Welcome to my video presentation for Monday, September 19. Below is a condensed transcript; my video contains additional details and several charts.

Broad inflationary pressures are compelling the Federal Reserve to continue tightening, suggesting that reaching the holy grail of 2% inflation will be a long and arduous quest.

However, although bearish sentiment is rising on Wall Street, I continue to see glimmers of hope that inflation has peaked, and we face better quarters ahead. If you look closer at the latest inflation data, behind the admittedly disturbing picture of still-elevated inflation, you can detect many encouraging signs.

To be sure, the S&P 500 finished last week 4.8% lower, with most of the loss stemming from a 4.3% selloff on Tuesday in the wake of an unexpectedly hot inflation report for August. All of the major indices have now racked up losses in four of the past five weeks.

The technology-heavy NASDAQ got clobbered the worst last week, as expectations of rising interest rates diminished the growth prospects of tech stocks.

Recession fears also pushed down the price of crude oil, which is good news on inflation but also an indication that economic projections are getting more pessimistic.

Another catalyst for last week’s swoon in equities was a bleak forecast from FedEx (NYSE: FDX), whose shares tanked after management issued an earnings warning. FedEx is considered an economic bellwether and the package delivery giant is shuttering locations and laying off workers due to a forecasted slump in demand.

Also contributing to the bearish mood was a statement from General Electric (NYSE: GE) that the industrial conglomerate was experiencing higher costs due to supply chain woes.

However, evidence is mounting that transportation bottlenecks and supply chain problems, caused by the Ukraine war and the pandemic, are easing.

The latest data for August show that shipping costs are dramatically falling, a trend that should show up within the next round of inflation reports. The logistics of moving goods, which were badly snarled by the outbreak of COVID, are getting sorted out.

Helping reduce shipping costs is the softening demand for goods, especially consumer discretionary items, which relieves a large part of the burden on supply chains. Also easing inflationary pressures is the falling cost of prices for inputs.

The CPI numbers lately have been hotter than expected, but leading indicators on inflation, such as input and shipping costs, are dropping. That strongly suggest we’ll start to get better news on inflation down the road.

Some of the worst fears about inflation revolve around expectations. Inflation becomes stubbornly high over a prolonged period when consumers start to expect inflation and behave accordingly. That’s when inflation becomes entrenched and a self-fulfilling prophesy. But on that score, we’re getting better news, too.

According to the New York Federal Reserve’s latest inflation survey, released last Monday, three-year inflation expectations dropped to 2.8% in August from 3.2% the previous month. U.S. inflation is expected to average 5.7% for all of 2023 and shrink to 2.8% three years out, largely thanks to falling gasoline prices.

That said, the Federal Reserve has reiterated that fighting inflation is Job One, and with the latest hot readings of price increases, the expectation is that tightening will continue at an aggressive pace.

The bond market currently estimates that the U.S. central bank will cease rate hikes at about 4.5% from 4.0% before, with the last hike occurring in March 2023. Accordingly, the 2-year Treasury yield has reached a new cycle high, and the 10-year is back near its mid-June high.

The week ahead…

The key economic reports to watch in coming days include housing starts (Tuesday); existing home sales and the Fed’s statement (Wednesday); initial jobless claims (Thursday); and the S&P manufacturing and services PMIs (Friday).

The biggest news of the week, of course, will be the Fed’s announcements on Wednesday at the conclusion of its two-day meeting.

Wall Street expects the Fed to hike rates by another 75 basis points (0.75%) when it meets this week, bringing the fed funds rate to 3.00% – 3.25%.

The upshot? I think it’s likely that the stock rally has merely paused, rather than start a new leg down. Markets should eventually start bouncing back as central banks become less hawkish in 2023. Stay patient and use the dips to pick up quality investments at bargain prices.

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John Persinos is the editorial director of Investing Daily.

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