June 16, 2023
Good morning,
This week has been all about inflation and the Fed. Let’s unpack inflation a little: headline CPI (Consumer Price Index) inflation fell to 4.0% y/y, the lowest rate since March 2021. Core inflation (excludes food and energy, Fed’s key data point) was stickier and came down to 5.3% y/y, but nonetheless showed progress. Producer price inflation (think manufacturing) fell all the way to 1.1% y/y, the lowest rate since December 2020. And import prices (particularly key to manufacturer’s costs) were squarely in deflation (negative inflation number) territory, down 5.9% y/y, the most since May 2020.
Broad-based progress on inflation has supported a stock market uptrend, historically. It is not the fuel for an animal spirit led raging bull market – it is just supportive of an uptrend. When CPI inflation has been running below its six-month average, as it is now, the stock market has tended to rally. More than that, when CPI inflation is below its 5-year trend, it is no longer a headwind to equities, and CPI is now just 0.2% above its 5-yr trend. It makes sense – the stock market is intimately liked to corporate earnings and slowly receding consumer inflation allows goods prices to remain high while goods costs in decline increase corporate profitability. All is well and good for now.
The Fed itself projects 1.0% real GDP growth in 2023, which, at best, implies stalling growth in the second half of this year. But until the economic data begins to reflect the anticipated slowdown, disinflation will continue to dominate the macro narrative for markets. Nevertheless, slowing growth in the second half and a potential recession starting in late 2023/early 2024 are the risks to the current uptrend in equities.
Overbought (aka overly bullish sentiment) signals from the market were supposed to be the topic du jour this morning. But, I thought, let’s not go into a three-day holiday weekend on a negative note. I’ll save that for next week. See you Tuesday. Have a lovely weekend.
Be well,
Mike