Mid-Week Update
Post-CPI
US core CPI was at 0.358% MoM, rounding up to 0.4% in February. This was stronger than the unrounded 0.3% consensus estimate. The very important “Supercore” non-shelter services element was up 0.47% MoM, which continues on the theme that the disinflationary force is quickly fizzling out. The implied read-through to PCE would suggest a 0.2% MoM print.
The picture is slowly starting to change, where facts are diverging from narratives posted to us by the Fed. Those numbers aren’t great. We have been pushing out the can several times, but at some point, the market will have to wake up to the likely scenario that a 2%-handle won’t be coming soon.
Read also my post on a possible inflation revival below.
Inflation Redux?
Last week’s US inflation readings did not allow for further disinflationary euphoria. While one data point doesn’t change the overall market narrative, some pressing questions must be answered. The fear of a second inflation round would indeed set shockwaves across all financial markets were it to materialise. For now, however, markets are shrugging it off and pushing out rate hikes, as the below chart for the US highlights.
The sharp US Treasury sell-off post-CPI was briefly corrected before resuming the initial trend higher in yields. Risk markets initially also disliked the number but then resumed the rally as markets opened.
I have updated both bond allocation models yesterday, while also getting the latest read on the liquidity driven SPX model. You can read the details below.
Bond & SPX Liquidity Model Updates
Last year, I presented two long-running bond allocation models, which have informed us when to hold bonds and when to fold them. Both models have a great track record, reaching back to the late 1980s and early 1990s, respectively. In 2022, they both successfully sidestepped the vicious bond sell-off and then re-engaged in bond markets only temporarily in 2023 before triggering a buy signal in early November 2023.
Let’s now examine what the models have been telling us about yesterday’s market moves.