All about inflation

November 12, 2021
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This week it has been all about inflation, inflation, inflation.

  • The Consumer Price Index (CPI) came in at 6.2%, a 30-year high, and above 5% for six consecutive months for the first time since the early 1990s.
  • This has many wondering if the Federal Reserve Bank (Fed) will now hike rates sooner, with the first hike now expected in the middle of next year and another by December.
  • We remain skeptical rate hikes will happen that soon (discussed more here), but should inflation remain hot, it is a possibility.
  • The well-known supply chain, labor, and everything shortages are impacting prices, but add Toyota Motors as the latest to suggest constraints may be peaking, as factories are back to normal after seven months. We’ve seen multiple large companies say similar things the past two weeks.
  • Lastly, inflation expectations are clearly on the rise, but someone forgot to tell the bond market, as the 10-year Treasury yield remains beneath 1.60%. We continue to think if the bond market was sniffing out massive inflation down the road then rates would be significantly higher than they are now.

DAILY INSIGHTS

U.S. equities opened slightly higher to conclude the trading week

  • As of Thursday’s close, the S&P 500 Index is tracking to end the week lower, breaking five straight weeks of gains.
  • European markets are higher through midday trading as Eurozone industrial production declined in September amid supply chain strains.
  • Asian markets finished mostly higher, as the Singles Day shopping festival hit a record.  

Chart of the day

  • The MSCI Emerging Markets Index is barely positive on the year, and is still down more than 12% from its February highs.
  • The lack of movement has represented a vast opportunity cost relative to U.S. stocks, as shown in the chart of emerging markets relative to the S&P 500 in the bottom panel.
  • We continue to recommend an underweight position to EM equities based on the negative relative trend, but in absolute terms the index is consolidating into a wedge formation that may come to a resolution sooner rather than later, and we do believe the more likely direction will be higher.

New 5 Charts with LPL Research later today

  • Be on the lookout for the latest episode of 5 Charts with LPL Research later today.
  • This week’s episode looks at gold breaking out, improved participation in S&P 500 stocks and more.
  • The video can be found on LPLResearch.com and YouTube around noon ET.

MODEL AND MANAGER UPDATES

MWP Tactical Absolute Return

We made changes to the Tactical Absolute Return model on the Model Wealth Portfolios (MWP) platform. The main objectives of the trades included the following:

  • We eliminated exposure to a liquid alternatives strategy.
  • We increased domestic equity exposure by adding to existing positions in strategies that emphasize banks and real estate investment trusts (REITs).

View the latest MWP Tactical Absolute Return trade log here.