Apr 12, 2024
Perhaps it was always too good to be true.
One of the bigger surprises of 2023 was inflation’s slow decline. Economists, asset managers, and media moguls warned of the proverbial “tiger” – once that tiger (inflation) was freed it would be difficult to get back in its cage. Yet despite expectations, that tiger, at least for a little while, proved to be tame and disinflation provided room for optimism.
Alas, the story to start 2024 is not quite so cheerful.
The latest troublesome data came from higher-than-expected inflation for March, which was released on Wednesday. The core consumer-price index (CPI), which strips out the volatile sub segments of food and energy, came in hot – rising 0.4% vs. expectations of 0.3%. If continued, the current pace would entrench inflation at over 4% year on year, double the Fed’s target.
Why is this important? Well the inflation data is used to inform decisions related to the direction of interest rates. Given that the market is a forward looking mechanism, the hope of declining interest rates in 2024 has largely been the engine propelling the stock market back to all-time highs.
Back in December, at the peak of optimism, most investors had priced in six or seven rate cuts this year. Those expectations for a pivot in monetary policy have slowly changed as inflation proves to be stickier than reports from 2023 once hinted.
Within minutes of this week’s inflation figures, market pricing shifted to implying just one or two cuts this year. Not only this, but cuts could be far later than most expected – some experts believe an interest rate cut may not come until after the presidential election in the fall.
So is it all gloom and doom?
PPI, a measure of wholesale prices, increased less than expected in March. Given that whole sale price increases generally flow down to the consumer, the report is positive. The core personal consumption expenditures price index, which is labeled as the Fed’s preferred input to the inflation mosaic, has yet to report and using the data from CPI offers reason to believe that pressures may be better than feared.
But trying to explain away uncomfortable numbers by pointing to this or that is reminiscent of 2021, when inflation denialists were certain that the rising cost of goods and services was simply a transitory phenomenon.
Although growth has remained impressively strong, it now appears to be bumping up against the economy’s supply limits, and is therefore translating into persistent inflationary pressure.
As you might recall, we’ve been in the higher for longer interest rate camp for quite some time now – a narrative we’ve been talking about since the summer of 2023. Although we don’t construct portfolios based on macro bets, it appears the market is coming around to agree with our views.
The Fed was already cautious about cutting rates when inflation figures were more co-operative. With the latest info, they’re likely to be even more wary now.
Have a great weekend,
– Your Titan team
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