Recent economic data, such as Tuesday's hotter-than-expected Producer Price Index (PPI) reading, suggest inflation is not moving as swiftly as hoped toward the Federal Reserve's 2% target.

Verdence Capital Advisors Chief Investment Officer Megan Horneman joins The Morning Brief to give insight into how the markets are moving and why the Fed will need to adopt a more hawkish tone to rectify the current inflationary trend.

Horneman explains that beyond the recent PPI report, there have been other economic warning signs: "This isn't the only report that has warned us that inflation is not going in the right direction. You can look at the ISM Manufacturing Report. You can look at the ISM Services Report. All of these things are showing that inflation and prices are trending higher again. The market's completely complacent to this. The Federal Reserve is complacent to this. And we need to get some more hawkish rhetoric or we're going to continue to see inflation pressures go higher."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Nicholas Jacobino

Video Transcript

Stocks are trading to the upside, at least for the Dow and the NASDAQ here shortly after the open.

Now, quickly pairing some of those earlier moves to the downside that we did see on the heels of this morning's PP I print, why?

Well, we did see downward revisions to March's report that is offering investors some relief in terms of efforts and progress on inflation.

So where does the market trade from here?

We want to bring in Megan Horne and Veron's Capital Advisors, Chief Investment Officer Megan.

It's great to see you here.

So when we talk about the move that we're seeing here to the upside, at least to a little bit today.

But really coming off the heels of what was a rally last week?

What's your take away from that PP I print and exactly that movement that we could see ahead of tomorrow's CP I report.

Um I think what we're seeing right now in the market is it's getting very complacent.

Um The PP I report today, the slight downward revision we had to March.

I'm not focusing on that.

What I'm focusing on is that 3.1% year over year when you exclude all of those volatile items, when you look at within that PP I report it's services.

And what is the fed told us that service inflation is very sticky.

Um This isn't the only report that has us that inflation is not going in the right direction.

You can look at the ISM manufacturing report, you can look at the ISM services report.

All of these things are showing that inflation and prices are trending higher.

Again, the market is completely complacent to this.

The Federal Reserve is, is complacent to this and we need to get some more hawkish rhetoric or we're going to continue to see inflation pressures go higher.

So what does that mean in terms of portfolio repositioning right now?

So we've been holding on to cash um overweight cash position really this whole year.

Um We did rebalance portfolios in the beginning of this year to get rid of some of those or take some profits on some of those uh parts of the market, your growth, your technology that rallied so much because we've always been in the camp that six rate hikes was absolutely ridiculous.

That was never going to happen.

Um We're now in the camp that honestly, I think that they're gonna have to remain on hold for the, the rest of this year.

We're not quite ready to say a, a hike is is in the cards yet.

Um But we, we did have at least one rate cut at the end of this year and I'm leaning towards removing that for our forecast.

So Megan, I'm curious how you're looking at this resurgence that we've seen in the meme stock trade and exactly how that may be potentially plays into the fed's calculus here down the road because we did hear from Kashkari suggesting in a blog post just last week that as we do see more and more interest in this meme trade, it is signaling maybe to some extent that financial conditions aren't really as tight as they should be up into this point.

Do you see any truth to that?

Absolutely.

Um It was, this meme stock craze was crazy when it occurred back in 2021.

It's just as crazy as it is now.

And if you look at something like the the US Financial Conditions index, um this is showing that financial conditions are actually easy.

Um This is a problem and now we're seeing this specula speculation trades.

Um The fear of missing out, this is all a bigger risk to the market.

This is why we think we can still see at least a 10% correction.

Um The timing of that, we're not exactly sure because remember markets can stay overbought, they can stay in this complacent area for longer than they should be.

But when they do that crash can be actually a little bit more than people.

I anticipate