Need to Know: Inflation is heading to zero, according to the one factor Jerome Powell absolutely will not discuss

Scott Grannis, the long-time chief economist at Western Asset Management who now authors the Calafia Beach Pundit blog, put together a chart, recreated here, showing how the M2 measure of money supply leads inflation, with a roughly one-year lag.

“The chart strongly suggests that the CPI is on its way to zero over the next 6-9 months. As such, it’s reasonable to conclude that the Fed has acted appropriately, if belatedly, and no further tightening is therefore necessary; lower inflation is ‘baked in the cake’ at this point,” he says.

But what about the deficit? There, he finds, while the COVID-era spending blowout was financed with printed money, the latest surge has not been monetized. “So there is no reason to worry about a resurgence of inflation fueled by excess M2 growth,” he says. And he’s not worried about the broader economy, noting the recent rise in U.S. consumer confidence. “This supports my long-held contention that there is no reason to worry about an imminent recession. The economy is likely to continue growing for the foreseeable future, albeit at a relatively unimpressive rate of 2% or maybe a bit less,” he says.

The team at bond shop Hoisington Investment Management Co. also put a big emphasis on the money supply. “Negative money growth, increasing fiscal deficit, rising real interest rates, and central banking guidance of higher short term interest rates are creating a classic ‘credit crunch,’” they say in their second-quarter outlook.

They put together this chart on what’s called other deposit liabilities, which are all the deposits at a bank minus term deposits and which ends up being a good proxy for the M2 gauge. Adjusted for inflation, ODL has turned negative for the last 36 months, and the 12- and 24-month rates of contraction accelerated. “The money mountain created in 2020-21, which supported spending and inflation, has been eliminated,” they say.

The markets

The S&P 500
SPX,
+0.28%
ended at its highest value in 15 months on Tuesday, but stock futures
ES00,
-0.24%

NQ00,
-0.29%
were weaker ahead of the Fed decision. The dollar
DXY,
-0.13%
was also weaker, while crude oil futures
CL.1,
-1.07%
were trading below $79 per barrel.

Follow all the action in financial markets during the Fed decision and press conference with MarketWatch’s live blog. 

The buzz

The Fed interest-rate decision comes at 2 p.m. Eastern, followed by the Powell press conference at 2:30 p.m. “We expect Chair Powell’s post meeting comments to stop short of committing to another rate hike at the September FOMC meeting, or November. He may say another rate hike sometime this year is a good base case, but we expect him to be careful and note data dependence,” said economists at UBS.

The results from Big Tech weren’t terrible, but not great. Alphabet shares
GOOGL,
+0.56%
rose 6% as the Google parent reported a stronger-than-forecast 7% revenue rise and said long-time CFO Ruth Porat will move over into a chief investment officer role.

Microsoft shares
MSFT,
+1.70%
slipped 3% as the software giant said it will take a long-time to benefit from its artificial-intelligence products. Microsoft earnings did beat Wall Street expectations.

Snap
SNAP,
-1.34%,
the messaging service, saw its shares tumble after guidance for a 5% revenue decline in the current quarter. Meta Platforms
META,
+0.98%
highlights the earnings releases after the close.

Outside of tech, arguably the most interesting company reporting results on Wednesday is Mattel
MAT,
-1.85%,
which makes the Barbie toy, the subject of the wildly popular movie.

Wells Fargo stock
WFC,
-2.02%
rallied on announcing a new $30 billion stock buyback, and beleaguered regional lender PacWest
PACW,
-27.04%
reached a deal to be sold to Banc of California
BANC,
+11.17%,
with private-equity backing.

Best of the web

In the era of remote work, hotel operators are now focusing on extended-stay hotels.

Tottenham Hotspur’s 86-year-old owner has been accused of insider trading by U.S. prosecutors.

The chief executive of U.K. lender NatWest
NWG,
-0.77%
resigned over being the source for a story on a U.K. politician the BBC later corrected.

Top tickers

Here are the most active stock-market tickers as of 6 a.m. Eastern.

The chart

Morgan Stanley’s Counterpoint Global put together this fascinating chart, drawing on the work of Hendrik Bessembinder, on the age and total wealth of the top 20 corporate wealth creators from 1926 to 2022. But the authors note that many of the companies on this list — Exxon Mobil
XOM,
+0.15%,
IBM
IBM,
+0.57%,
General Electric
GE,
+6.27%,
and General Motors
GM,
-3.51%
— made the cut because of the performance of their stock in the 1950s. They note that nearly 60% of companies that have been public in the U.S. over the last century failed to outperform one-month Treasury bills. “The skewness in wealth creation suggests two approaches for investors: seek broad diversification or build a portfolio that tries to avoid the wealth destroyers while owning the wealth creators,” they say.

Random reads

This wall, and it’s just a wall, is on sale for $50,000.

A British television channel fooled many viewers with its satire on harvested human meat.

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