TREND: Tuesday’s November US inflation report is the most important remaining data point of the year. More so after S&P 500’s recent double digit rally that is increasingly ‘fighting the Fed’. Consensus is for a worryingly small fall in both the 7.7% headline and 6.3% core year-on-year rates. But our own inflation tracker (see chart) is reassuring that underlying price pressures are easing. This gives comfort a gradual stock market recovery is supported, regardless of Tuesday’ number. Inflation is driving everything, from Fed hikes to recession risks and earnings views.
VIEW: Our inflation tracker shows median price pressures 24% off their peak levels and down 5% from two months ago. Supply chains, housing and commodities have led the falls. Whilst the concerns are focused on the lagging labour market, and low but sticky consumer and investor inflation expectations. Markets may be vulnerable to a reality check after recent strength, but further inflation falls are the key fundamental support. Inflation drives everything, from the Fed terminal interest rate view, to the US recession likelihood and to weaker earnings expectations.
DRIVERS: We track leading or coincident price indicators for six big inflation drivers. We do this to get a better sense of underlying inflation. The reported CPI figures are by definition lagging, and compounded by how weirdly housing prices (30% the index) are calculated. We track the labour market (employment ISM, JOLTS), housing (Zillow rent, NAHB index), goods (Used cars, Manufacturing ISM prices), commodities (Gasoline, broad commodities), supply chains (Fed’s supply chain index, container rates), and inflation expectations (Michigan survey, Break-evens).
All data, figures & charts are valid as of 08/12/2022