US inflation

This is all excellent news, for US inflation. The month on month Core CPI print was 0.2%, well below the post pandemic average of 0.5% and above (see 3rd row, 3rd column).

Just ahead of the result release itself were the survey measures of expected inflation, which were also very well behaved.

And this is before the OER (owner’s equivalent rent) data rolls over. Shelter costs had been one of the bigger drivers of inflation, and, from more contemporaneous indicators like Zillow new apartment rentals, we know that the pace of shelter inflation will be subsiding, and thus should show up in OER with a lag of about 6 months.

So, the pathway to the soft landing remains narrow, but so far, so good.

Now, the problem remains wages, and we are alert to the risk that persistently high wages growth knocks us from the desired path.

But, this data is good, the market liked it, and should the market get carried away we will fade that strength over time. You can see the US dollar continues to retreat (as benign CPI prints equate to less need for tight policy, which drives the rate differential between the US and everyone else) and yields (both nominal and real) drop, albeit modestly.

Credit spreads tightened, as fears of rates induced recession can moderate, accordingly. It is far too soon to declare victory either way, and hence we remain diversified, sitting not too far from our SAA weights, with regard to growth vs defensive tilts.

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