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Remember ‘Rate Cuts by Mid-2023’?

CAMS Weekly View from the Corner – Week ending 7/7/2023

July 10, 2023

Collective narratives are funny things that often lean into downright silliness.

Often what makes them funny, if not silly, is their “foundation” is often built upon a sliver of truth that typically is greatly exaggerated coupled with being projected well into the future as though the exaggerated sliver of truth is based on an overwhelming amount of factual data that wreaks of an obvious trend change.

Back in the day (as they say) it used to be more accurately stated and labeled as a rumor. Long standing market participants, do you remember the ole “buy the rumor sell the news” adage?

Seemingly, somehow the accurately stated rumor has been replaced with “fact” and hence becomes the foundation of a narrative that itself is presumed factual and hence is traded upon, discussed in casual conversations, and written about as though it is a foregone conclusion and so obvious that anyone who questions said narrative is labeled with you-name-it one liners.

With this offered one of several market oriented narratives has been “rate cuts by……” with an open end date by design because the narrative, like most narratives, became a moving target. From memory somewhere along the 2022 path rate cuts were expected sometime by the latter part of that year because the price inflation issue had to be but a blip on the historical timeline right?

As it became obvious that was not in the cards as is typical the goalposts were moved around via the expected timeframe of “early 2023” to then “mid-2023” and will surely continue to be moved further employing the common characteristic of collective narratives which is positive assuredness without evidence to support it.

To be fair, which is also a common characteristic of collective narratives; the goalposts will no longer be moved but will be taken down as the narrative evaporates into the ether in light of its blatant miscalculation. We suspect this is where the “rate cuts by…..” narrative is heading as it is now being commonly accepted that “rates higher for longer” is entering the scene.

This is becoming clearer as we stand here in the middle of 2023. Not only are we not hearing or seeing any signs of rate cuts but the Federal Reserve is offering more rate hikes to come as we move through near-term months.

For our part strewn throughout countless editions over the previous couple of years-plus, to include recent months, we have offered various price inflation measures that offered the price inflation issue was anything but a blip on the historical timeline.

Being the next Federal Reserve meeting is coming up in a couple of weeks coupled with the fact that we are in mid-2023 already (how did that happen right) below we will share a couple of views on updated price inflation.

They will not be cherry picked in order to pick the best looking measure to support the “price inflation is dead” view but rather will be focused on a deeper look inside the price inflation issue coupled with one that has been a central focus of the Federal Reserve itself.

First up we offer Median CPI directly below.

To calculate the Median CPI, the Cleveland Fed analyzes the median price change of the goods and services published by the BLS. The median price change is the price change that’s right in the middle of the long list of all of the price changes. This series excludes 49.5% of the CPI components with the highest and lowest one-month price changes from each tail of the price-change distribution resulting in a Median CPI Inflation Estimate.

According to research from the Cleveland Fed, the Median CPI provides a better signal of the inflation trend than either the all-items CPI or the CPI excluding food and energy. According to newer research done at the Cleveland Fed, the Median CPI is even better at PCE inflation in the near and longer term than the core PCE.

The two paragraphs above is excerpted from the Cleveland Federal Reserve which is the 4th District Bank of the Federal Reserve System. We offer the excerpt to share a bit more detail on the construction and in our view the importance of this long standing price inflation measure.

The chart above depicts this data back to the early 1980’s for a broad perspective. To the far right we see our most recent results via the chart. Price inflation progress?

This upcoming week we will see new data for price inflation released with this measure also being updated.

Obvious to casual observation via the above chart this measure has experienced little trend reversal from the rocket ride upward of the previous couple of years-plus which itself has been a notable historical aberration relative to its multi-decade results. Said differently, this price inflation experience has been serious and historically significant and is not going away easily.

Chairman Powell of the Federal Reserve has addressed Services price inflation as being a significant concern.  The initial upturn in price inflation began in Goods but then broadened out to Services which encompasses far more of the economy and once experienced is more sticky. 

The above chart dates back to 1960 for broad perspective. The far right of the chart speaks to the rapid upward trend in recent years with recent months showing little change relative to change of trend.

In light of its importance via the Fed Chairman’s continuous comments on this aspect of price inflation imminent rate cuts are out of the question.

Take note of the two charts together in how little to no progress has been made all while for the previous (near) year now the aforementioned rate cut narrative grew in acceptance if not expectation.

Deeper inside the price inflation storyline much progress remains to be seen. We can only offer in light of the deeper story everyone should become accustomed to the “rates higher for longer” tag line rather than the “rates will be cut by…….” view that has been bandied about for some time now that has lacked broad factual price inflation evidence to support it.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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