Economic Data Points to Lower Inflation

In recent months, there have been noticeable signs of inflation slowing down in the United States, affecting expectations for rate hikes and influencing consumer and investor sentiment. This  has prompted a reevaluation of market expections regarding the Federal Reserve’s future monetary policies.  In short, the stock market has rallied off of this one report. The thesis being that the FED will now cut rates sooner than initial thought in 2024. The concensus is now at four (4) rate cuts.

Our view is that this premature on a number of reasons. Even though consumer prices slowed based on the CPI, we feel that inflation is sticky particularly in the service sector of the economy. While true that this decline offers a glimmer of optimism amid the looming specter of recession and higher costs, it is still too early to call the battle against inflation over.

We should keep in mind that it is easier to cut inflation from a high number to a medium number, but to get to the 2% target it will be more difficult. Actually, the more realistic target is more like 3% these days.

Further good news came in on a weaker retail sales indicating that maybe the effects of monetary transmission are starting to hit consumer demand. There was also a slight decrease in the confidence that workers leaving jobs could obtain a new job quickly.

Today oil prices also fell into the low 70 range.

At this point in the business cycle, the Federal Reserve confronts the formidable task of navigating the intricate interplay between inflation dynamics, monetary policy, and macroeconomic stability. The recent signs of easing inflation have prompted a market assessment, we think overeaction, that rates cuts will happen sooner than had been forecasted.

Our current view is that rate cuts will be three (3) for next year and will happen later than the market concensus. Thus, we would remain cautious. The next key earnings report is for Nvidia (NVDA) next Tuesday. If this report dissapoints, then expect some of the recent euphoria in the stock market to also tank.