Yesterday’s CPI inflation data notes an economy that still has elevated inflation, but the trajectory of inflation is cooling and cooling very quickly.
Core CPI excluding shelter costs was up just +.17% MoM. On a year-over-year basis, Core CPI ex shelter was up +3.9%. A year ago, CPI ex shelter cost inflation data was well over >7%. The combined efforts of the Fed to both hike interest rates and shrink their balance sheet has made a meaningful impact on inflation and the trend of inflation. Eventually the drug works and tougher financial conditions are at work. Rental shelter costs are falling in every survey we look at. The upcoming decline in shelter costs should lead the headline CPI number to come down quickly in the very near term. We need shelter costs to fall and the labor market to weaken. Those are coming attractions.
Big picture is that the market reaction to higher-than-expected headline CPI on Tuesday was to push yields higher, basically pricing in another Fed hike in May. The UST yield curve remains very much inverted and recession looms. The risk is that the Fed hikes another 25bps in May, likely a final hike that will prove too much to avoid a so-called “soft landing” for the economy. Sometimes the way to win is to stay away from segments or asset classes not in the path of progress. Growth stocks are allergic to higher yields (we prefer value > growth) and a hard landing for the economy will bring about a rush of high yield bond defaults. We’re staying away from HY credit for now.
Richard Barrett
Chief Investment Officer
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