Inflation is on the Ropes

Adding to the massive rally in stock markets.

November 30, 2023 • Estimated Reading Time: 6 minutes

The markets operate on the flow of money, not feelings.

The last written post spoke about how the change by the US Treasury to offer fewer longer term bonds would more than likely lead to stocks continuing their upward trajectory until February. Well, the latest inflation data gave the markets another boost thanks to a much lower print than anticipated. The result was like throwing rocket fuel on an inferno.

Inflation Rate Resumes its Downtrend

A previous post from Oct 28th entitled The Present Focus pointed out how the inflation print on Nov 14th would be crucial.

It is crucial that inflation does not creep back up to the 4% mark when the next print comes out Tuesday morning, November 14th. Other than the obvious negative implications of further higher prices on goods and services, it would also mean that the downtrend in inflation has been broken and a new uptrend has begun. This would drastically increase the odds that The Fed will be forced to once again raise interest rates.

The new inflation data delivered in the best way possible. Much better than almost anyone predicted as it resumes the downtrend which had leveled off and threatened to reverse back up the last few months. Instead, inflation is once again moving in the right direction. Adding to the monstrosity of an already massive move in stock markets over the past month.

Why the inflation print was so significant

It puts inflation back into a downtrend and moves us closer to the 2% target.

*Image and chart courtesy of SlickCharts

The closer inflation gets to 2% growth, the closer The Fed is to cutting interest rates. Lower interest rates make borrowing money for large purchases more affordable which leads to more spending overall in the economy.

Perfect Timing

Stocks typically experience their best performances of the year mid-to-late October through April. This means we are in the early stages of their best performing months. After receiving two great catalysts, it looks like this year will be no different.

Rate Cuts May Be on the Horizon

While I have been in the “higher for longer” camp, this last inflation print has changed my view. Meaning, I thought The Fed would leave interest rates at the current level through most of 2024 at least, and possibly even be forced to hike again. Inflation trending back down and getting closer to 2% changes that thinking.

New data, new view. That’s how consistently accurate forecasting is done.

What’s this mean for the coming months?

Inflation’s resumption of the downtrend and the markets reaction to it is telling us that the chances of a recession in the coming six months is slim-to-none.

You may even see a rate cut by The Fed in the first quarter or two of 2024. While it was nowhere in sight a month ago, it is now a probable outcome. This is because it is imperative for economic stability that we do not go into a deflationary environment. As bad as elevated inflation is, deflation is far worse for the system and much more difficult to remedy.

Yeah, but what about how inflation is tracked???

Great question. The truth is there is more useless information floating around about inflation as just about anything right now. Most are simply opinions that derive from people who have been wrong about economic calls and choose to make up narratives rather than be a professional and admit they were wrong.

So, in a forthcoming post I will break down some of the arguments and show you what I have found to be of actual use when tracking inflation. It’s not nearly as complicated as most think, but there is a group of people that would rather scare and anger you for engagement than inform and help you.

That is not what you will see on this site. You are far better served understanding the economic system which we all operate within daily, than by clicking on headlines with incessant BS “crash” narratives.

What Happens Next?

While markets have been red hot, they are also due for a decent short-term correction. However, they have been due for a while now and the truth is corrections happen through both price and time. Meaning if stock prices do not rollover and instead stay flat for a bit, they can very easily go much higher from here.

Keep an eye on how this plays out as it all offers clues to how the future will play out economically.

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