• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Stocks

Powell, How Would You Rate Inflation Now?

As real inflation ticks higher and much faster than actual GDP growth momentum, then it starts to become a real scare, an inflation scare.
By MALEEHA BENGALI
May 11, 2021 | 05:30 AM EDT

One of the biggest debates this year has been that of inflation vs. deflation. Despite the double-digit price rises year-over-year in several commodities -- from lumber, copper, iron ore, steel and some food staples, the market is still of the view that this may be "transitory."

After all, can you blame the participants if their leader, Fed Chair Jerome Powell, keeps humming on about the same thing. The truth of the matter is they do not really know. They are just hoping they have stimulated enough that the economy gets a full-blown recovery together with inflation. The only question is we are definitely getting the latter, the former being sustainable is debatable.

We know that U.S. bonds' 10-year yields are coming from all-time lows of 0.5% toward 1.6% today at the time of writing. Even if we go back toward 2%, it will not be a big move, just more of a normalization of the levels that seem synonymous with this level of growth. But it is the pace at which the yields move that is more relevant than the level that it gets to. It is the direction change as this has implications of asset allocation and subsector preferences. An excess of $4 trillion in monetary accommodation mixed with $2 trillion of fiscal stimulus, the broad money supply growth surely makes a case for higher inflationary readings ahead. The Fed are adamant in letting this run hot, sustainably above 2% before they even think about thinking about raising rates. Just because inflation did not appear in the last decade, most seem accustomed to the fact that it may not happen now. That is naive thinking as never before did we combine so much fiscal stimulus with monetary policy.

The soaring prices in construction materials, copper and other raw materials is the demand surge from China via their infrastructure spending and growth to boost gross domestic product from the depths of the COVID crisis. This is putting an inordinate amount of pressure on the supply side as demand is soaking up all the excess material. Combined with the net zero emissions, electric vehicles, sustainable movement, this adds a further leg higher to an already tight market. Iron ore was up 10% today at one point. World food prices increased for an 11th consecutive month in April, hitting their highest level since May 2014, with sugar leading a rise in all the main indexes, the United Nations food agency said on Thursday. The Food and Agriculture Organization's food price index, which measures monthly changes for a basket of cereals, oil seeds, dairy products, meat and sugar, averaged 120.9 points last month vs. a revised 118.9 in March.

Whether the Fed thinks this is transitory, the moves higher across the board are real and growing. Prices paid component and various company conference calls have all talked about pass through cost inflation to consumer. Without adequate payroll growth, it does not present a healthy environment picture at all. Unfortunately, the Fed cannot stop bankrolling the markets till it reaches its employment goals, making the inflation dynamic even worse.

During the fourth quarter of 2020 to the first one of this year's rally, it was both reflation and reopening themes that rallied. Since the second quarter started, only the reflation names are moving. Reopening is getting left behind as there are serious concerns on the pace at which economies ease restrictions, despite the vaccination rates. But not all reflation stocks are going up. Oil, for instance, has done nothing since end of March. It was one of the sectors that chased higher as every time the yields moved higher, but this time it has stayed flat or down. That is because the market knows more physical oil is around the corner whereas the same cannot be said for copper or iron ore, in the near term.

At first, the market rejoices with everything rallying up, as higher yields mean the economy is improving. But then, as real inflation ticks higher and much faster than actual GDP growth momentum, then it starts to become a real scare, an inflation scare.

This environment is typically not good for equities nor bonds. The weakness that started in technology stocks that saw vicious rotation out of them into "value" sectors is getting worse. The sector fundamentals have not changed, but the macro tailwind has now become a headwind, the same reason why lower rates took technology sector higher, is taking it lower today outside of its earnings growth stories. Sooner or later, this pressure can and will feed into the overall market, especially now when everyone is long and complacent. Fed Powell, back to you, so what will it be?

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Bengali has no position in any security mentioned.

TAGS: Currencies | Federal Reserve | Investing | Rates and Bonds | Stocks

More from Stocks

Specific Stocks Appear Solid but Upward Momentum Can't Yet Be Trusted

James "Rev Shark" DePorre
May 19, 2022 4:29 PM EDT

I remain convinced that we can't begin to talk about a bottom in the indexes until the S&P 500 is in a technical bear market.

Is This the Time to Buy Costco?

Bruce Kamich
May 19, 2022 3:05 PM EDT

Buy a falling knife? No, but this one's intriguing.

TJX Cos. Is Ignoring the Market's Downdraft

Bruce Kamich
May 19, 2022 1:25 PM EDT

Does this strength have staying power?

These ETFs Will Meet You in the After-Hours Club

Mark Abssy
May 19, 2022 12:30 PM EDT

Let's check three funds that are set to buy the close and sell the open.

After Wednesday's Bloodbath, a Battle Is Brewing in the Market

James "Rev Shark" DePorre
May 19, 2022 11:56 AM EDT

We see traders hunting for an oversold bounce, while investors are dashing for the exits. Here's my take on the wild action so far -- and whether we're in a recession yet.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 01:44 PM EDT STEPHEN GUILFOYLE

    Stocks Under $10 Portfolio

    We're making a series of trades here.
  • 03:07 PM EDT PAUL PRICE

    Why Is Walmart Down Big Today?

    Besides its poor earnings report Walmart was way...
  • 07:14 PM EDT PAUL PRICE

    A New, Very Scary Movie

  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login