Skip - Stop - Stop & Reverse
Macro Perspectives
The headline inflation number came in right at 4% year-over-year. If we take into account “basing effects”, even if June were to be a hot number, the rate-of-change in next month's report (relative to June of 2022) will fall to the mid-3s.
This is why the Fed has been telegraphing a "skip" on the rate hiking cycle.
Not only is the headline number falling sharply, but the Fed, at an effective Fed Funds rate of 5.08% is above its favored inflation gauge, core PCE, which is running 4.7% at the last reading - taking the Fed Funds rate above the rate of inflation has historically been the antidote for putting downward pressure on inflation.
So, a "skip" by the Fed is fuel for stocks.
As we discussed yesterday, the Nasdaq and S&P 500 have well broken out of the bear market downtrend of last year. The Dow and Russell (small caps) are just breaking out. Here's an updated chart on the Russell, which was one of the best performing stock indices in the world yesterday.
That said, this "skip" from the Fed doesn't look like a "stop," much less a "stop and reverse."
Why? Oil.
The core inflation rate (ex food and energy) remains above 5%. Importantly, the sharp fall in the headline rate has been brought to us by manipulation, namely the Biden's administration's liberal use of the Strategic Petroleum Reserves - draining 40% of the reserves to put downward pressure on oil prices.
It's now time to restock. And through anti-oil policies, the U.S. has ceded control over production to OPEC+. It seems likely that higher oil prices are in our future.
That will underpin inflation. Meanwhile, the Treasury will be issuing over a trillion-dollars in new debt over the coming months (on top of the existing unsustainable debt burden).
All of this, and as we look around Japanese stocks are making new 33-year highs (nearing the old record highs) German stocks are near record highs. U.S. stocks are resuming flight. Plus we have the early stages of a fourth industrial revolution underway (driven by generative AI).
Complicated paradox? Or is this the formula we've been discussing in my daily notes taking shape? For details, let's revisit my February 28th note ( Should it be a $26 Trillion Economy? ). . .
Again, this note was from February. Fast forward to today, and this formula of hot growth, hotter than average inflation and rising wages appears to be coming to fruition. It will be good for stock prices and it will inflate away the value of debt.
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