CPI Moderation

George Chin |

Equity and bond markets rallied on news that inflation is slowing. See below to see CPI trends.

Source: https://fred.stlouisfed.org/series/CPIAUCSL  

Though some have discounted the possibility of a recession, we think it’s entirely possible. The US economy will likely dip into a shallow downturn in the first quarter of 2024. Expectations are building that the Federal Reserve may cut rates in 2024 reversing its current policy. We think that’s likely. 
We are positioning portfolios on the assumption that dividends at one point will matter, interest rates will flatten to fall, corporate earnings will continue to be relatively solid, and the unemployment rate to remain low. There are many other factors we consider and those are assessed as well as we construct portfolio strategies.
A recent article highlighted this issue on CNBC.com. Excerpts are provided below.


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“Inflation was flat in October from the previous month, providing a hopeful sign that stubbornly high prices are easing their grip on the U.S. economy and giving a potential green light to the Federal Reserve to stop raising interest rates.

The consumer price index, which measures a broad basket of commonly used goods and services, increased 3.2% from a year ago despite being unchanged for the month, according to seasonally adjusted numbers from the Labor Department on Tuesday. Economists surveyed by Dow Jones had been looking for respective readings of 0.1% and 3.3%.

Excluding volatile food and energy prices, the core CPI increased 0.2% and 4%, against the forecast of 0.3% and 4.1%. The annual level was the lowest in two years, down from 4.1% in September, though still well above the Federal Reserve’s 2% target. However, Fed officials have stressed that they want to see a series of declines in core readings, which has been the case since April.

Markets spiked following the news. The Dow Jones Industrial Average roared higher by nearly 500 points as Treasury yields fell sharply. Traders also took any potential Fed rate hikes almost completely off the table, according to CME Group data.

“The Fed looks smart for effectively ending its tightening cycle as inflation continues to slow. Yields are down significantly as the last of investors not convinced the Fed is done are likely throwing in the towel,” said Bryce Doty, portfolio manager at Sit Fixed Income Advisors.

The flat reading on the headline CPI came as energy prices declined 2.5% for the month, offsetting a 0.3% increase in the food index. It was the slowest monthly pace since July 2022.”

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