Inflation is starting to ‘fall like a rock’ and leads to deflation: Fundstrat

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  • Inflation is beginning to “fall like a rock” rather than a feather, according to Fundstrat’s Tom Lee.
  • Lee noted outright deflation in some areas of the economy, suggesting that inflation is less sticky than perceived.
  • Stock market investors are looking for a cooling off of inflation as it would allow the Fed to smooth its path of rate hikes.

Inflation is starting to “fall like a rock” instead of a feather, leading to outright deflation in some areas of the economy, by Fundstrat Tom Lee said in a Wednesday note.

A slowdown in rising inflation would be welcome news for investors given that the stock market has sold off 5% since Fed Chairman Jerome Powell aggressive speech in Jackson Hole last week.

Powell reiterated the Fed’s determination to control inflation by being aggressive with interest rate hikes and reduction of its balance of 9 billion dollars. The market is currently expecting another outrageous 75 basis point rate hike from the Fed at its FOMC meeting in late September.

If inflation cools and is less “sticky” than most expect, it could change the Fed’s current rate hike trajectory, ultimately leading to a faster turn to a pause in rate hikes. of types. That would be a boon for risky assets, which have been hampered in recent months by rapidly rising interest rates.

And according to Lee, inflation is cooling off fast.

“42% of CPI components are falling from recent highs = deflation,” Lee said, adding that five of the nine US regions experienced outright deflation in July on a month-over-month basis.

“These 5 regions account for 49% of GDP. In East North Central, the annualized CPI is -3.96%, full DEFLATION,” Lee said.

In addition, leading indicators of inflation such as used car prices, airfares and real estate “suggest that many other components of the CPI could start to fall altogether,” according to Lee.

“There are plenty of counterpoints to suggest that inflation could fall faster than consensus expects. This, in turn, would change the Fed’s policy course. Inflation swap markets are arguably already reflecting this, therefore, lower levels of implied inflation,” Lee explained.

Delving into the real components, Lee noted that commodity prices such as gasoline, wood and wheat fall like a rockas well as electronics, meats like chicken and beef, and clothing.

At the same time, used cars and vehicles, airfares and durable goods are “starting to drop like a rock,” and history has shown that rental and housing costs will soon “fall like a rock,” according to the note. .

Analyzing rent data from the past 40 years for New York City and San Francisco, Lee found that “when landlord-equivalent rent falls, it falls like a rock…rents could fall much faster than expected.” that many expect.

With the prospect of inflation falling rapidly, Lee reiterated his call for a second-half stock market rally that could ultimately push the S&P 500 to new highs by the end of the year. “Bottom line. We see the thesis of the second-half rally intact,” Lee concluded.

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