Forecasting things like (not limited to) GDP growth, unemployment and inflation is tricky business. Very few get it consistently right (especially policy makers). And whilst macro forecasting is generally a fool’s errand – there are things we can observe to improve our probabilities of success (or at least reduce our risk). Consider inflation… whilst not perfect – there are a set of reasonably strong correlations which exist over extended periods. And it’s these types of correlations we can use to our advantage.As I will demonstrate – over the past 5 decades (after the US dollar removed its peg to gold in 1971) – inflation levels have largely correlated to what we see with commodity prices.
Powell Appeases the Market… Or Does He?
For me, there were two (big) questions for the Powell this week: (1) are rate hikes off the table – given faster-than-expected inflation and continuing economic strength? and (2) when will the Fed commence QT tapering (and by how much)? Powell was unequivocal on possible rate hikes… forghedaboudit. Equities cheered. But why remove optionality? Why Powell is so convinced we don’t see a re-acceleration in inflation? Admittedly it’s a lower probability outcome… but we can’t rule it out. But he apparently can…
Rate Cuts and Small Business Optimism Fades
Make that three in a row. Jan, Feb and Mar CPI all exceeded expectations – showing how stubborn inflation can be. And whilst the Fed focuses more on Core PCE (due at the end of the month) – this remains a concern. Here’s the thing: non-core inflation continues to hurt real America. Take small business – their confidence is now at 2012 lows. Their primary concern: inflation and higher input costs.
The Real Surprise with Powell’s (Dovish) Statement
Investors were on tenterhooks going into today’s Fed interest rate decision. Markets were up sharply the past few weeks – expecting Powell to remain dovish. However two consecutive months of hotter-than-expected inflation prints had some thinking twice. Turns out Powell is a dove. However, he delivered more dovish ‘fuel’ for stocks that what many expected.
For a full list of posts from 2017…