Rosenberg says one Fed hike isn't the mistake, five would be

At a level not seen since before the 2008 Great Financial Crisis, the U.S. 10-year Treasury yield has broken above 5% as markets prepare for higher interest rates. Looking ahead, famed economist David Rosenberg says the bigger risk isn't Wednesday's expected Federal Reserve rate hike; it's the series of hikes the market has started pricing in beyond it. Rosenberg added that while he thinks the Fed will move, the economic numbers don’t justify it.

"If you're trading on faulty data, my heart goes out to you," the founder and president of Rosenberg Research told Kitco News. "And if the Fed is gonna respond to faulty data, then they're gonna be on the precipice of a policy misstep." The CME's FedWatch Tool puts a quarter-point increase at 90.3%, with the odds of a cut at zero. A move that size would take the target range to 3.75% to 4% and mark the first hike since July 2023. Most of the profession agrees it's coming. After Friday's inflation report, 86 of 101 economists in a Reuters poll said the Fed would raise. A week earlier, most of that same group expected the central bank to sit still.

Rosenberg's argument isn't with the decision. It's with what the decision is built on. "This is an exercise in flexing its anti-inflation muscles and trying to restore any perceived loss of credibility," he said. "But it's not real in any other sense."

Where the data doesn't line up Core prices rose 0.3% in August, a tenth hotter than forecast. Only nine of 73 economists in a Bloomberg survey saw it coming. Headline inflation ran 3.4% over the year, according to the Labor Department. Rosenberg says he took the report apart line by line against industry sources, and several pieces don't match. Hotel and motel rates were negative in industry data through the first half of August, he said, while the CPI showed a big jump. Telecom services posted a record increase in the consumer index and, by his reading, a negative print in the producer index. He said the Manheim index had used car prices falling while the CPI had them up 0.4%.

"When you actually take the industry data and map it into the BLS numbers, that core number was actually close to being flat," he said. He expected the pushback. "People will say, well, that's data mining. No, I actually refer to it as data analysis." On the report as a whole: "It looked a little spurious to me, not something as a central banker that I would be raising interest rates on." By his count, 45% of the index's subcomponents were flat or negative last month, against a historical norm he puts at just over 40%. He was no kinder to the 162,000 jobs added in August, calling it "a number that has 100% chance of getting revised" and pointing at the seasonal adjustments around back-to-school hiring.

The number nobody's watching His whole case comes down to wages. Nominal wage growth has been slowing for a year, he said. Real average hourly earnings fell 0.3% from a year earlier, while a longer average workweek lifted real weekly earnings 0.3%, according to the Bureau of Labor Statistics.

"How do you get sustainable inflation without the labor market playing a role?" Rosenberg said. "Labor is the biggest cost in the overall price structure of the economy. And that's what's gone missing in this particular inflation narrative. Nobody's talking about it." What is moving prices, he says, is energy arriving as a cost rather than as demand. Diesel crossed $6 a gallon this month for the first time, according to GasBuddy. Brent pushed toward $110 after drone strikes forced Saudi Arabia to shut its East-West pipeline, which can move about 7 million barrels a day around the Strait of Hormuz. The Associated Press reported the line could be down for weeks.

"It is a tax hike on the private sector," Rosenberg said. "This is not a source of inflation. This is a cost squeeze." The history backs the shape of his argument.