Fed Can Keep Raising w/Core CPI 4.8% YoY 

The market celebrated the June monthly CPI data. Headline CPI came in at just 3.0% YoY – and Core CPI fell to 4.8% YoY. Good news. However, with Core CPI still more than 2x the Fed’s target – expect them to raise rates again at the end of the month. However, what surprises me is the market believes the war with inflation is basically done. Is it? I think that is presumptuous. The fight with Core inflation will be a long one. If correct, the Fed may not need to keep raising rates aggressively – however are likely hold them there until their objective is met.

Stocks Under-appreciate the Impact of Credit Tightening

The market continues to hit a wall in the zone of 4200. And there is good reason for that… Investors are being asked to pay a large risk premium to own stocks. By my calculation – the forward PE is in the realm of 19x. That’s far too high with interest rates at 5.00%; inflation more than twice the Fed’s objective; and a real risk of recession. Today I will also spend a minute on the so-called banking crisis. I prefer to call it a crisis of confidence – as the US banking system is sound. However, we should expect many more regional bank failures – and that will lead to greater credit tightening. That’s a negative for the economy and risk assets.

What Do Credit Spreads Tell Us?

There are two types of economic indicators which are often cited in the financial media: (i) those which lag; and (ii) those which are leading. The latter of more useful. One of the best real-time leading indicators are credit spreads. These are excellent indicator of the ‘health’ of the financial system. So what do they tell us today with interest rates sharply higher?

For a full list of posts from 2017…