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Investors are ignoring surging energy inflation at their own peril: Morning Brief

This is The Takeaway from today's Morning Brief, which you can sign up to receive in your inbox every morning along with:

  • The chart of the day

  • What we're watching

  • What we're reading

  • Economic data releases and earnings

Investors were treated with an uncomfortable surprise on Wednesday: The Consumer Price Index came in higher than expected, jumping 0.3 percentage points in August and ratcheting up the year-over-year comparison to 3.7% — the highest since May.

As anyone with a (non-EV) car knows, surging energy prices accounted for much of the increase, with the gasoline subcomponent soaring 10.6% in August alone — the third-largest monthly rise since the Global Financial Crisis.

But stocks barely batted an eyelash, and the Nasdaq (^IXIC) and S&P 500 (^GSPC) finished the day in the green. The Dow ended down fractionally.

Investors thinking ahead to next week's Federal Reserve meeting might be forgiven for looking through the headline print to the core number, which the Fed prefers. Core inflation excludes volatile food and energy and just dropped to 4.3% — the lowest since September 2021. And with good news out of core inflation, why should investors think the Fed should react to high gas prices, which, if anything, suppress spending on non-gasoline items?

But those higher gasoline prices come as WTI crude oil (CL=F) has rallied 28% over the last three months, with technicals pointing to huge potential upside. In early September, WTI broke to new highs on the year, and now $90 per barrel is only minor potential resistance on the path to last year's highs around $120.

To those who would laugh at $120 crude, we point to the recent words of JPMorgan Chase CEO Jamie Dimon. Only days ago — and to little fanfare — he raised the possibility of an eyewatering $150 handle.

Speaking at a Barclays conference, Dimon said his general bearishness last year is based on "huge, semi-tectonic shifts" that he's seeing in the economy — signs that point to potentially higher prices across the board one year from now.

Dimon said he wouldn't be surprised to see the US 10-year Treasury note (^TNX) yielding 5.5% (over 100 basis points higher than the current 4.3% rate) and crude oil landing between $120 and $150.

"These things are tectonic differences from what you've experienced since 1945," he added. When the chairman of the world's biggest bank says we haven't seen the likes of this environment since the end of World War II, investors might well listen.

Looking at the historical reaction of stocks on CPI release dates reveals a tight correlation to the overall direction of the market.

While the correlation isn't perfect, the big drops in the orange line (shown above) reflect just how sudden and dramatic changes in critical data can lead to a major repricing of risk.

Should headline CPI continue to accelerate to the upside, it will eventually force a reckoning with the bullish pricing of stocks. For those looking to time an exit to the substantial bull market rally off last year's October lows, this event could well be that catalyst.

If Jamie Dimon is correct, then the time frame is sometime in the next year.

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