In a perfect world, inflation should be boring. Boring is good. However, when you inject an additional $6+ Trillion into the economy with far fewer goods being produced, inflation becomes a story. Last month’s inflation report showed headline (and core) CPI ticked higher. However, what caught my eye was “supercore” inflation – something the Fed says is a good predictor of future prices. Suerpcore is services inflation less shelter. This was up 4.4% YoY – also moving higher. The reason: pressures with wage growth – which remains around 4.7% YoY
Fed’s Task in Changing Times
How aggressive can the Fed be in the coming months? The economic data doesn’t suggest a material slowdown – surprising to the upside in most cases. Therefore, are markets pricing in too many rate cuts? Maybe… longer-term yields are rallying post rate cuts. What’s this mean?
Will Investors be Emboldened by Fed Easing?
Are stocks headed for a melt-up with the Fed set to ease rates over the next 12+ months? It could seem that way as stocks continue to print new highs as the ‘soft landing’ script firms. And whilst there might be further upside – the environment echoes a lot of what we experienced from the mid 1990’s. For example, at the time we had expanding growth, low inflation with aggressive easing from the Fed. What’s more, investors were very bullish on the promise of the internet – set to deliver powerful productivity gains. Stock multiples continued to expand as the S&P 500 delivered strong double-digit gains not seen in decades. Today conditions feel similar.
10-Yr Yield Rallies… as ‘Bear Steepener’ Warns
After the Fed initiated its easing cycle with a jumbo cut (50 bps) – the soft landing script kicked into full gear. Markets roared higher as they price in strong economic growth in the months and years ahead. And who knows – maybe that’s what we get? But have you noticed what we’ve seen with bonds post the Fed – especially the long end? Those yields have been rising – not falling. The closely watched benchmark US 10-year yield for example is up 17 basis points (where one basis point equals 0.01%.) That wasn’t Powell’s plan.
For a full list of posts from 2017…