Markets consolidated on the back of an improvement in Inflation expectations, which was expected. Expectations for the year ahead fell from 4.1% to 3.8% in June.
It is true that expectations matter to the US Federal Reserve and often do lead the headline inflation number. So this is all good news.
The Fed is also all too aware that this improvement in expectations runs the risk of re-accelerating while core inflation remains as stubbornly high as it is.
Overall consumer expectations do tend to quickly react to any change in gasoline prices. Stability in that area is improving and at manageable cost levels, but with the oil price having steadily straightened in recent weeks, the Fed would be a little watchful on this front.
Perhaps of most concern though remains that core inflation level. Headline inflation and expectations remain above the Fed’s comfort zone. It is nice that these series have been falling, but they need to still be lower. So no backing off from the Fed just yet.
With these factors retreating however, any sharp sudden drop in core inflation would indeed allow the Fed to take a longer pause. The problem is that the far more likely course for the core rate remains stability at what are extreme levels.
This, with the risk that headline and expectations could bounce on any significant shift higher in the gasoline prices, leaves the assessment here that rates are still even from current levels going higher for longer.
We also saw inventories remaining flat and used car prices continuing to plummet. These are very strong recessionary pointers. Used car prices especially are always a powerful alarm bell for sharp economic downturns.
Inventories have been flat for a substantive amount of time now. Meanwhile, used car prices are in a clear crisis like freefall. There is much to be concerned about for the US economy, and I do not think most economists have fully grasped just how entrenched and long term this economic dismay will be. The view here remains a further 1-3 year substantive downturn for the US economy.
Markets have not even begun to consider such a scenario. It will take time, perhaps months, for the market in general to become aware of the true nature of this ‘first of its kind’ economic downturn. One of widespread disruption and dysfunction where the US is literally splitting in two.
The devastation of the middle and working class continues while the rich are for the moment maintaining or building their wealth. Hence the odd occurrences in different data series.
We should not under-estimate the strength that comes from playing good defence at the appropriate time, and the opportunities presented historically by such aberrant mispricing.
Market commentary and analysis from Clifford Bennett, chief economist at ACY Securities
