Growth, Inflation & Policy
As of November 1, 2022
INFLATION, GDP AND VALUATIONS
- Historically low inflation has led to strong asset returns and structurally higher equity multiples, but there may be a return to a more volatile macroeconomic regime.
- Even though inflation (as measured on a year-over-year basis) is expected to roll over, this does not necessarily mean that prices have to substantially come down (they can remain flat at higher prices). We believe that policy will stop and start, and while policymakers do not want to drive the U.S. into a recession, the Fed doesn’t seem to have much choice.
- Given the shape of the yield curve, a recession should be investors’ base case.
INFLATION EXPECTATIONS
- The September reading of CPI showed inflation up 8.2% year-over-year and only slightly down from a high of 9.0% in June, while core CPI climbed to a new cycle high and is now up 6.6%.
- Cleveland Fed Nowcast estimates show that CPI for October is expected to remain unchanged on a year-over-year basis, although marginal declines in the subsequent months are more likely.
- Even with monthly inflation cooling, it will likely still be 5 months before inflation is below 5%.
RATE HIKE EXPECTATIONS
- The market continues to be surprised by CPI as the Treasury yield curve shifted higher after CPI announcements in both September and October.
- While we are sympathetic to the view that inflation will roll over as the economy slows, potentially quite aggressively, we want to acknowledge that we don’t think anyone, let alone economists that told us inflation would be transitory last year, has a good handle on inflation. We are being very humble with our forecasts.
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