The new Blue Chip Indicators put core PCE inflation at 2.5% by next year’s fourth quarter, and 1-year and 10-year forward breakeven inflation rates are near the same level. This « cheerleading » mindset is the height of absurdity. Gasoline prices come down $1 from record highs and the trumpets were blaring as if inflation was dead. All of that is true but it will be a matter of where inflation settles. Everyone is expecting inflation to moderate over the next year, citing lower commodity prices, an improved supply/demand imbalance, and lower wage pressures. Because of this, the path of inflation remains a prime concern for equities. We do not have that luxury right now with inflation so high. Investors have been conditioned for years to take « bad news as good news » because inflation was low and the Fed could come to the rescue (with supportive stimulus). The phrase « data-dependent » has been in the Fed’s commentary for a long time. With the poor economic data presented day after day, week after week, if a recession isn’t here already, rest assured we won’t need the FED to bring one into the picture. The situation is the inverse of Goldilocks, with recession risks rising every time the Fed tightens. All three are looking for that « unbalanced force » to change direction and stabilize the investment scene. The objects in motion that are critical to investors today are inflation, rising interest rates, and falling stock prices. « Objects in motion stay in motion in the same direction unless acted upon by an unbalanced force. » – Isaac Newton The Macro View Inflation is HERE, and corporate EARNINGS will suffer.
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