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What the latest ISM manufacturing data says about inflation

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TKer.co Editor Sam Ro joins Yahoo Finance Live to discuss whether inflation and supply chain bottlenecks are easing.

Video transcript

BRAD SMITH: While investors here are closely watching for further signs of cooling inflation after yesterday's PCE numbers, the global supply chain is starting to show some signs of moderation. Editor at TKer.co and we've got Yahoo Finance's contributor here Sam Ro here with us-- great to have you here on set with us, Sam. All right, first and foremost, what's the latest here? What should we be gleaning into in terms of the inflationary scenario right now?

SAM RO: Well, I think you guys just reported on it, right? The ISM number says that the prices paid component is starting to cool a little bit. And when you also look into the report, they're also saying that supplier delivery times are getting a little bit shorter. And I think if anything, that's one of the strongest leading indicators of inflation, right? When stuff is getting to the stores a lot faster, when businesses and manufacturers and stuff don't have to wait for stuff, they don't have to charge as high a price, and the prices can begin to cool.

BRIAN SOZZI: Yeah, those discounts are really coming to the aisles of Kohl's very soon. But Sam, look, we were just talking a little bit about this. Is this recessionary, though? The fact that prices are rolling over, is this the first time-- is it the first sign that interest rate hikes from the Fed are starting to take hold?

SAM RO: It could be. If the supply delivery times are improving because of demand cooling, then, yeah, that's probably inflationary. But, you know, again, this is all going to be much more clear in hindsight, unfortunately. But if this is a matter of the manufacturers, the logistics providers, and all these folks being able to improve supply in a way that sort of outpaces the sort of decline in demand, then that's actually really good news, right? Because then you have less inflation without all the demand destruction needed to cool inflation.

JULIE HYMAN: Yeah, the idea is that of delicate needle threading, balancing, whatever you want to call it. You wrote about all of this in the "Morning Brief" today, by the way, also in your TKer.co newsletter. And you talked about a lot more about the lead times, the idea of the delivery lead times, as maybe a leading indicator, because those have kind of presaged some of the numbers that we've just been talking about.

SAM RO: Yeah, S&P Global's chief economist Chris Williamson has done quite a bit of work on this. And there's actually a pretty tight correlation between CPI and supplier delivery times. And if you go all the way back into ancient history, you know, Alan Greenspan once said that this was his favorite indicator of inflation.

So, you know, it's good news that supplier delivery times are coming down because stuff are actually hitting store shelves, right? A couple of years ago, the complaints from consumers was that the store shelves are empty. There's no toilet paper. There's not enough this. There's not enough that. Now, all the stuff is there. The prices are higher, but at least all those goods are starting to make it to those shelves.

BRAD SMITH: OK, and so now as we had seen this pop on the Dow earlier on some of the economic data that have come out, we've now seen the Dow go back flat and even touch back into negative territory. And so with all of this movement today, on the economic data in mind, if we're gleaning history's insights here that we can kind of extrapolate, what should we be looking for, for a bottoming on the S&P 500 or on the Dow, even?

SAM RO: Yeah, I mean, I think Jerome Powell and a lot of the members of the Fed have made this pretty clear, that they want to see-- well, it's two C words, right? It's consistent-- convincing and consistent-- what was it? One of those combinations of those things. Basically, they want to see a trend, right? One month's worth of data is not going to be enough. Two months' worth of data is not going to be enough.

You know, February, March, or whatever, everyone was talking about peak inflation. And then two months later, you have CPI spike up again. So I think they're making very clear that they're not going to react to one or two months' worth of data. They want to see a trend. That's right, it's clear and convincing. Clear and convincing evidence that inflation is cooling. So maybe it takes a couple more months of ISM price data or CPI or core PCE cooling before we start getting signals that the Federal Reserve doesn't have to tighten monetary policy as aggressively as it has been.

BRIAN SOZZI: Sam we're getting some real-time viewer feedback from senior editor, friend of the show, Myles Udland. He wants to know if you have stock picks or an S&P 500 target.

SAM RO: Stock picks, I'm not huge into stock picks. I may write about that someday in an upcoming issue of TKer for why that's the case. S&P 500 target, it's probably going be up. It's got to be up. When? Who knows? But it's going up.

BRIAN SOZZI: I didn't think you could answer that.

SAM RO: Yeah, we all have-- if you have a good long-term time horizon, the S&P 500 is 20% cheaper today than it was six months ago. So if you're planning for retirement, it's a lot better to be contributing now than it was six months ago.

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