HEAD FAKE: US inflation remains the most important number in global markets. And still the top worry amongst investors, ahead of recession or geopolitics. Its further decline is driving the outlook for an aggressive six US interest rate cuts this year. Which is also pushing a rotation from the defensive growth big-tech stock winners of last year to the interest rate sensitive and cheaper laggards, from financials to real estate. Interest rate cuts, alongside the earnings pick up it would support, are the twin pillars of our bullish-but-different 2024 market outlook. Today’s December inflation print may be a head fake. With a well-telegraphed base-effect driven headline rise, masking a welcome drop in underlying core inflation below 4% for the first time.
NOWCAST: The Cleveland Fed NOWCast is for a temporary headline inflation pickup, as also seen in Europe. Rising to 3.3%, but largely on the base effect of last year’s big energy fall. Underlying inflation continues to ease, to an estimated 3.9%. This is supported by our inflation tracker (see below) and ‘truflation’ measures. Markets have historically reacted strongly to this report. Reflecting inflation as still the top investor worry, despite its sharp fall the past year. This puts it ahead of recession, geopolitics, and interest rates on the typical investor worry-list.
TRACKER: Our tracker of leading and coincident data supports the easing in price pressures. 60% of constituents have seen easing pressures the past quarter, led by housing, employment, used cars, gasoline. With rises on supply chains, given mid-east tension, and consumer inflation expectations. We track labour (employment ISM, JOLTS), housing (Zillow rent, NAHB index), goods (Used cars, Manufacturing ISM prices), commodities (Gasoline, broad commodities), supply chains (GSCP index, container rates), and expectations (Michigan survey, Break-evens).
All data, figures & charts are valid as of 10/01/2024.