New York Stock Exchange’s senior market strategist Michael Reinking claimed on Wednesday that the markets were “well prepared” for the headline inflation figures released earlier, but stressed that the data was “poor”.
In an interview with Fox News Digital, Reinking also noted what the latest inflation data, which is at a recent 40-year high, means for the next steps of the Federal Reserve as central bank officials try to tame rising inflation.
On Wednesday morning, the Ministry of Labor said that the consumer price index, a broad measure of the price of groceries, including petrol, groceries and rent, rose 9.1[ads1]% in June from a year ago. Prices rose by 1.3% in one month from May. Both figures were far higher than the 8.8% headline figure and 1% monthly profit forecast from Refinitiv economists.
The data mark the fastest inflation rate since December 1981.
INFLATION INCREASES 9.1% IN JUNE, ACCELERATES MORE THAN EXPECTED TO NEW 40 YEARS UP
“I think the markets were pretty well prepared for the headline numbers to get hotter than expected,” Reinking told Fox News Digital, pointing to the price of gas in mid-June, which he said was at its peak at the time.
“We have seen gasoline prices come in the last month,” he noted.
Last month, gas prices broke records with the national average above $ 5 per gallon.
On Wednesday, the national average for a gallon of gas was $ 4.63, about 40 cents lower than the month before when it was more than $ 5, according to AAA.
Reinking claimed that the so-called core price data, which excludes more volatile measurements of food and energy, was a bit of a surprise.
The Ministry of Labor said that core prices rose 5.9% from the previous year. Core prices also rose 0.7% on a monthly basis – higher than in April and May – indicating that underlying inflationary pressures remain strong and widespread.
“The core CPI was really where the problem was because we did not see any kind of slowdown in this data,” Reinking said. “When you look at all the different components, we were hoping to see some relief in the prices of used cars, the cars, potentially clothing given what we have heard from retailers, and we did not see any of that.”
The report, which is worse than expected, is expected to have major implications for the Federal Reserve and will probably strengthen a number of aggressive interest rate increases in an attempt to curb prices. Politicians have already raised the reference rate by 75 basis points last month for the first time since 1994 and have confirmed that a similarly large increase is on the table in July.
Reinking claimed that with inflation even warmer than economists expected in June, Wall Street is now raising the odds of a huge 100 basis point increase in July.
The market strategist noted that the Fed had indicated that they want to see inflation data “fall significantly for several months” before taking “the foot off the accelerator.”
He claimed that the data released on Wednesday “resets the clock” because it revealed that there was no “deceleration”.
Reinking went on to claim that although Wall Street “had generally expected the Fed to go another 75 basis points by the end of July”, Wednesday’s data opens the door to a potential 100 basis point rise.
He pointed to the comment from Atlanta Federal Reserve Bank President Raphael Bostic earlier Wednesday, saying that “everything is at stake” when asked about the prospect of the central bank raising interest rates by a full percentage point later this month.
About 38% of traders now price the chances of a 100 basis point increase later this month, according to CME Group’s FedWatch tool, which tracks trading.
Nevertheless, the Fed is in a precarious situation when it crosses the line between cooling consumer demand and bringing inflation closer to its 2% target without inadvertently dragging the economy into a recession. Higher prices tend to create higher prices for consumer and corporate loans, which slows down the economy by forcing employers to cut spending.
Asked if he thinks the Fed can construct an evasive soft landing, Reinking told Fox News Digital “it’s threading a needle.”
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“I think it’s a possibility,” he continued. “We’re coming from a pretty good place from an economic perspective, especially compared to the rest of the globe … so it’s a possibility, but it’s going to be a tight squeeze.”
Reinking also noted that “there is a possibility” that the data released on Wednesday “was the peak of inflation”, especially when looking at “what commodity markets have done in recent months.”
He also warned that investors are likely to “continue to see quite a bit of volatility as markets somehow deal with this ebb and flow of economic data and the path to Fed policy going forward.”
Reinking noted that the United States is “clearly in an economic downturn.”
“The bigger question from here is how deep and how long the downturn is going to be, and inflation and the Federal Reserve and their reaction to inflation are going to play a big role in how long that extent is,” he continued.
Reinking also revealed what he believes is the “big concern” in the markets right now.
“The concern of the markets is that the Fed is going to magnify an initial policy error by not reacting to inflation data early enough and now having to tighten into an already slowing economy, thus enlarging it and creating a bigger downturn,” he explained.
Reinking spoke with Fox News Digital as the second-quarter earnings season begins with JPMorgan Chase, Morgan Stanley, First Republic Bank, Cintas and Conagra Brands leading earnings before the market opened on Thursday.
He argued that economics “sits in a very good place to understand what is happening from a macro perspective.”
“One of the big keys, I think, that we are going to see in this quarter is whether the banks are actually starting to increase provisions and reserves for loan losses going forward,” he added.
“As we expect a decline, we are in a way reversing the course of reserve runoff that we have seen over the past year,” Reinking continued. “Now they [banks] must start rebuilding these reserves in order to prepare for a more difficult credit environment. “
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On a more general note, Reinking argued that if management begins to cut guidance “and the market can become comfortable with guidance being somewhat more conservative, it can help things stabilize here in the short term.”
FOX Business’ Megan Henney and Breck Dumas contributed to this report.