November US CPI at 7.1% year over year was .2% lower than the 7.3% consensus forecast. Excluding food and energy, the consumer price index rose 0.2% in November (compared with .3% expected and was the smallest advance in 15 months), up 6% from a year earlier. Every sector showed a smaller increase in November than in October except for shelter (where owner-equivalent rent was up 7.1%), which lagged behind the real-time decline in home prices and rents and accounted for more than half of the core CPI increase. The rate of change in inflation has been slowing since June, and if it continues apace, CPI will be below the Fed’s 2% target by June 2023.
Every asset market soared this morning, hoping that central banks would soon be able to pause rate hikes. Speculative mania remains alive and well, and the analyst consensus continues to expect no recession with 5.5% S&P 500 earnings growth in 2023.
But here’s the thing: the massive monetary tightening to date will already heavily throttle financial conditions through 2023. And the more bullish dreams trade up commodities and other risk assets, the more the US Fed can justify holding rates above 4% and indefinitely reducing its balance sheet (QT).
Lower inflation is good, but it’s not bullish for risk markets in 2023.
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