CPI printed in line at .2% for both Headline and core although the unrounded core number was actually .17%. The increase in inflation was caused almost exclusively by an acceleration in the flawed shelter component which increased from .2% to .4% and is up 5.1% year over year. Market rents year over year are actually down .8% which demonstrates the massive lag of the shelter calculation vs. actual inflation.
If the Fed looked at a harmonized PCE core, which normalizes the BLS shelter calculation, it would cut more aggressively as it is well below 2%. We now forecast that PCE for July will print very cool at .02%, which will give the Fed further comfort to cut.
We continue to forecast that the Fed will cut only 25bp in September as this Fed operates as if its third mandate is to be behind the curve. We forecast that the Fed will cut 3 times this year. These rate cuts will require a liquidity injection into the banking system to lower the Fed funds rate, which is likely to cause a rally in both the bond and stock markets.
We also forecast that the election will result in a split government which will stave off a large corporate tax increase. We reiterate our 6,000 500 target on the S&P as long-term rates decline and we get clarity on the election.
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