Among the price changes for hundreds of items listed in the government’s inflation report for May, there weren’t many declines to talk about.
If you love a good cruller, you may have noticed the 0.4 percent drop in sweetrolls, coffeecakes and doughnuts. Lamb and mutton, salad dressing and bananas were also among the minority of consumer goods showing year-over-year declines. Otherwise most prices were up, as BTIG LLC strategist Dan Greenhaus noted of the report showing the biggest gain in consumer prices in more than a year.
The whiff of inflation is in the air, as unmistakable as the scent from a fresh batch of hot Original Glazed wafting out of the Krispy Kreme glazer. And no one needs to be reminded of the potential ramifications that rising prices hold for all the sweetrolls the Federal Reserve has been dishing out during the five-year bull market in stocks.
Accelerating inflation -- the consumer price index increased 2.1 percent last month from the prior year -- makes today’s Fed decision more risky than previously expected, Bespoke Investment Group LLC wrote in a report yesterday.
An “inflation scare” that alters Fed policy was one of the top concerns that Charles Schwab Corp. strategist Liz Ann Sonders listed in an Bloomberg Television interview last week when asked what could cause a long-awaited correction in stocks.
Policy announcement days have not generally been kind to the stock market in recent history as the Fed begins unwinding its asset-purchase program, even as the improving economy that’s influencing those decisions sends benchmark indexes to unprecedented heights.
The Standard & Poor’s 500 Index went lower 69 percent of the time in the last two hours of trading on Fed decision days over the last two years, according to a report yesterday from Birinyi Associates Inc. Granted, the average move was not too steep -- about 0.1 percent followed by an average 0.2 percent decline the following day.
That counters a trend of stocks rising on Fed days over a longer time horizon. The S&P 500 has gained an average of 0.5 percent on days of Fed announcements since the central bank took its benchmark rate to near zero at the end of 2008, according to Bespoke, with much of the gains coming in the final two hours of the sessions. The average advance on Fed days has been 0.4 percent since 1995, the firm said.
Today’s statement could send stocks lower, at least on the initial reaction, if the Fed signals the sweetrolls are running low, Bespoke said.
“The market is positioning for a more hawkish statement than prior meetings,” Bespoke said, pointing to a flattening Treasury yield curve that suggests higher interest rates will drive selling in shorter-term notes.
Time to go make the doughnuts.