Investors like the inflation news. The chart below tells the story. Our source is Bloomberg data. We owe credit for the chart concept to John Authers, in his November 15 Bloomberg opinion column, “Investors Better Hope This Disinflation Stays Immaculate,” (https://www.bloomberg.com/opinion/articles/2023-11-15/inflation-is-falling-but-us-stock-investors-better-hope-it-stays-immaculate). To sum it up: It’s the “core” that counts.
Another high-frequency indicator is found in state sales tax collections. Hat tip to Philippa Dunne and TLR Analytics (https://www.tlranalytics.com). We will explain why this is important. Sales taxes are levied on nominal prices of transactions. So, if the prices are rising, sales taxes are rising even though number of units sold may be flat. The reverse is also true. When sales tax collections are weakening and coming in below the estimates by the various states, it indicates two things. First, it indicates that unit sales are weakening. Second, it indicates that the nominal prices are weakening — or at least not rising as rapidly as previously. We now see both trends at work. That is why we believe the downward trend in inflation will continue.
And we have seen the changes in retail sales, which support the forecast of an economic slowdown, in my opinion. The Fed saw that, too, and a million other data points.
Markets celebrated the sequence of data reports, which indicate that the inflation pressure is easing and that the economy is now responding to Fed tightness by slowing down. Remember the “long and variable” lags between Fed action and economic outcome? Well, they appear to be arriving now.
Have we reached the 2% inflation target? No.
Will we reach it? Nobody knows. All the pundits’ forecasts are speculations. But the trend is headed in that direction.
Does Fed tough talk mean the Fed doesn’t see the changes in trend? No. The Fed sees this, which is why it is subject of internal debate among the 19 people who sit on the Federal Open Market Committee.
The Fed must continue to talk tough as a messaging strategy. That is “Fedspeak” at work. It cannot ease off the rhetoric too soon. But I have always believed that the correct way to interpret the Fed is to look at what they do and not at what they say.
Does this tough talk mean more interest rate hikes are coming? Nobody knows. Not even the Fed members know. That said, the flow of new data suggests that rising Fed policy interest rates are becoming less and less likely.
Does it mean the Fed will be cutting rates in early 2024? No. They may cut, or they may wait. Futures markets are pricing in cuts. We shall find out soon enough.
So, what’s really changed? Inflation rates are falling, not rising. Anecdote after anecdote indicates that the pressures that have been accelerating the rising prices of many items are subsiding. And the macro measures that are used, like the ones in the chart above, are supporting this conclusion.
Enjoy the holiday season with fewer inflationary pressures than you expected. And watch the high-frequency indicators closely now for directional changes in trends or acceleration in trends.
The US Equity ETF portfolio remains fully invested. We are underweight the retail sector and the consumer discretionary sector.
Hope your holiday season is safe and your Thanksgiving gathering was a good one.
David R. Kotok
Co-Founder & Chief Investment Officer
Email | Bio
Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.
Sign up for our FREE Cumberland Market Commentaries
Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
