid restrictions.
It used to be that should the U.S. get a cold the rest of the world got the flu. China may have taken that position.
Before you get too optimistic don’t overlook the fact that Europe will suffer though a difficult winter as Russia cuts back on its natural gas exports.
Russia can afford to do that since limits on their crude exports have not proven effective.
Another factor to consider is the Saudis may increase crude production, further lowering crude prices.
This is all just to say that it seems harder to project lower index values.
I’m not saying there is anything near value here, but a move down seems harder and harder to accomplish.
If the recent relation between crude and equities holds, it only seems reasonable to assume that we may have seen the worst.