Pro Perspectives 5/13/21

May 13, 2021

As we know, the broad expectations on the inflation outlook are shifting.

A hot CPI yesterday.  A hot PPI today.

Input prices. Output prices.  Final prices.  Everything is on the move.  It's becoming indefensible for the Fed. 

This was posted from the owner at my local sandwich shop (locally famous for his pragmatic messaging) …

This is all translating into inflation expectations, which as you can see in the chart below, is leading of commodity prices (i.e. inflation expectations are projecting a sharper move higher in commodity prices).
What does the Fed care most about?  Managing inflation expectations.  They are losing the battle.  And with the view creeping into markets that the Fed will have to move earlier on rates, rather than later, stocks have had a four-day sell off. 

But if you miss this four-day, 4% dip in stocks (to buy), you may miss your chance. 

As you can see, S&P futures bounced early this morning, right into this big trendline that represents the trend from the bottom marked by Fed intervention last year. That was good for a sharp 2% bounce. 

Bottom line:  Inflation is not a risk to stocks.  Inflation, inflates the nominal value of stocks. 

The risk to stocks is how quickly the Fed will kill the economic recovery to get inflation under control. 

If we believe anything the Fed says, we should probably believe them when they tell us that they will let the economy run hot, "sustainably" above their target rate of 2%).  Sustainably is the key word.  It means they won't be killing the recovery soon.  And it's looking more and more likely that they will be caught wrong-footed, chasing inflation from well behind.  That creates a scenario for a hot run in inflation (maybe/likely double-digits).  That's a recipe for continued inflation of asset prices (stocks included).