Pro Perspectives 5/31/23





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May 31, 2023

Two voting Fed members spoke today, and both used the word "skip" related to the coming monetary policy meeting.  
This was deliberate, and it's big news!  
This comes after 10 consecutive rate hikes.  The effective Fed Funds rate is above 5%.  The Fed's favored inflation guage (core PCE) is below 5%.  As we've discussed, this is where, historically, the Fed has taken rates, to get inflation under control (i.e. above the rate of inflation). 
That said, the headline CPI numbers, as we've also discussed are on path to plunge, as the "base effect" will considerably change the year-over-year comparisons. 
We talked about it last month after the media worked themselves into a frenzy over the UK inflation number, which came in above 10%.  
But it was clear that the next inflation number would be measured against a significantly higher data point from twelve months prior.
And it was very likely, even if April inflation in the UK were to be relatively hot, that the year-over-year CPI would come down to the 8% area.  That's exactly what happened.
The same is happening around Europe.  The year-over-year measures are dropping.  Spain has dropped from 4.1% to 3.2%.  France has dropped from 6.9% to 6%.  Germany has dropped from 7.2% to 6.1%. 
And in the U.S., as we discussed earlier this month (here), because of the base effect, by June, prices will be measured against a higher base (of the year prior), and that should deliver us a year-over-year inflation number in the mid 3s (percent), if not in the high 2% area
This would support the Fed's "expectations setting" today.
So, this comes after the "Nvidia moment" of last week which may have marked the starting line of a major technological transformation era.  The debt deal drama should be behind us by tomorrow.  And suddenly the word "skip" should become a very powerful, positive catalyst for stocks. 
Notably, the movers on the day (after the Fed comments) were small caps, which have underperformed.