Even after the market crash, investors continue to make two implausible assumptions about the next six months, says this economist

Not for the first time, inflation data took the market by surprise. The bad news was the S&P 500 SPX,
saw the biggest one-day drop in two years, plummeting 4.2%. The good news if you’re checking your 401 (k), you’re only back to last week’s levels and futures hold up in the early hours of Wednesday.

A month of data is just a month of data and there are still believers that the Fed will halt the rate hike campaign in the not too distant future.

“With inflation expectations nearing normal levels and rising disinflationary pressures everywhere but the official CPI, we still expect both headline and core inflation to fall faster over the next 12 months than they do. officials currently believe, “said Paul Ashworth, US chief economist at Capital Economics. “The pin isn’t dead yet.”

But what a bloody month of data it was. The first surprise of the day was that core CPI was much warmer than expected and two methods of cutting numbers by the regional Fed contained further bad news. The Atlanta Fed’s sticky CPI price index rose 6.1% year-on-year from 5.8%. Remember, this is a weighted basket of price items that should slowly change (think, menu). The Cleveland Fed median CPI, meanwhile, accelerated to 6.7% from 6.3%.

If you use the old rule of thumb that the Fed must raise interest rates above the core inflation rate, and remember, that particular saw is on the Fed’s website! – then the market is still underestimating by far how high rates will have to go. Even after Tuesday’s inflation surprise, fed fund futures imply a terminal rate around 4.25%.

Anatole Kaletsky, president and chief economist of Gavekal, calculates that even if price increases were to stop completely at this time, core inflation would still be 4.3% in December and the nominal rate of 6.2%. If core inflation continues to rise at the rate of 0.56% as it did in August, it will reach 6.6% in December, and if inflation rises at the same rate as the median CPI over the past three months, that number core will reach 7.2% by December.

“Many investors expect the US economy to plunge into a deep recession and the Fed to respond by panicking and abandoning its inflation target. Both could happen eventually, but neither is even remotely plausible within the next six months or so, ”he says.

After all, the most recent US activity data is actually strengthening. “With inflation and labor market reports still clearly indicating overheating, the Fed will have no excuse to hint at a pause, let alone a future easing,” Kaletsky said.

He predicts that the fed funds rate will be 4.5% by Christmas, that core inflation will be around 6.5% and that the US economy will still show no signs of recession.

“In this case, it is difficult to imagine why 10-year bond yields should trade below 4%, and it is very plausible that the yield curve could disinvert, pushing long-term bond yields towards 5%,” he has declared. He didn’t offer a stock market forecast, but suffice it to say that if he’s right about bonds, stocks would see more days like Tuesday.

The market

ES00 US stock futures,
+ 0.16%

+ 0.20%
they were a little taller. The DXY dollar,
fell and the 10-year Treasury TMUBMUSD10Y yield,
rose to 3.46%.

The buzz

Producer prices weakened by 0.1% in August, to slow the year-on-year rate to 8.7% from 9.8%.

The UK saw inflation come a little below expectations, falling to 9.9% in August from 10.1%.

The Bank of Japan conducted a check on the foreign exchange market, reports the Nikkei newspaper, laying the groundwork for a possible intervention to stem the decline in the deteriorating Japanese yen USDJPY.

Starbucks SBUX,
unveiled the three-year forecast, forecasting it will increase adjusted earnings by between 15% and 20% on comparable store sales growth of between 7% and 9%. Starbucks previously expected comp sales to grow from 4% to 5%. It said it will return $ 20 billion to shareholders over the next three years through share buybacks and dividends.

GOOGL of Alphabet,
Google has lost most of the appeals for a $ 4.3 billion fine imposed by the European Union on Android.

The International Energy Agency kept oil demand growth forecasts for 2023 unchanged, after lowering China’s forecasts but raising those for the rest of the world. The European Union has said it will raise around 140 billion euros from unexpected taxes on energy companies.

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