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What Schwab's Liz Ann Sonders Is Watching Now

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What You Need to Know

  • Schwab's chief investment strategist recently discussed outlooks for inflation, the Fed, stimulus spending and tax hikes.
  • She says much of the jump in consumer prices is behind us.
  • Sonders says it's too soon to know the impact of potential increases in corporate and capital gains taxes.

Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., says much of the pickup in consumer prices “is largely behind us,” but she’s not fully convinced that the increase in inflation overall is transitory, as the Federal Reserve says.

In a recent Schwab Live webinar, Sonders noted several economic measures that she’s  following closely for signs of rising or falling inflation:

1. Rent of primary residence and owner’s equivalent rent, which together account for about 30% of the consumer price index (CPI). The owner’s equivalent rent is the amount a homeowner could charge to rent out their home in the current market and includes expenses such as mortgage and tax payments.

Both measures are closely tracking each other, have been falling since 2020 and recently headed higher, rising 2% from a year ago.

2. CPI minus PPI. The year-over-year change in this data point is negative, which generally doesn’t bode well for profit margins and stock prices, according to Sonders. In July, the producer price index for final demand increased 7.8% from a year ago — far more than the comparable 5.4% increase in the CPI.

Renewed supply chain disruptions, including those emanating from China, could feed into rising inflation, Sonders said, but she noted a slight improvement in supply deliveries, as reported by the Institute for Supply Management.

3. Wages. The rise in wages could become a longer-term inflation story as businesses struggle to attract workers, Sonders said, noting that some sectors such as leisure and hospitality  are under heavy pressure to attract workers.

Those industries, however, are not a large share of the U.S. economy or national inflation metrics. These pressures could ease if more workers enter the labor market when enhanced unemployment benefits end in September for many.

In the latest jobs report, average hourly earnings among private-sector workers rose 4% in July from a year earlier but, adjusted for inflation, they were down 1.2%. Sonders prefers the Atlanta Fed wage tracker, which shows a three-month moving average of median wage growth of 3.7% in July.

On the Fed

Beyond inflation indicators, Sonders is closely watching for signals from the Federal Reserve about when it will announce the timing to reduce its monthly asset purchases, which remain at $120 billion worth of Treasurys and mortgage-backed securities.

Minutes from the Fed’s last policymaking Federal Open Market Committee meeting will be released Wednesday at 2 p.m. Eastern time. Next week, Aug. 26-28, Fed policymakers, including Chairman Jerome Powell, plus central bankers, policymakers and economists from around the world will meet at the annual economic policy symposium in Jackson Hole, Wyoming.

Sonders does not expect another taper tantrum like the one in 2013, when then-Fed Chairman Ben Bernanke told a congressional committee that the Fed could begin reducing its bond purchases “in the next few meetings” even though previous FOMC minutes showed little agreement among Fed officials about when to begin the easing. The tantrum caused U.S. bond yields to soar and battered emerging market stocks.

Sonders expects the Fed will soon clarify the time frame to begin the tapering and its first rate increase is “still well into the future.”

On Infrastructure and Stimulus Spending, Tax Hikes

It’s too early to consider the impact of any potential corporate tax or capital gains tax increase or what will happen with the $1 trillion infrastructure bill that has passed the Senate but not the House, or the $3.5 trillion spending bill. The Senate has passed a budget resolution supporting its framework. The House plans to vote on the resolution next week.

Sonders said most Washington experts, including Schwab’s own Michael Townsend, don’t expect “anywhere near the upper end” of the two tax proposals: 28% for corporate tax, up from 21% currently, and 39.6% for the top capital gains tax, up from 20%. Expectations are closer to 25% for the corporate tax rate and 28% for the capital gains tax rate.

(Pictured: Schwab Chief Investment Strategist Liz Ann Sonders)