Over the next two months, the y/y for the core deflator is likely to show further sizeable declines from January’s reading of 1.79%.
However, emboldened by the Republican pushback against the second of President Trump’s recent nominees for the Board, the Fed is likely to resist political pressure for a rate cut. Equities are poised to hit new highs. Initial jobless claims have dropped 28k in the last four weeks. The unemployment rate will soon fall to new lows.
A rate cut seems unnecessary even to proponents of the low inflation school. If the y/y for the core deflator remains persistently below 2.0%, the Fed will, of course, be able to take its time over rate hikes. Nevertheless, a move in Q4 should still not be ruled out. Indeed, there are some areas where inflation has firmed this year. Netflix is planning to hike prices.
The yield curve may steepen in the coming months. However, any such shift will be modest, reflecting the importance of IT in driving the S&P 500 higher. Rising IT shares are the flipside of the technological changes that are bearing down on inflation.
There are now 29 (out of the 65) IT companies in the S&P 500 index that are trading at new highs for the year. Eleven are in software and there are six in fintech. There are also six in the semi-conductor industry. The Philly Sox index rose again last week, helped by strong gains in three companies (Analog Devices, Broadcom and Xilinx).
