Momentum Shifts to the Other Team

Thought to ponder…

“Emperors, explorers and presidents made decisions without fully understanding either the situation they faced or the effects of their actions. And so must we.

John Kay and Mervyn King

Radical Uncertainty

The View from 30,000 feet

On Monday UConn won the NCAA National Tournament. In watching market action this year, and considering it in context of sport, I’m reminded of how in a basketball game sometimes a team can get out in front by a wide margin, only to see their margin eroded as momentum shifts to the other team. Things are rarely one-sided for a whole game. Even an inferior team occasionally has a streak and can rack up some points against a superior opponent. This year began with signs of disinflationary trends and robust growth merging to embed a soft-landing. This outlook led the Fed to optimistically broadcast to investors that they would embark on a rate cutting campaign this year. Markets do what markets do, and pretty quickly began to run up asset prices in anticipation of the return of cheaper money. At this point, Team Disinflation had a wide lead. Fast forward three months, and we get a set of data prints like we did last week with CPI coming in hot, the NFIB Small Business Survey indicating that companies are concerned about inflation and the University of Michigan Survey of Consumer Expectations showing that inflation expectation are notching up, compounding the previous week’s strong ISM Manufacturing report, indicating an uptick in growth expectations. Add to this mixture with a drone attack or two in the Middle East, and we get a formula for inflationary concerns, hence the other team is getting some momentum in their favor. However, based on the data we’re seeing, we do not believe this is not a time to be despondent and give up on Team Disinflation. We have said since the beginning of the year, that the path for disinflation will be a function of what happens with Housing, Wages and Energy. The wildcard is Energy because it is being driven by both supply/demand factors as well as a more unpredictable geopolitical function that is nearly impossible to forecast. The Fed can’t influence Energy prices so they must look through them, which may alter their trajectory, but we feel is unlikely to change it. For the time being, there is still a path for disinflation to come out on top, but there has been a momentum shift in the game that stands a chance of dislodging hopes for Team Disinflation’s victory that needs to carefully monitored because there’s no such thing as a sure thing in markets or sport.  

  • The latest updates on the largest drivers of inflation: Housing, Wages and Energy

  • Digging into the CPI report and identifying the villains and heroes of the storyline

  • Tunneling into the auto insurance component of CPI

  • Focus Point Sector Rotation Update: Rapid shift in momentum indicating short-term oversold within uptrend

Caleb Sevian