Stocks finished mixed Friday but scored solid gains for the week, as surprisingly moderate U.S. inflation data prompted hopes that the Federal Reserve could soon stop its pattern of interest rate hikes. With June consumer prices and producer prices showing smaller than expected increases, investors are now considering whether a strong economy could push stocks higher by the end of the year. Investors are increasingly betting on a “Goldilocks scenario,” in which the US avoids a recession as inflation eases swiftly—otherwise known as the “soft landing” so many thought impossible a short time ago.
Mohamed El-Erian, a long-time skeptic of the Fed’s inflation-fighting strategy, has finally come around stating “you cannot get in the way right now of the soft-landing narrative—that narrative is building momentum.” The bottom line is that US inflation sharply cooled last month to 3%, down from its peak of 8.9%.
Future Wealth’s View
Everyone needs a cover or to “save face” when they get it wrong because few have the guts to accept they really go it all wrong. Having misread the Fed and accepting that he was wrong, El-Erian went on to hedge that if the Fed attempts to get to its 2% inflation target too quickly, it could end up “breaking something.” – Break something? That helps a lot, Mr El-Erian. We can surmise that he will not want to get too specific again for a while and that he will likely not be invited by CNBC again for a while either.
We, at Future Wealth LLC, opine that the Fed does not have to do too much to get down to 2% inflation. The markets will do it for them, in our view. Looking at economic data – used car prices fell 4.2% in June, the biggest monthly drop since early in the pandemic, and there are clear signs of worsening housing affordability, meaning there are no longer 15 people overbidding on a house driving up housing prices and inflation.
Of course, it does not mean that the inflation battle has been won. As we have stated in past reports, the stock market is looking ahead to 2024 and continues to stay bullish. But, if there is one lesson we have learnt from our years in working on Wall Street – euphoria can turn into despair in the blink of an eye.