What’s The True Inflation Rate?
Brian Gilmartin | May 24, 2022 12:18AM ET
Bespoke put up a couple of good charts on Monday showing TIPS breakevens beginning to fall and the 5-year breakeven with the conclusion being that “there is no evidence here whatsoever that the market is concerned about a long-term inflation spiral.”
The S&P 500 held the 3,800 level last week—a key Fibonacci retracement level for the technically-inclined investor—thus, with falling inflation expectations, the stock market could turn friendlier quickly.
An interesting and somewhat contradictory story from Walmart’s earnings last week was that Walmart (NYSE:WMT) said food inflation was running double-digits.
Half of Walmart’s annual revenue is grocery so don’t discount that lightly. That means half of Walmart’s expected 2023 revenue of $595 billion (or almost $300 billion) is grocery-driven making Walmart the largest grocer in America by a long-shot.
With Ukraine being one of the world’s largest wheat exporters, it might take a year or two to replace that harvest and the grain price increases we’ve seen. Wheat is up 60% per this year per one source.
In addition to the S&P 500’s retracement level retest at 3,800, since the 10-year Treasury yield hasn’t made a new high since May 9’s 3.17% high tick, if bond prices firm up and yields fall, that’s another positive for stocks.
Finally, the dollar– as measured by the Invesco DB US Dollar Index Bullish Fund (NYSE:UUP)—which has been exceptionally strong this year—has been weaker the last 3 days.
Summary/conclusion: The Food & Energy components of the inflation indices could remain elevated for a while, but the breakevens are now indicating that inflation is expected to moderate and is expected to return to its traditionally-benign 2.2% annual rate.
As of last Friday, May 20, the SPDR® S&P 500 (NYSE:SPY) was down 17.71% year-to-date, while the Barclays iShares Core U.S. Aggregate Bond ETF (NYSE:AGG) was down 9%, leaving a 60%/40% balanced account down 14.23% YTD. That’s painful for a lot of investors particularly those in or nearing retirement.
The final thought is that, given the last two weeks' data here and here, S&P 500 earnings haven’t weakened at all with the stock and bond market weakness. At least not yet.
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The TIPS and breakevens were worth noting. The true inflation rate is probably far lower than the headline numbers. Just keep that in mind.
None of this is a prediction or forecast. As year-to-date returns have shown, the stock and bond markets can be riskier than you think.
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