The market (and the data) suggests rising consumer price inflation has peaked and will continue falling. Look at almost any market-based inflation proxy, whether it's commodity prices or 5-year/5-year forward inflation expectations, and they topped out around February or March of 2017.
And yet Wall Street inflation estimates remain blissfully high, basically taking the first quarter's 2.5% (quarterly) growth and projecting it out into the future. As such, the disinflationary reality will be disappointing, as it gets reported. Wall Street just doesn't know it yet.
Our call on declining prices is pretty intuitive when you consider what's happening in commodity prices. The CRB Index, a price basket that tracks 19 different commodities, has fallen -9.1% in the past six months. More drastic still is Oil's -18% decline over that same time period.
So the market is clearly pricing-in falling inflation
Energy stocks (XLE) have led the S&P 500's sector losers in 2017, with a year-to-date decline of -11% (a whopping performance spread of almost 15 percentage points between Energy and the next biggest relative loser, Financials (XLF), which is up 4.7% year-to-date). The market's forward expectations of inflation, via 5-year, 5-year Forward Inflation Expectations, has slipped from 2.23% in March to 1.83% in June.
All of this has already started flowing through to the government's Consumer Price Index. The headline CPI just slipped for the third straight month today to 1.87% in June from a high of 2.74% hit in March. We call this ongoing trend Reflation's Rollover.
Inflation: Our Estimates Versus Wall Street
Wall Street consensus doesn't yet understand that inflation is falling. As Hedgeye CEO Keith McCullough writes in today's Early Look:
"Given that both Oil and the CRB Index continue to deflate, it’s almost too easy to predict what reported inflation data will do as we head into Q2 end and the beginning of Q3. The Hedgeye Predictive Tracking Algo on US Inflation (y/y headline CPI) says:
A) US Consumer Price Inflation (CPI) peaked in first quarter 2017 around +2.5% year-over-year (headline)
B) CPI should drop and roll by over 100 basis points intra-year to +1.8% and +1.1% by fourth quarter of 2017 and first quarter of 2018, respectively
Predictably, most of the blue-chippers who make up the Bloomberg Consensus Forecast are still anchoring on that > +2.0% inflation that already peaked. Give them and the Fed maybe another 3-6 months to catch up to what Mr. Market already thinks."
You can see our estimates versus Wall Street's in today's Chart of the Day.
Falling inflation has been awful for Energy stocks. Since we think falling inflation continues into 2018, the portfolio positioning takeaway is pretty simple: Stay away from Energy stocks.
