Yesterday, the Fed released the Minutes from their Feb 1 meeting.

The policy cheat-sheet revealed all the voting members of the board of governors favored the .25% rate hike… though two stalwarts said they would have supported a .50% boost.

More substantially, the Minutes reveal unanimity among the policy mandarins that further rate hikes are going to be necessary in 2023.

“What most investors do not realize is that during the The Great Inflation of the ’70s,” said Zach Scheidt at the beginning of the Fed rate hikes a year ago, “we actually had to ‘beat’ inflation several times.” Mr. Scheidt:

Inflation got really high and then the Fed raised interest rates, and then inflation backed off. And then the Fed said, “Okay, all right, well, let’s let the economy recover.”

And then inflation perked up again. And they said, “Oh wait, wait. We’ve got to put the kibosh on this and we’ve got to help slow things down.” And we had this, what I call a whipsaw inflation environment. And that is exactly what I think we’re setting up for here in the United States. And that creates a lot of challenges.

If history rhymes, we’re gonna have to fight inflation again and again until it’s beaten into submission, er, that is, until the Fed hits their arbitrary target of 2%.

Last week, we learned that January’s inflation rate year-over-year remained at 5.9%… 0.5% in January alone. The news cycle gleefully interpreted the data as the “immaculate disinflation”– a slowing in inflation from the prior 6.4%.

For the past 5 months, the stock market has been buying the “disinflation” narrative. The “Bear Market of 2022” bottomed out on September 30, 2022 at 28,725. Between that bottom and February 14, 2023, the Dow rose to 34,245.

Far be it for us to point out, February 14 was also the day the January CPI report came out. As of the close yesterday, over the last 5 trading days, the Dow has lost a skosh over 1,200 points.

One reason? The “disinflation = Fed pivot” story is breaking down. And big retailers are bracing for a consumer slowdown.

“If you want to know how this year may be for the retail industry,” CNBC’s Melissa Repko, “look no further than Walmart’s cautious outlook.” Repko summarized Tuesday’s forecast from Walmart and Home Depot:

The discounter easily topped expectations for the holiday quarter on Tuesday, but it gave a weaker-than-expected outlook for the year ahead. Home Depot issued similar guidance. The home improvement retailer, which also reported fiscal fourth-quarter earnings Tuesday, said it is planning for flat same-store sales, as stubborn inflation and climbing interest rates cause consumers to watch their spending.

A consumer slowdown in the first and second quarters of this year would just be, well, bad timing.

So it goes,

Addison Wiggin,
The Wiggin Sessions

P.S. Morgan Stanley strategist Michael Wilson, a notable bear on Wall Street, grabbed headlines the world over this week. Wilson warned in a letter to shareholders Monday that because of the bull market since September, the S&P 500 has entered the pithily titled “Death Zone” when measured by risk of investing in overvalued stocks:

(Source: Morgan Stanley Research)

Stubborn inflation at odds with “disinflation,” an evermore “hawkish” Fed, continued consumer reliance on credit, and jeopardized earnings at large corporations (among other things) were all given as evidence enough the S&P could get whacked come spring into summer.