PCE core printed below expectations at .1% vs. expectations of .2% and the prior month was revised downward to .1%. The last six-month annualized inflation rate is 1.76%, which is well below the Fed’s arbitrary 2% target. This decline in inflation without a significant drop in unemployment further invalidates the Fed’s Phillip’s Curve theory of inflation. The year-over-year number declined to 3.2% from 3.6% last month, and the shelter corrected PCE-R declined to 2.6% year over year. We expect that inflation will continue to cool when the December CPI/PPI/PCE is reported in December as the 15% decline in gasoline prices has still not been fully reflected in the headline and there will continue to be bleed through to the core as energy is the most ubiquitous component of both goods and service costs.
The recent sharp drop in inflation validates our view that 2024 will be “the year of global rate cuts” as slow or negative economic growth and plunging inflation cause global central banks to cut rates. In fact, 29 out of 30 OECD countries are expected to cut rates by an average of over 150 basis points as implied by interest rate futures markets. The Euro Zone is currently in a recession and the ECB is likely to cut in the second quarter of 2024, if not sooner. A simple rule of investing is to be cautious when central banks are raising rates and reducing global money supply, such as in 2022, and be aggressive when central banks are loosening policy by increasing the global money supply. A good example of a loose policy is 2021 when the global monetary base increased dramatically triggering a speculative bubble in a variety of assets including crypto, SPACs, and meme stocks.
We reiterate our 2024 target on the S&P of 5,500 with the greatest risk to our target being to the upside. We also expect the 10-year treasury to drop into the 3-3.5% range. We expect financial-related sectors such as preferred stocks, financials, and REITs to outperform the market.