Regardless of where CPI lands tomorrow, my view is that the Fed will hold rates higher for longer than the market believes. Higher interest rates combined with a shrinking money supply (QT), translates to: tighter monetary conditions, a higher cost of capital, less revenue visibility for companies, more employee layoffs and a deeper recession. The equity market will bottom after the Fed cuts rates. This won’t happen for some time. Recall that we still have easy monetary policy given that Treasury yields sit below the CPI.
Headline CPI will likely be in the 6% range for several months. I’m not sure that Core CPI will decline month-to-month when the numbers are released tomorrow morning. Recall that Core CPI increased 0.3% in December from November and that November Core CPI increased 0.2% from October. Whether CPI comes in slightly higher or lower than consensus is nothing but noise. 6% CPI is far too high. Further, if you read these pages, you know that I believe that CPI is under-reported as a result of the Federal Government not using real world data, and underweighting certain categories.
Already in recession. My view is that the U.S. economy has been in recession for almost one year and that the depth of the recession will increase. If the economy was so rosy, companies would not be laying off thousands of employees. Approximately two thirds of the number of Tech employees that were laid off in all of 2022 have been laid off year-to-date 2023.
Higher cost of capital. The money supply continues to shrink which means Treasury Yields will continue to march higher (as the supply of capital shrinks, the cost of capital increases). This means that equities will drift lower as reality finds its way back into the equity market.
Fed pivot not in sight. When the Fed both reduces its Fed Funds rate and stops QT, that can be considered a pivot. I do not see that happening soon, nor am I sure that the Fed will pause rate hikes when the FOMC next meets on March 21st and 22nd. Historically, the equity market has not bottomed until after the Fed has cut rates.
Stagflation. I believe we are stuck with high interest rates for some time combined with high prices for goods and services, high debt levels and anemic economic growth, i.e. Stagflation – an economic condition the U.S. has lived with since Q1 2022. Read more HERE.