Economic prints show inflation to be cooling, but could there be another round of inflation ahead for consumers? Marketgauge.com Chief Strategist Michele Schneider remains defensive in case of an inflation spiking, citing increased oil demand in commodity markets, the Fed's rate hike outlook, and how the Russell 2000 and regional banks are performing in 2023.

This post was written by Luke Carberry Mogan.

Video Transcript

JARED BLIKRE: Another round of inflation around the corner.

That doesn't sound like something a lot of people are expecting.

MICHELE SCHNEIDER: Well, we're really looking at the energy and oil market because a lot of the numbers that have come to date really have shown a decline that we saw in energy and oil.

And of course, that was a very celebratory reason to think that inflation had cooled and would stay cooled.

But what we're seeing now is just the reverse.

The CRB has gone up, and the oil market has inclined about 15%.

We're trading at around $81 a barrel right now, and that $80 a barrel was a really key area.

And of course, we have many, many stories, not just because of OPEC Plus.

But even here at home with the reserves being extremely low and demand being greater than what they thought.

So I'd say that before I would go in full hog into this prediction.

We have to continue really to watch what's happening there with oil.

Because regardless of the yields going up today, or the dollar going up, we know that there are factors in commodities that ignore all of that when we come into a real supply-demand situation.

So that's kind of what we have our eyes on right here.

JARED BLIKRE: All right.

What I have on the interactive right now, this is WTI crude oil.

We're just looking at that.

I want to show everybody the S&P-- the S&P Goldman Sachs commodity index.

This has been for a while, and you can see here just breaking through its negative trend line.

I think it's above the 200-day moving average as well.

There you go.

What's the importance?

What's the significance of this for markets in general?

Because a lot of times this just spells more inflation, something we've been talking about.

MICHELE SCHNEIDER: Well, it's kind of-- I think we're at a really interesting spot here, in terms of the consumer, and we can certainly talk about that sector in a moment.

But we have a situation now where the yields have gone up, obviously, right now.

People were looking based on what Powell said, and I've certainly heard many, many people talk about the potential pause or possibly pivot in 2024.

But essentially, what you've got right now is folks feeling it from two areas.

They're feeling it not only from an inflation standpoint, and prices have not really come down very much, at least that I can see when we go out, just basically to a supermarket or for anything for that matter.

And we have a lot of commodity prices still high, cotton being one.

Food prices still being high on many levels.

And two, is now with the higher interest rates, you're pinching people two ways.

They're going to pay more in both ends-- what they borrow, their credit card debt, and even what they pay even if they're paying with cash in terms of inflation.

So that, to me, is somewhat dangerous.

Because that means that the Fed before they start cheering, soft landing, have to worry what's going to happen over the next six months, if these things we're talking about actually continue to go up.

And I'd say energy is probably the biggest area because that impacts everyone.

As much as we like to think we're in a total EV world, we're not.

JARED BLIKRE: Sure.

MICHELE SCHNEIDER: But-- and so people still rely on oil and gas, and seasonally right now, we've had a lot of grid problems because of the extreme heat.

So all of this is in my mind constantly.

And I think that's really what we have to watch now; is if this CRB continues to go up, what all these numbers that we've seen soften over the last few months will start to rise.

And how aggressive the Fed gets when they're already pinching and knowing the economy is growing basically, because of a lot of government spending and consumers right now still cheerful.

Go ahead.

I'm sorry.

JARED BLIKRE: I just want to get to some tickers here.

So we can put your charting skills to work.

MICHELE SCHNEIDER: [LAUGHING] OK. JARED BLIKRE: I've got all the tickers we talked-- I can go transportation, regional banks.

You just go, and I will outline here, and I'll be your graphics operator.

MICHELE SCHNEIDER: OK. Well, yeah.

I mean, let's-- and I'm sorry to go on a rant, Jared.

JARED BLIKRE: No, it's OK. MICHELE SCHNEIDER: It's just that I feel very passionate about people being careful right-- now getting too complacent.

JARED BLIKRE: Very good.

MICHELE SCHNEIDER: Right.

OK, so there we go.

All right.

So let's go with my economic modern family, right?

Because that has always been my guide technically.

So we can start with the Russell 2000, because I think that's key.

A lot of people anticipated that we might see a little bit of softening in the tech and growth stocks in the NASDAQ and see some of that rotation to value.

And, of course, that would be a better sign for the economy.

And right now, that's not so terrible to think because IWM is actually doing pretty good.

It is somewhat outperforming the spy.

That's always a good thing.

193 was a key breakout on a two-year business cycle.

The only thing right now is the momentum is declining, but there's no real divergence between what we're seeing in price and momentum.

So right now, we could just say, yay, that's a good sign that we can notch up today's readiness as just a normal amount of correction that one would expect after so many green days.

JARED BLIKRE: All right.

A key part constituent of the Russell 2000 small caps is a financial sector.

Regional banks, been under huge pressure this year.

But we've seen them surge recently.

I'm going to put up a chart of KRE, that's the SPDR S&P regional banking ETF.

And what are what are we seeing here?

We haven't quite made it back to that breakdown level from earlier in the year.

In fact, we got quite a bit of space in there.

MICHELE SCHNEIDER: Right.

Actually, 52 would be a really good area to clear, to prove that we can actually get above all of that resistance that we had before.

But right now-- again, this is actually also outperforming the S&P 500 right now.

That's kind of an interesting sign that the banking is doing better.

But on the momentum, once again, with this being read, we're seeing a slight possibility of a mean reversion here.

So I'd say some kind of correction would not be crazy.

It wouldn't necessarily mean tremendous weakness.

But we're watching around that 44 level to really hold our 44-45.

And if we can get through 52, that should be a nice rally, and a lot of these banks that were basically written off as dead.