What $6 Diesel and This Week’s Inflation Reports Mean for the FedVIEW IN BROWSER
Most people who live in the city or suburbs don’t think twice about the price of diesel. Maybe they should. I can assure you, long-haul truckers pay attention to it. Farmers do, too. So do folks who work in construction. That’s because diesel fuels the trucks that haul goods across the country. It powers farm equipment and the heavy machinery used on construction sites. And right now, diesel prices are making history. This week, the national average hit $6 a gallon for the first time ever, according to GasBuddy. That’s up about $2.30 from roughly $3.70 a gallon one year ago. Now, you might be thinking, “I don’t drive a diesel. Why should I care?” Because those higher fuel costs don’t stop with truckers, farmers and construction crews. They can ripple through the entire economy. When it costs more to ship food to your grocery store, harvest crops, move raw materials or deliver products to your doorstep, somebody has to absorb that extra expense. The margins in a lot of these businesses are already paper-thin. And they can’t just eat that added cost forever. Eventually, some of it can wind up in the prices you and I pay. That’s why this week’s inflation reports were so important. In today’s Market 360, I’ll break down what they revealed about inflation and explain why the pressure is building on the Federal Reserve. I’ll also explain what this means for investors and show you why specific stocks can still thrive, even as stubborn inflation and higher interest rates rattle the broader market.
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Wholesale Inflation Heats UpOn Wednesday, the Producer Price Index (PPI) rose 0.4% in August, in line with economists’ estimates and up from July’s revised 0.1% gain. There was some good news in the report. Core PPI, which excludes volatile food and energy prices, rose just 0.2%. That was slightly better than expected, but wholesale goods prices jumped 1.1% in August. Energy was the primary culprit. Wholesale energy prices surged 4.2%, while food prices were relatively contained. Diesel did a lot of the damage. The Bureau of Labor Statistics said diesel fuel prices surged 24.1% in August alone, driving nearly two-thirds of the increase in wholesale goods prices. And here’s the troubling part: Diesel prices have climbed even further since the PPI survey period ended. The national average has now reached a record $6 a gallon. So, if those higher fuel costs persist, we could see even more energy-related inflation show up in the September data. Consumer Inflation Stays StickyThen, on Friday, we got the Consumer Price Index (CPI). Headline CPI rose 0.4% in August and was up 3.4% over the past 12 months, both in line with economists’ expectations. Once again, energy was a major driver. Gasoline prices jumped 3.9% in August, accounting for one-third of the entire monthly increase in consumer prices. Gasoline prices are now up 27.4% over the past year. More concerning for the Fed, core prices rose 0.3% in August. That’s hotter than the 0.2% increase economists expected and an acceleration from July’s 0.2% gain. Remember, core CPI strips out volatile food and energy prices. So, the hotter reading suggests inflationary pressures may be broadening beyond energy. Shelter costs were part of that problem, too. They rose 0.3% in August, up from just 0.1% in July. That matters because housing costs are a major component of core inflation. And when shelter inflation is accelerating at the same time energy prices are surging, it makes the Fed’s job much harder. That’s also why the diesel story matters beyond the pump. You don’t need to drive a diesel truck to feel the effects of record-high fuel prices. Higher energy costs can work their way through the economy and eventually show up in the prices you and I pay. And with crude oil now back above $100 a barrel, those pressures may not ease anytime soon. Pressure Builds on the FedThe inflation reports quickly spilled over into the bond market. The 10-year Treasury yield climbed above 4.9% for the first time in three years. The European Central Bank also raised interest rates this week, adding even more upward pressure on global rates. As I have been saying for a while now, the bond vigilantes seem to be driving the bus. That leaves the Federal Reserve in a difficult position heading into next week’s Federal Open Market Committee (FOMC) meeting. Fed Chair Kevin Warsh has already said inflation remains too high. And just last week, Fed Governor Christopher Waller said he could support holding rates steady if inflation continued to cool and core CPI rose just 0.2% in August. Well, we didn’t get that. By the same token, the labor market has been pretty resilient, with the U.S. adding 162,000 jobs in August. Wall Street has taken notice. According to CME Group’s FedWatch tool, traders are now pricing in about an 85% chance that the Fed will raise rates by 25 basis points next week. 
Source: CME FedWatch Clearly, that is not what Wall Street wants to hear. Stocks came under pressure this week as Treasury yields moved higher and investors started preparing for another potential rate hike. And with September already a seasonally weak month for stocks, I would not be surprised if we see some more bumps along the way. But I don’t want you to lose sight of something important, folks. Follow the Money, Not the FearThere is nothing wrong with corporate earnings – they’re still phenomenal. Our friends at FactSet estimate a year-over-year earnings growth rate of 28.5% for the S&P 500 for the third quarter. And despite all the hand-wringing over inflation, interest rates and energy prices, institutional investors are still putting money to work. The key is knowing where that money is going. When volatility picks up, a lot of investors react to the same headlines and pile into or out of the same obvious stocks. But the big institutional investors – the “elephants” of the market – tend to move differently. They build positions quietly, often well before a stock becomes popular with the public. For nearly five decades, I’ve used quantitative analysis to identify those kinds of shifts. My proprietary P.I. system analyzes more than 6,000 stocks for signs that institutional money is moving in or out. And that is exactly what I’m doing right now. My P.I. system is currently flagging stocks where the “elephants” appear to be quietly building positions before the crowd catches on. These are the kinds of setups that can produce some of the market’s biggest moves once that institutional buying starts showing up in the share price. In fact, this same system has helped me identify hundreds of stocks that went on to double, and dozens that climbed more than 1,000%. And right now, I believe a fresh batch of these opportunities is beginning to emerge. That’s why I recently recorded a special presentation revealing how P.I. works, what it is seeing today and where I believe the next big opportunities may be taking shape. Click here to watch it now. Sincerely, |
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