CAMS Weekly View from the Corner - Week ending 4/12/24
April 15, 2024
Strewn throughout many editions over the previous year-plus we shared the consensus certainty that price inflation as an issue was over, the Fed would be able to cut interest rates consistently for seemingly as far as the eye could see and with this the economy would not miss a beat in its expected continual growth trajectory.
This expected bottom line result came with a downstream belief that everyday households would experience ever growing wages when adjusted for price inflation which would lift all classes to new economic heights.
In-house we referred to this certainty as “The Narrative” to succinctly address the collective expectation.
Relative to interest rate cutting expectations The Narrative is imploding.
If we circle back to late 2023 it was a foregone conclusion via consensus views that come the March 2024 Fed meeting their interest rate cutting campaign would have begun. As 2024 unfolded those expectations disappeared but in its place “the next” Fed meeting became the assured timeframe for rate cuts.
The problem is the next Fed meeting via rate cut expectations has continued to be pushed further down the timeline which has now become stopped clock analysis. The message will be proven correct given enough time.
The problem is reality. That is price inflation is not easily moving into the history books. Interestingly, the history books offer once price inflation eras are allowed to begin they are not easily escorted off center stage. This is being shown to current policymakers all while the citizenry experience the reality of it in real time.
Spring Becomes Fall
Via the CME’s FedWatch Tool the aforementioned assured March 2024 rate cut expectations gradually morphed into downstream months with our current rate cut expectation being pushed out to September. Early spring season turns into fall season.
Should you prepare for that early spring expectation to turn from current fall season into winter? This is not a prediction but do not be surprised by this if general financial conditions continue to be loose along the forward path.
We have shared ad nauseam how general financial conditions have loosened tremendously - in particular over the previous six months - with a lean toward doing so over the previous near-year.
Powell and crew over at the Fed have aided and abetted this process. First with language that contradicted the reality that was unfolding across the landscape of broad market(s) and economic system participants and then over recent time adding fuel to the fire with introducing language that rate cuts would be coming at some point near-term.
This has amounted to trying to stop the car while pushing down on the accelerator a bit more and then again a bit more and a bit more – you get the point. Are we really going to be able to put this price inflation era to rest while simultaneously laying the groundwork for general financial conditions to get continually looser? This is nonsensical like attempting to stop a car with the accelerator.
When broad financial conditions are loosening system wide this equates to as though rate cuts have already begun. This general storyline of ending price inflation in this manner seems like a tall order. When viewed through the lens of history it offers it will not happen. We shall see if history proves correct.
Ten Months and Counting
A key component of the aforementioned Narrative was an assuredness that price inflation would consistently and smoothly trend lower and lower on its way to the Fed’s 2% target objective. This component would then allow for the others to fall right into place via the expectation.
Rate cuts would be able to unfold consistently which would further support non-inflationary economic growth. Then with this follow-on component in place – via the expectation – the logical follow-on would be the everyday wage earner would see their price inflation adjusted wages move on a consistent upward trend. Through this we would collectively see an escalation of higher standards of living across the board.
The above Narrative’s implosion is offered in one picture directly below.
Above is the well recognized Consumer Price Index (CPI) depicted over the previous decade for some perspective. Last week we received an update on CPI with it reflecting a rate of growth that is increasing to the tune of 3.5% year/year.
Our red horizontal line underscores the CPI’s inability to continue trending lower. The starting point of our red line is June of 2023 – 10 months ago – at which time, per consensus, price inflation was no longer going to be an issue.
Now nearly a year later not only has the downtrend been stopped in its tracks but we are attempting to kick up higher on the growth rate on a trend basis.
The question all along the path of the previous near year is would this red line area prove to be a plateau before the next leg lower on the downtrend. With last week’s CPI update we are kicking upward instead. Now the focus is will this upward move prove to be an aberration?
More broadly, in looking at the above decade long chart notice how the recent 10 month lows, underscored with our red line, still remain at the highest levels we have experienced in the years prior to the start of this price inflation era. This overall reality and end result offers policymakers are not winning this price inflation battle.
For their part interest rate traders are offering a parade wave to near-term interest rate cuts as price inflation reality continues to point to on-going issues.
As of this writing the Fed meets again in 17 days. Prior to that meeting we will have additional price inflation data released to the public. If that data proves as discouraging as that displayed above the sanguine “we got this” type language coming from the Fed’s Chairman (Powell) may have to change to something more commensurate with the price inflation reality facing them and the citizenry.
For our part, using history as our guide, we cannot help but ask if this price inflation era can come to an end without monetary policy tightening to a point that economic recession occurs?
History offers no but that does not mean such an outcome is certain. Regardless, it’s a curious question that we cannot help but ask as we continue to walk down this current price inflation era.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis