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THE INFLATION GRIND CONTINUES

All eyes were on the release of CPI this morning (March 12th) to see if there were clues on the direction of inflation which may also help decipher the next move from the Fed. CPI rose 0.4% from a month ago and 3.2% over the trailing 12 months[1]. The monthly increase was in line with expectations and the annual rate was slightly higher than expectations. When we factor out food and energy, inflation rose by 0.4% for the month and 3.8% over the last year; both of these statistics are slightly higher than the consensus forecast[1].

When the equity markets opened, the three major indices were all higher in the range of 20 to 40 basis. Bonds sold off a bit with the yield on the 10–year treasury rising by 4 basis points to approximately 4.15%[1].

So, what does this mean? My immediate thought is that interest rates rose slightly because inflation is still with us. Annual inflation, both with and without energy, is slightly higher than consensus. However, this was not a blowout release such that we are seeing a complete acceleration of inflation. It feels like everyone will read into this to suit their narrative. I am anticipating headlines that will say the relatively modest increase in inflation still provides the Fed supporting data to cut the Fed Funds rate because Fed Funds are still well above the annual rate of inflation. The inflation hawks will point to the slightly higher annual inflation in both the core and headline levels and argue that inflation did accelerate annually, and the Fed must vigorously resist rate cuts and should still keep a potential rate increase on the table. The equity markets appear to be playing the part of the Labrador Retriever, just being happy to be here, and not have stocks getting thrashed due to a too-hot economy.

I am still focusing on the inflation backdrop with an eye on how employment and wages react to inflation news. There have been more reports of companies announcing plans to reduce their headcount and just the thought of a potential increase in layoffs may take the pressure off wages and thus inflation. More to come on this.

What should investors do? We met with one of our larger clients last week and they have cash needs for 2024 so we are working on creating that liquidity while the stock market remains. We will continue to recommend that clients rebalance around (+/-) the range of their equity targets and also assess their overall asset allocation. These disciplines remain central tenets of a good long-term investment philosophy.

We are watching with interest some of the recent articles questioning how high the market can go and touting that the broadening of participation in the rally means that this bull market has room to grow. Maybe. Stocks ultimately rise due to economic prospects and then when companies deliver on earnings. The stock market strength that we have witnessed allows us to work with clients to take gains and be mindful of risk. We will be monitoring this wage, employment, and inflation relationship to decipher our views on the remainder of the year. Stay tuned!

[1] Source: Bloomberg

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