Markets fall on a false narrative
Markets fall on a false narrative
The initial interpretation of the CPI number today sent markets down sharply but by the end of day they realized their mistake...
I do not intend to be posting here everyday, especially not about every data point, but it sure is easier than making a YouTube video every time!
In my investment approach, I don't scrutinize every PMI, CPI, GDP, or NFP figure individually. Instead, my focus is on discerning the overarching macroeconomic trends or potential turning points, placing less importance on the prevailing narrative. The sheer volume of weekly and monthly data points often introduces a lot of noise, which can obscure clarity. It’s crucial, though, to have a solid investment thesis and remain vigilant for signs that might challenge it. That's why I took a closer look at today's CPI figure, which showed an unexpected increase, contrary to my current investment thesis - that being that inflation continues to moderate and we’re heading towards the Fed’s target (and may even overshoot to the downside).
In time, the current monetary policy might become overly restrictive. There have already been hints from Federal Reserve members about reconsidering the ongoing quantitative tightening that's happening more subtly. This potential shift could mark a key turning point in the less apparent aspects of monetary policy, in contrast to the more widely monitored federal funds rate, which usually garners most of the attention.
Regarding today’s “higher than expected” CPI print - it’s largely the case because of lags in data and the methodology used to calculate the CPI rate. The current discussions about CPI Shelter/Rent indicate that while there's an observed slowdown in shelter/rent inflation, it's not declining as quickly as the real-life rent market. This lag is due to the CPI's method of calculating rent changes, which tends to reflect market shifts with a delay. The primary takeaway is that the CPI Shelter component is on a downward trend, but it will take time to fully align with actual market trends.
If you want to see this visually - here’s what that looks like practically speaking:
The CPI Shelter component can be likened to an 18-wheeler cautiously descending a hill: the direction (downhill) is clear, but it will take time to fully materialize.
Suffice to say I was happy to see the market recover this afternoon as the sell off was unjust in my view. I am not adding further here at the moment although I’d like to. I need to be mindful of a potential continuation of the short term trend that continues to persist. With the use of leverage in many of the portfolios I need to make sure I’m on the right side of larger market trends and right now the market is taking a breather and raising doubts about the continues deceleration of inflation and associated likelihood of rate cuts beginning in a couple of months.