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Inflation To Roll Down Dramatically in First Half of 2024


Inflation To Roll Down Dramatically in First Half of 2024

New York - January 19, 2024 ~ The futures market has priced in 6 rate cuts this year, starting as early as March.  We forecast that this fundamentally flawed Fed is extremely unlikely to cut aggressively as they have admitted that they have no ability to forecast inflation as their Phillips Curve models have failed.  Consequently, the Fed is going to default to looking at last-twelve-month data and continue its track record of being 12-18 months behind the curve. The good news is that the pattern of historical inflation indicates that last twelve months ’ PCE is likely to decline dramatically by May.  The Fed is very likely to cut rates in July as Inflation rolldown/base effects are extremely likely to drive PCE Core closer to the Fed’s 2% inflation target.  

 

PCE Core has only increased by .88% over the past 6 months at an average monthly rate of .15%, vs. a 2.2% increase over the prior 6 months at an average monthly rate of .37%, resulting in a potential .22% role down of LTM inflation every month.  Even if the Core accelerates to an average of .2% per month, the PCE Core will decline to approximately 2.5% after the May PCE is announced.   If PCE Core drops to 2.5% or lower by the May report, that puts the Fed in a position to cut at the July meeting.  

 

In addition, there most likely will be numerous cuts from other central banks by July, including the ECB, providing impetus to move.  If the Fed starts cutting in July and cuts every subsequent 2024 meeting there would be 4 total cuts, which is our base case.

We remain bullish about both the stock and bonds market for 2024 with a 5,500 target on the S&P and a 3-3.5% target on the 10-year treasury. Even if the Fed only cuts 4 times, the beginning of cuts marks the end of this tightening cycle and is very likely to be extremely bullish.  In addition, even if the Fed disappoints on rate cuts and only does 3 in 2024, the rest of the world is likely to lead the Fed in cuts and drive global rates lower.

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