After a decade of intractable, below target price growth, globally, and numerous false inflationary dawns, you’d be forgiven for dismissing the notion of a durably resurgent Phillips Curve and a stealth build in underlying domestic inflationary pressure.
You would be forgiven, but you’d likely be wrong.
We’ve detailed our evolving inflation expectations and the attendant investment implications extensively and given the latest CPI, PCE and ECI data, our expectation for resurgent inflation is already largely on the tape.
“Proving” something that’s already occurred is a tautological exercise, but it can be useful in contextualizing prevailing trends and patchworking a macro mosaic around why those trends are/aren’t likely to persist. The goal here is simply to visually catalogue those prevailing trends.
To be sure, some of the latest step function price increases in commodity/energy markets embed geopolitical considerations but, collectively, the ranging cross-section of domestic inflation indicators below tell a fairly congruous acceleration narrative.
And given that the underlying macro dynamics that perpetuated prevailing price trends are still in place and/or building, we’d argue that the burden of analytical proof fall on explaining why those underlying trends should not persist over the nearer-term.
Lastly, to quickly front-run some of the expected follow-on questioning:
- Inflation: Inflation trends matter primarily with our expectation for domestic yields (& the $USD). We appreciate the risk embedded in the consensus, spec short position in treasuries and don’t like them at every price, but we continue to think accelerating core/headline/wage inflation will support a bullish view on yields (and a hawkish policy tilt) through reported 2Q data, at least.
- Positive Dollar-Commodity Correlation: Geopolitical and foreign policy factors have been a primary catalyst under the latest bout of energy/metals reflation. To the extent those issues find clarity or resolve favorably, the direct correlation between the dollar and the commodity complex is likely to decay.
- Growth Slowing: We continue to expect a transition to a growth slowing Quad 3/Quad 4 environment domestically in 2H18. Decelerating growth and durable dollar strength are not a particularly inflationary factor set. We think the latest inflationary thrust likely peaks in 2Q/3Q alongside trough comps in Oil and the easiest Healthcare and Wireless Services comps, after which the growth/inflation environment and rising prospects for a rhetorical, dovish pivot out of the Fed probably reverse to a tailwind for treasuries.
Policy makers have now been watching Core PCE inflation hold below target for 71-months. That probably ends in Apr/May. Godot had a good run …….
