New CPI report shows weaker-than-expected inflation numbers

Jon Adams, BMO Senior Investment Strategist, talks about the latest CPI report which shows inflation slowing down.

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ZACK GUZMAN: I want to shift over, though, to the broader market where we have seen the Dow give back its initial gains that it posted today. We had weaker than expected numbers being brought in when it comes to inflation. And those had originally created a bit of a pop for the broader market, but not so anymore. As you see, the Dow off by about 200 points today.

I just want to walk through some of those numbers we got because we did see a 0.3% increase in terms of inflation as measured by a CPI, compared to July. That was slightly softer than expectations at 0.4%, also below the 0.5% reading we got last month. Year over year, though, still 5.3%. So still, I guess, some debate here in regards to whether or not this is, indeed, transitory inflation that we're seeing play out right now.

But to dig into that, I want to bring on our next guest. Jon Adams is BMO Senior Investment Strategist. He joins us right now. And Jon, I mean, you know, it does seem-- I mean, if you want to just call it what it is here in that inflation came in below expectations, that maybe there is more life to this idea of it being transitory, and we're coming down now, what did you make of the reading?

JON ADAMS: Sure, and thanks for having me on today, Zack. You know, I don't think it changes too much from the Fed's perspective. It did come in below expectations. If you look at core inflation, came in at 4% significantly below expectations there. You saw a lot of these components like used car prices and airfares actually declined last month, which had been some of the main drivers in inflation kind of surprising to the upside. So I think at the margin, perhaps it pushes out some potential hikes from the Fed late in 2022 to potentially into 2023.

But from a tapering perspective, the Fed is still on pace to kind of telegraphed tapering next week, begin tapering November or December, barring some kind of negative shock from an economic perspective. So you're seeing a relatively muted reaction in markets. You are seeing bond prices rally on that lower than expected print. Equities are rallying a bit from being down further earlier in the day.

ZACK GUZMAN: Yeah, and when we look at kind of, I guess, the long-term trajectory, it's interesting to see this flag by Fundstrat today, just kind of looking at the 50-day moving average and what-- every time we've seen the S&P 500 hit that, kind of presenting a buying opportunity, kind of near those levels right now. I mean, how does maybe the longer term investor, how are they supposed to be looking at maybe the data that's been coming in softer recently and whether or not that could mean, you know, from here, maybe the news gets less bad? And we've seen that trigger momentary pops in the broader market.

JON ADAMS: Yeah, I would say there is a buy the dip, to your point, mentality, especially on behalf of retail investors in this environment. And that's been a very good strategy over the last few years. But you have seen some choppy economic data, especially in the labor front. It's been a bit noisy with payroll surprising to the downside, initial claims now at a kind of a pandemic low. So we'll be watching labor data closely, as will the Fed-- inflation data as well.

But if you look at the backdrop, it's still pretty constructive. We remain overweight equities in our portfolios, as we have for the last few years. And really, for us, it's a strong economic picture. Also, very strong equity earnings. We thought we were closer to peak earnings kind of in Q1. And now we're seeing extremely strong earnings in Q2 and project that to continue, albeit at lower levels, in Q3 and Q4.

So for us, from a medium-term perspective, it's still a pretty positive picture for equities overall. And this CPI print potentially reduces some fear around an inflationary overshoot, which should also be positive for equities.

ZACK GUZMAN: Yeah, just one last, too, before we let you go-- if you are overweight equities, what are the best opportunities you're seeing right now? Because I suppose if we're seeing weaker than expected inflation, the Fed could remain accommodative for longer. It could be a boost for tech stocks, one of the few sectors in the green as we've seen this dip continue today. I mean, would that be still where you'd lean in?

JON ADAMS: We are seeing growth outperforming small on the miss in inflation today, also large outperforming small. But we're pretty balanced with respect to value versus growth. We still like US equities in particular. We have a balance toward large and small. We're not overly concerned about valuations here in the US. We've actually seen multiples kind of contract a bit just because earnings have kind of outpaced price growth overall.

So, not overly concerned about valuation. There are clearly some tail risks around the Delta variant, around the Fed if they get a bit too aggressive. We think that's unlikely. And if inflation is, in fact, much more transitory, as we've been projecting, as the Fed's been projecting, we still think that's a pretty attractive environment for some further strength in US equities.

ZACK GUZMAN: BMO Senior Investment Strategist Jon Adams, appreciate you coming on here to chat with us today. Thanks again for the time.