The stock market and the bond market have both rallied sharply this month on the belief that interest rates have peaked and that the Fed will begin cutting rates before the middle of next year.
However, the Fed will only begin to cut interest rates if inflation continues to decelerate.
During the months ahead, therefore, any sign that inflation is continuing to slow is likely to encourage investors to push stock prices higher.
On the other hand, if investors’ hopes for lower inflation are disappointed, the stock market could suffer a sharp correction.
It is important, therefore, to have a clear read on the outlook for inflation.
The new Macro Watch video, uploaded today, examines recent trends in inflation and considers the factors that will determine whether inflation will, in fact, decelerate during the months ahead.
To judge the future direction of inflation, the Fed closely monitors trends in the three component categories of Core PCE Inflation:
- Core Goods Inflation,
- Housing Services Inflation, and
- Inflation in Core Services excluding Housing.
This video takes a close look at all three of these categories and discusses the forces that are directing their movements.
It concludes that inflationary pressures are likely to continue to abate across all three categories. This suggests that inflation will continue to move significantly closer to the Fed’s 2% target.
If this proves to be correct and the Fed does begin cutting interest rates during the first half, as now appears likely, against a background of still plentiful Liquidity, all the major stock market indices are likely to set new record highs during the next six months.
Bears beware!
For all the details, Macro Watch subscribers can log in and watch this 21-minute video now. There are also 42 slides that subscribers can download.
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