(Kitco News) – Financial markets were in flux on Thursday after the latest Producer Price Index (PPI) report came in hotter than expected, and with the intense focus on interest rate cuts by investors looking for further gains in the risk-on rally, analysts at The Kobeissi Letter said, “The Fed's worst nightmare has begun.”
“We now have MULTIPLE rising inflation metrics with signs of a weakening labor market,” they wrote in a thread on X. “For the first time since September 2022, both CPI and PPI inflation are officially back on the rise. Did the era of stagflation just begin?”
Elaborating on the tricky situation in which the Fed finds itself, the analysts noted that “For the first time since April 2023, Core PPI and CPI inflation are back above 3.0%.”
“Even as the Fed thought inflation was heading to their 2% target, it clearly is NOT,” they added. “Inflation has clearly leveled off ABOVE the Fed's 2% target, yet they keep cutting interest rates.”
“This helps explain why we have seen straight-line higher price action in the 10-year note yield,” the analysts said. “Even as the Fed has cut rates by 75 basis points, with an unexpected 50 bps cut in September, rates are RISING. Many believe mortgage rates are heading to 8%+ next.”
And it's not just rising yields that are sounding the alarm, as “US temporary help services jobs are down 145,800 over the last 12 months, to their lowest since October 2020,” the analysts noted. “This is considered a LEADING indicator for the unemployment rate. Temporary help services jobs have shrunk for 23 months, the longest stretch since 2008.”
For this reason, The Kobeissi Letter recommended shorting the SPX heading into this week, a move the analysts said “paid off.”
“Despite a very strong postelection rally, the market is nervous about inflation in 2025,” they warned.
Noting that the Fed has been notoriously behind the curve regarding inflation in recent years, the analysts highlighted Fed Chair Jerome Powell’s quote from May 4, where he said he “doesn’t see the stag or the flation” when asked about stagflation.
During a press conference on November 7, Powell offered a different take when pressed about the issue, saying, “The whole plan is not to have stagflation, so we don’t have to deal with it. That is actually our plan.”
Powell just said the Fed's plan on how to deal with stagflation is not to have stagflation. Then he laughed. That says it all. Sell your dollars and buy gold now, while you still can.
— Peter Schiff (@PeterSchiff) November 7, 2024
“This will be the new version of their ‘inflation is transitory’ call in 2021,” The Kobeissi Letter said. “At a high level, stagflation is an economy with RISING unemployment and rising prices. This is a nightmare situation for the Fed because it puts them in a lose-lose situation. If you raise rates, we head into a recession; if you cut rates, inflation will rise even further.”
Highlighting the inflationary nature of rate cuts, the analysts noted that “Since Fed rate cuts have begun, the average rate on a 30-year mortgage has gone up nearly 100 bps. We now have 7%+ mortgages and rising rates across the board. Consumers are losing confidence as rates rise despite a promise of lower interest rates and relief from the Fed.”
With all the data points combined, The Kobeissi Letter warned that the fiscal situation in the U.S. is “beginning to look like stagflation seen in the 1970s.”
“Just as the Fed thought they had inflation under control, inflation and unemployment rebounded,” they said. “If we see another wave of inflation in 2025, we could be in a similar situation, but likely not as bad as the 1980s.”
They added that with the rebound in inflation, “we are beginning to see sharp moves in bond/commodity markets,” and said, “This will likely spill over into the equity market into 2025. We are trading the swings.”
“As we look ahead, all eyes will be on the November jobs report,” they concluded. “The October jobs report was the weakest since 2020, but it's being written off due to the hurricane. Downward jobs revisions are the new normal.”
The sentiment from The Kobeissi Letter was echoed by Joshua Kagan, CEO of Bonfire RWA, who warned that “if inflation stays high - and long-term interest rates remain high - we will have major structural issues with walls of both government and #commercialrealestate debt resetting at much higher rates in the coming years.”
“Doesn't seem like markets are sufficiently pricing this risk,” Kagan added. “But I am also reminded of the Keynes' quote, ‘Markets can remain irrational longer than you can remain solvent.’”
