Team inflation transitory was thumping its chest at the beginning of the year, but the inflation environment is changing. The PCE is now at 5.4% from 5% YOY expectations. Last month was revised higher to 5.3% from 5%. The MoM inflation rose to .6% versus expectations of .4%. With the latest PCE inflation increasing and the trimmed inflation stable, the market is realizing that the road to the 2% target may be slower than anticipated just a few weeks ago. one year inflation expectations as reported by the University of Michigan is stable at 4.1% which is a far cry from 2%.
The implications are clear. The Fed will have to continue to raise rates and any rate level will be held higher for longer. The economy is running hotter than expected so any recession concerns will be pushed further into the future. Personal spending increased 1.8% while personal income only increased .6%. The no landing is back to a soft landing but not until at least the third quarter.
Just when it looked like bonds would be a good investment, we are seeing yields break higher and equities are breaking lower. The deflationary trades will now be reversed.
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