Paul Tudor Jones says the Fed is done … where are we on the potential for rate cuts? … inflation may not be falling as fast as many believe … the latest on consumer sentiment
Yesterday, billionaire hedge fund manager Paul Tudor Jones said the Fed is done hiking rates.Older investors will remember Jones for famously predicting the October 1987 Black Monday crash – and making a fortune as a result. It’s worth listening when he makes a market prediction.From Jones:
I definitely think they are done.They could probably declare victory now because if you look at CPI, it’s been declining 12 straight months. … That’s never happened before in history.
Our hypergrowth expert Luke Lango made this same point about the consistent, sustained drop in the CPI data to his subscribers last week.After highlighting the numbers, Luke concluded:
While it may still feel like prices are high, the data says we are in the midst of the most powerful disinflation streak of the past century.Inflation is very clearly on track to revert back to its long-term averages within a few months.As inflation falls, stocks are rising – especially inflation-sensitive tech stocks…This rally is not a head fake – it’s the start of a big breakout, mainly due to the expected sharp decline in inflation in the near future.
Jones also believes this is the beginning of bullishness, though his forecast for the broader market (as opposed to Luke’s focus on tech) is tempered:
Equity prices … I think they’re going to continue to go up this year.I’m not rampantly bullish because I think it’ll be a slow grind.
Whether it’s “rampant bullishness” or a “slow grind,” it’s encouraging to read this optimistic view of where we’re headed.
But as analysts like Jones and Luke believe the Fed is done hiking rates, the question now shifts to the timing of rate cuts
Yes, if the Fed pauses rates in June, it will be supportive of equity prices. But it’s unlikely that such a pause would lead to a huge, sustained rally.That’s because Wall Street expects this pause and is currently pricing it into the market. Plus, a pause doesn’t actually help our economy; rather, it merely stops increasing the pain of higher-and-higher rates.History suggests that the new bull market we all want will begin sometime after the Fed shifts gears to rate cuts. So, is that about to happen?It is if you believe Wall Street. It’s not if you believe the Fed.The CME Group’s FedWatch Tool puts the odds of rate-cuts sometime in 2023 at 99%. In fact, a majority of traders believe that by the Fed’s December meeting, the target rate will be at least 75 basis points lower, if not a full 100 basis points.On the other hand, yesterday, Atlanta Fed President Raphael Bostic said he doesn’t see any rate cuts coming this year.From Bostic:
My baseline case is we won’t really be thinking about cutting until well into 2024…If I had a bias between going up and going down as our next action, I would say we might have to go up.What we’ve seen is that inflation has been persistently high. Consumers have been really resilient in terms of their spending and labor markets remain extremely tight.All of those suggest that there’s still going be upward pressure on prices.
Minneapolis Fed President Neel Kashkari echoed this hawkishness. While not explicitly calling for more rate hikes, he left the door open to them.From Kashkari yesterday:
We at the Federal Reserve probably have more work to do on our end to try to bring inflation back down.The labor market is still hot, and we have not seen much softening in the labor market. So, that tells me that we have a long way to go before we get inflation back down.
How is it that Bostic and Kashkari continue to be so fearful of inflation despite the months of cooling inflation as highlighted a moment ago by Luke and Jones?
Well, it depends on which data you emphasize.On one hand, there’s plenty of dovish data.For example, there’s the CPI, which has fallen from more than 9% last summer to the latest reading of 4.9% (year-over-year numbers).That’s a huge decline. And it makes it clear that inflation is on its way out the door, right?Well, if we change our focus to month-over-month data, it muddles that takeaway.Below, we look at the last six months of month-over-month CPI data. As you consider these numbers, is the takeaway that inflation is declining or that it’s bouncing around in the same overall range?October 2022 – 0.5%November 2022 – 0.2%December 2022 – 0.1%January 2023 – 0.5%February 2023 – 0.4%March 2023 – 0.1%April 2023 – 0.4%To me, there’s nothing all that consistent about those numbers.
The data are also less dovish if we look at a metric the Fed values far more than the CPI – the core PCE Index
Below, we look at Core PCE dating all the way back to November of 2021. What you’re going to see is that in that month, Core PCE clocked in at 4.82%.It then climbed as high as 5.42% in January of 2022 before saw-toothing in the months since.Today, the figure comes in at 4.60%, which is only slightly below our starting value of 4.82% from 18 months ago.If you’re like me, as you look at this chart, you do see an overall downward trajectory – and let’s be encouraged by it – but it doesn’t exactly scream “core PCE is vanquished.”
So, if we’re looking at a year-over-year CPI chart showing a drop from 9%+ to 4.9%, the obvious takeaway would be “Inflation is done. Put a fork in it!”But with a shift in orientation to the Core PCE chart, it makes more sense why Chicago Fed President Austan Goolsbee just said “Inflation is improving, but it’s not improving that rapidly.”Bottom line: As we mull the timing of rate cuts, we must do our best to see things as the Fed does. And that means acknowledging stickier Core PCE inflation, and tempering our hopes for what will really drive a market rally – rate cuts.
Meanwhile, how are consumers viewing inflation and the economy?
As you know, inflation is, in part, a psychological phenomenon.If shoppers believe prices are rising, they’ll hurry to the store to buy their goods/services today at prices they expect will be lower than those tomorrow.But this elevated buying pressure today results in a surge in demand that produces the higher prices consumers fear. It’s a self-reinforcing feedback loop.Given this, it’s important we monitor consumer expectations about inflation.Here’s MarketWatch:
Americans view on near-term inflation moderated slightly in May. They now expect the inflation rate in the next year to average about 4.5%. Inflation expectations had surged to 4.6% in April from 3.6 in March.Inflation expectations over the next five years rose to 3.2% from 3% in April. That’s the highest reading since 2011…Federal Reserve officials won’t be pleased to see expectations of inflation over the long-term increase. They view expectations as a key source of future inflation pressure.
Meanwhile, consumer confidence levels are dropping
Last week, the University of Michigan’s gauge of consumer sentiment fell to 57.7 for May. That’s down from 63.5 in April, and is the lowest level since November last year.Now, the press release with these data suggested that part of the sentiment decline was due to worries about the debt ceiling gridlock in Washington D.C. So, hopefully as soon as that resolves, we’ll see a boost in consumer confidence.On that note, President Biden and Speaker McCarthy and scheduled to meet today. Hopefully, there will be good news by the time you read this.Stepping back and looking big picture, how do we wrap all of this up?Well, inflation is cooling, and it’s cause for genuine optimism and budding bullishness.But let’s be cautious and clear-eyed in our optimism.The Fed’s preferred measure of inflation shows slower progress…which suggests we should be prepared for similar slower progress when it comes to any meaningful change in policy. But if stock prices race ahead based on an expectation of rate cuts in the coming months yet those cuts never materialize, there will be a great deal of disappointment on Wall Street.Cuts are coming, but not necessarily as fast as Wall Street anticipates.We’ll keep you updated.Have a good evening,Jeff Remsburg
