Looking for inflation in all the wrong places

Last week, I suggested that even though Fed Chair Powell voiced a balanced view of inflation, a voting bloc of hawks (Waller, Bostic, Barkin, and Bowman) on the FOMC may be a key obstacle to the market expectations of a June rate cut. Indeed, Atlanta Fed President Raphael Bostic reiterated his view last week of...

Is transitory disinflation here to stay?

I’ve discussed the risk of transitory disinflation before, and it manifested itself in the form of hotter-than-expected January CPI and PPI reports. The reports rattled the bond market and expectations of the first quarter-point rate cut has been pushed out from May to June and a slower rate cut trajectory for the remainder of year....

The term premium red herring

About a week ago, market anxiety was high over surging Treasury yields, which was attributed to concerns over a soaring fiscal deficit and a rising supply of Treasury paper. This led to upward pressure on the term premium, or compensation for holding longer duration assets, and real yields.     Here’s what has happened since...

How the USD could sink the S&P 500

Correlation isn’t causation, but the USD Index has shown a close inverse correlation to the S&P 500. The relationship partly ended when the S&P 500 surged on AI mania. However, small-cap stocks, which are less subject to the enthusiasm over the AI revolution, maintained their inverse correlation.     The USD Index is approaching a...

Does inflation matter to stocks anymore?

Mid-week market update: The S&P 500 roared out of the gate this morning on a slightly softer than expected CPI print. Robin Brooks observed that super-core CPI (core services  ex-housing and healthcare, light blue bars) have been decelerating.     Unfortunately for equity bulls, the gains faded over the course of the day.   Callie...

Between the Scylla of inflation and Charybdis of financial instability

In response to the recent financial turmoil, Fed Funds futures is discounting a 25 bps hike at next week's FOMC meeting, followed by a brief peak and rapid rate cuts for the rest of the year.     Are those market expectations realistic? How will the Fed navigate between the Scylla of inflation and Charybdis...

Is there an inflation threat in your future?

On Valentine's Day, the European Central Bank tweeted a poem to underscore its commitment to fighting inflation.     The ECB tweet is also indicative of the tight monetary policy undertaken by most major central banks. Only two central banks, the BoJ and the PBoC, are meaningful suppliers of global liquidity. The rest are raising...

A risk of transitory disinflation

The main event last week for US investors was the FOMC decision. As expected, the Fed raised rates by a quarter-point and underlined that "ongoing increases in the target range will be appropriate". Powell went on to clarify that "ongoing increases" translated to a "couple" of rate hikes, which would put the terminal rate at...

The bulls cross their fingers for January

Mid-week market update: The bulls are nervously getting ready for a party. Jeff Hirsch of Almanac Trader pointed out that two of his January indicators are positive. When all three are positive, the rest of the year tends to lean bullish.    This year, the market has eked out a 0.8% gain for its Santa...

Soft CPI is helpful, but it’s still a bear market

Preface: Explaining our market timing models  We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.   The Trend...

How inflation is a game changer for portfolios

In light of the dismal performance in the first nine months of a 60/40 portfolio in 2022, it's time to ask, "What's changed and what adjustments should investors make to their portfolios?"     The answer is inflation, and it's a game changer. The correlation between stocks and bond increasingly rise as inflation rises. In...

A 2022 inflation tantrum investing roadmap

In the wake of the hot January CPI print, I have had a number of discussions with readers about the most advantageous way of positioning an equity portfolio in a rising rate environment. The most obvious strategy is to use an allocation similar to the Rising Rates ETF (EQRR) is to tilt towards value and...

The inflation challenge

Inflation fears have been rising in the wake of the hot October CPI report. Barry Ritholz, the CEO of Ritholz Wealth Management, recently issued an open challenge to the inflationistas.     Which side of that bet would you take?     Rising inflation concerns Inflation concerns are becoming widespread. FactSet reported the highest number of...

How to engineer inflation

Both the June CPI and PPI came in hot and well ahead of expectations. There was the inevitable debate about the transitory nature of the price increases. Looking longer-term, however, the conventional models for explaining inflation have been unsatisfactory.   Notwithstanding the numerous failures by Japanese policymakers, consider the US as another example. Let's begin...

The inflation red herring

Rising inflation fears are all over the headlines. From a top-down perspective, inflation pressures are clearly rising.     The Transcript, which monitors earnings calls, documented companies reporting rising inflationary pressures from supply chain bottlenecks and commodity price strength, which have the potential to create margin squeezes.   “…the inflationary pressures, particularly surrounding some of...