Trading Desk: Cut Through The Inflation Dread

Everybody knows the Fed is going to raise interest rates again next week. Today’s inflation number doesn’t make that story appreciably worse for Wall Street.

We were looking for a 0.50 point hike yesterday. The odds of a bigger move actually went down. Inflation at this level simply doesn’t move the needle in the wrong direction.

All we lost today was the hope that we’d see real progress toward getting prices under control. That hope has now been deferred yet again, pushing back to next month’s numbers.

The odds of one last rate hike in February have gone up a little. We’ll worry about that when it happens. The point is that the Fed doesn’t deal in hope.

The Fed deals in economic realities. On that basis, inflation is trending roughly where we thought it was a month ago . . . no better but really not much worse.

February is a long way away. We’ll be approaching the one-year anniversary of the Ukraine oil shock. At that point, unless demand for fuel surges in the next few months, energy inflation is going to flatline on its own.

And if the negativity has some teeth and the world is teetering on the brink of a deep recession, demand for fuel is going to implode, which will shift the energy numbers into reverse. Broad-based inflation will magically evaporate.

In that scenario, the Fed will stop. I don’t want that narrative to play out that way. We’ve suffered in an inflationary boom, too hot to handle. Shifting straight to an economic chill will be at least as unpleasant.

But either way, energy inflation is going to flatline. It’s calculated on a year-over-year basis. A year ago, West Texas crude was $69 a barrel before spiking $50 in the weeks after Russia shocked the market.

West Texas crude is $74 a barrel now. Barring another supply shock in the next three months, even if oil rebounds 18% between now and February, energy inflation is going to zero out by the time the Fed has its first 2023 meeting.

The Fed is close to declaring victory. Don’t go to sleep now. One way or another, rates are close to the top.