Pro Perspectives 5/7/24





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May 07, 2024

We talked yesterday about the bounce back in stocks, from what looks like a relatively shallow technical correction (7% in the S&P 500 index).
Shallow corrections are a sign of strength in a bull market.  And it's a bull market driven by durable tailwinds of a new industrial revolution AND the deployment of trillions of dollars in deficit spending.
We've also talked a lot about the outlook for an easing cycle for interest rates, which is another tailwind.
The posturing on "when" it will commence, continues this week with a lineup of Fed members making the media rounds.
But as we discussed in late March, if there were doubt on whether or not this easing cycle would materialize, the Swiss National Bank removed that doubt with its surprise rate cut in March. 
As we discussed in that March note, the major central banks of the world have coordinated closely throughout the crises of the past 15 years.  They all went to ultra-easy emergency level policies in response to the pandemic, and now all (exception Japan) have interest rates set ABOVE the rate of inflation (restrictive territory).
And we should them to all be cutting rates, in coordination, mostly to ensure that global liquidity doesn't become too tight, and (related) that their respective government bond yields (borrowing rates) don't run away (higher).
With that, the Bank of England meets this Thursday.  Both the Bank of England and the European Central Bank are telegraphing the beginning of rate cuts in June.  That's driving UK stocks back to new record highs.  German stocks are less than one percent away from new record highs. 
And we should expect the U.S. central bank and U.S. stocks to follow.
But what about "sticky" inflation in the U.S.? 
Check out this chart … 
We had a growth shock in money supply (the green line), from the 2020-2021 policy response to the pandemic.  That was the inflation catalyst.
And you can see the lagging effect on inflation (red and blue lines), as it peaked 16 months after the peak of money supply growth.  
We've since had the disinflationary effect (falling inflation) from the decline in money supply growth.
Not only has money supply growth declined, it has contracted for sixteen consecutive months.  Contracting money supply is historically deflationary.
If we apply the sixteen month lag of inflation to the trough in money supply growth, it would project much lower inflation data (maybe deflation) by August. 
If that's the case the Fed will be cutting sooner and aggressively.