Is Inflation Really Out Of Control?

1.) PCE – This is often referred to as the Fed’s favorite inflation metric. I’m not sure if that’s true, nor do I really care. What I do care about is whether inflation is accelerating or decelerating. This morning’s PCE data came in with a fairly significant month-over-month deceleration, which is not likely something that will cause the Fed to hike rates. Sure, inflation is uncomfortably sticky in year-over-year terms, but the April core PCE print is not an upside shock, and real consumption is softening at the margin. Personal spending came in at +0.5% month-over-month, which matched consensus and is only slightly below the prior 0.6–0.9% range seen in recent months. That means that households are still spending, albeit slowing, but there is no immediate sign of real demand destruction. Markets like it when inflation is either accelerating OR decelerating…as long as growth is stable to accelerating. So far, so good.

2.) RATES – Yield on the US 10YR Treasury is still in a bullish trend, which means its bias is still upward. That said, would it be surprising to see it move toward 4.25%? No, not really. But it would be equally unsurprising to see it move toward 4.6%, which is the greater intermediate-term probability. Bond volatility is now down toward 70, which means that even if rates do move back up, it should be a fairly controlled move, which is what equity markets would welcome.

3.) GOLD – As I mentioned the other day, even with the 10YR yield down over the last week, REAL RATES are up, and gold doesn’t really love that. That said, gold has now tapped its 200-day moving average, an area that often is supported by buyers. Could this time be different? Of course. Anything is possible in markets. My signals are not looking strong for gold. In fact, our Tiger model has completely sold out of gold…so the algorithms are, so far, seeing the same thing from gold. To be fair, could our model reload its gold position? Yes, it could. The last time gold was down in this area, our model was allocated to 60% of its potential full allocation. I don't expect it to reload just yet though.