Oil prices climbed for the fifth day running on Friday. However, the break-even inflation rate for 10-year Treasuries rose by just four basis points last week and remains well down from the 2018 high (2.18%).
Higher energy prices cannot deflect from the big downshift in core inflation appearing within services. Last week’s CPI report looked ‘strong’, with the ex-food & energy CPI up 0.24% m/m. However, there was a big split: goods inflation is heading higher – in the short run – in part due to last year’s trade spat. The y/y for core services inflation tumbled. Domestic prices are being squeezed.
This will be a recurring theme. Technological change will leave its biggest mark on the cost structure of many companies operating within services. If the trade dispute with China is resolved, last year’s price increases across a range of goods will also unwind. Core inflation will fall back swiftly over the course of 2019.
This will help propel equities higher. The Fed will, at some stage, come under pressure to hike again. However, one rate increase in 2019 – possibly in Q4 – may not be a threat to the economic expansion. Anything more would be unnecessary, and counter-productive.
• Latest rally driven by ‘progress’ over trade spat
• Falling services inflation a bigger reason to be bullish
• New low for mortgage delinquencies bodes well too
