Cooling of inflation (“i”) aka disinflation is Fed primary focus and in 1H2022, the sole focus of markets. Obviously, there remains the question of how quickly inflation can cool, and this lack of visibility unsettles markets. But as we discuss below, energy prices have dropped sharply in the past few weeks with Natural gas down -45% and oil -14% and we have heard that food suppliers are sitting on mounting food inventories. Thus, headline drivers of inflation (food + energy) could be cooling sharply.

But the converse of this “i” positives is the mounting concerns about S&P 500 EPS guidance in 2H. Our Head of global portfolio strategy, Brian Rauscher, has written extensively on this. Keep in mind:

  • EPS risk as the “bullwhip” effect is going to cause wild swings in EPS
  • nominal GDP, however, will continue to be strong given headline inflation
  • markets, in our view, can more easily see through “e” than they can see through “i”
  • thus, in 2H2022, the easing of “i” matters far more to markets than “e”
On Thursday this week, May Core PCE came in at +0.3% (+4.7% YoY), below Street’s +0.4% and another modest but encouraging downside read on inflation. PCE, or personal consumption expenditures, differs from CPI as the PCE measures the costs of goods an...

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