A January Surprise?

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

It seems to us that the investment community is all in on the idea that inflation has been tamed and that a 2% CPI or PCE is right around the corner. But could this belief be setting investors up for another inflation shock? 2023 has witnessed strong rallies in both bonds and stocks driven by the belief that the Fed has pretty much accomplished its objective. Investors have been driving down yields across the yield curve since mid-October’s peak, and as a result, financial conditions have actually eased quite substantially, which we recently pointed out in our post titled, “Fighting the Fed – What’s the Implication. Falling US rates have led to a sell-off in the US $ relative to the Euro, Yen, and other major currencies.

In addition, gasoline is up nearly 6% so far in January, while copper (up 12%) and other commodities have seen strong rallies as the weaker $ and lower import prices combine to spur on demand. Furthermore, the historically strong labor market is encouraging folks to dine out more according to the OpenTable seated diners index which has been rising recently. Both rents and used cars have seen price increases since November. All of this taken together will likely make the Federal Reserve’s job much more challenging. So as my picture above depicts, will the market get its soft landing or will the investment community land squarely on its collective head? Are you prepared for a possible market reversal?

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