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Distorted CPI Indicates No Rate Cut Before July

Distorted  CPI Indicates No Rate Cut Before July

Both core and headline inflation printed .1% hot at .4% and .3%, respectively.  Almost all of the hot core print was due to an increase in shelter from .4% last month to .6%. In addition, financial services increased by 2.5%, which is based on the market price of equities, causing core CPI to rise by .05%.  Shelter expense is distorted by the archaic BLS estimation method which is purposely delayed by 6 months and uses lease renewals which are delayed.  Actual rents are down 1% vs. the up 6% Y/Y increase reflected in the CPIIn addition, the entire increase in financial services inflation is caused by increases in market prices whereas real financial services inflation is approximately zero. 


Due to the distorted CPI numbers, Core PCE is likely to print at .5% for January, which will result in Y/Y PCE staying at 2.9%.  Core PCE will be driven up by .14% by the inaccurate financial services number and another .12% by the distorted shelter estimate.   Consequently, Core PCE is likely to be overstated by double.  When financial services inflation drops due to declines in stock prices and shelter cools down to .4% per month, year over year Core PCE should gradually cool down to the 2.5% range by the end of June, which could set the stage for a Fed rate cut in July.


We continue to forecast a June rate cut by the ECB as CPI in Europe is likely to decline dramatically over the next 3 months, as it does not suffer from the shelter and financial distortions in US CPI and the European economy has completely stalled and is likely to go into a mild recession in Q1, led by Germany.


We reiterate our 5,500 year-end 2024 target on the S&P driven by global rate cuts but believe the S&P will be range bound in the 4,800-5,000 range over the first 6 months of 2024 as the massive distortions in Y/Y Core PCE slowly attenuate. 



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