Inflation incoming

The US Inflation number is fast approaching. This has been of the main drivers of the recent tremendous start of year rally in US and global stock markets.

It is virtually a given and certainly expected by market participants that inflation will decline yet again and significantly. This is all very probabl.Though anything can happen with surveys? Which after all is all any economic data release represents. Nevertheless, it should be a number that is welcomed.

The market is expecting 6.7%. Down from the previous 7.1%. Gasoline and energy prices have corrected and this should be about right. My forecast is nearer 6.9%.

Stocks will rally, but should they?

So far, the very large institutions have been avoiding the thin holiday markets, but will begin to return with more force next week. It is likely they have continued to receive redemptions, and some fresh selling pressure could be expected on this basis.

The real problem will come with the again, and repetitively so, false hopes of some kind of Fed pivot during the year. When in fact, the very best that can be hoped for is a slowing and pause of rate hikes. We could even see a further 3-5 50 point rate increases this year. Then, at whatever level the Federal Reserve finally pauses, they will be sitting on their hands for a very long time.

My forecast for the Fed Funds Rate remains in the 5.75% tp 6.5% region, followed by an 18 month to 2 year holding pattern. Even with a lower inflation rate, it is still stubbornly too high for the Fed’s comfort.

Markets are likely to be seriously disappointed. The whole idea too, that a weakening economy is good for US stocks, is another total nonsense.

Earnings, after having been driven higher in recent years by the entirely artificial forces of ridiculous near zero rates and massive government bond buying and handouts, are now reverting to the real economy as their basis in growth. The negative economy, the US was already heading into another recession in December, means negative earnings.

Investors should focus on the risk scenario that markets are not fully pricing how high for how long rates will actually be, nor anywhere near the full nature and extent of the slow-down. Both in degree and duration.

Markets are actually looking across a mist filled abyss, as if it were just another walk in the park small valley crossing.

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

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