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Not so Fast Jerome

As the chart below illustrates Chairman Powell has been premature in his pivot. Immediately following today’s release of a hotter CPI print, Fed Funds Futures are now pricing in only 22% odds of a June cut, 10 yr yields ripped to the important 4.50% level and equity futures sold off hard (IWM futures off almost 3%). A few details:

• Headline CPI came in at 3.5% vs 3.4% expected and Core came in at 3.8% vs 3.7%

• Inflation is going the wrong way whether you look at the 1-month or 3-month change (as illustrated below, ty Jason Furman)) or the 6-month change which grew at the fastest level since July of last year

• Yes, OER is still contributing to higher inflation readings but the rate of growth is decelerating

• Gas prices are starting to have an impact for sure

• “Supercore” Services ex-housing rose at 4.77% y/y rate which is the fastest since April of last year

• Medical costs, health insurance, home insurance and car insurance are really starting to bite

The bottom line is that, while there are signs of consumer demand weakening and small businesses struggling, the Fed can not seriously tell the American people that they are gaining on their price stability mandate, and they can therefore begin cutting rates. Our view for several quarters has been “Higher for Longer” on both growth and inflations and we remain of that view. That said, we are concerned that the weakness in some of the employment, restaurant traffic and NFIB (small business) data may be telling us that demand weakness could be emerging. The Fed is in a very tough spot. They see the same signs of emerging weakness, but they can not afford to ignore the fact that inflation is accelerating. The last thing we will say is: Now is not the time to incur more risk.

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