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Yesterday’s CPI inflation number changed everything, right?


The higher-than-expected inflation number for September–a core inflation rate of 6.6%–guaranteed that the Federal Reserve will raise interest rates by 75 basis points at its November 2 meeting and raised the odds for a 75 basis point increase at the December 14 meeting too. Up until today’s inflation surprise, the consensus was that the Fed would raise rates by just 50 basis points in December on the way to a modest 25 basis point increase in February and then an end to the cycle of interest rate increases.

After today’s inflation number I think you can throw that consensus in the trash can of history.

The big bounce on Thursday came on program trading as the decline in the Standard & Poor’s 500 triggered computerized trades and on profit-taking by Put options traders who had seen their bets on a market decline turn positive and were buying shares to cover those bets.

In the real world, the CPI inflation report points to higher inflation for longer, more stubborn inflation resists the Fed’s interest rate increases, and higher odds that the Fed will have to induce an actual recession in order to bring inflation under control. (I’ll leave aside for another day the very strong possibility that the Powell Fed doesn’t have the stomach for a recession and will simply declare victory and move to cutting rates to postpone the reckoning.

Among the stocks that rose most strongly today were bank stocks. The Financial Select Sector SPDR ETF (XLF) gained 4.13% on Thursday, October 13.

Individual bank stocks did as well or better–without much discrimination between better and worse banks. (Another sign that the big bounce on Thursday had more to do with market trading internals than with any shift n fundamentals.)

JPMorgan Chase (JPM) gained 5.56%. Wells Fargo (WFC) rose 4.62%. Bank of America (BAC) was up 6.13%. U.S. Bancorp (USB) picked up 5.78%. And Truist Financial (TFC), a member of my Dividend Portfolio climbed 4.78%.

I don’t like the economic and financial environment looming ahead for banks. I see bad loans rising with a need to reserve more against bad loans. Slowing economies aren’t good for loan demand or credit card delinquencies either.

So I’m taking advantage of this moment to sell Truist Financial out of this portfolio in spite of the stock’s hefty dividend. (In other words, I think the near-term prospect of losses in the share price outweighs the dividend payouts.) I’ve got a loss on this position of 4.07% since I added it to this portfolio on June 13, 2022. The stock is down 22.19% for 2022 to date as of the close on October 12.