PCE Price Index Comes in Hot

Hey everyone and thanks for jumping back Into the macroverse today we're going to Talk about the most recent pce price Index report or the preferred measure of Inflation by the Federal Reserve and of Course the effect on risk assets if you Guys like the content make sure you Subscribe to the channel give the video A thumbs up and check out into the Cryptoverse premium at into the Cryptiverse.com let's go ahead and jump In so we got a new report today that Actually came in somewhat hotter than Expected and if I were to give you the Exact numbers I believe that headline Inflation or headlines pce came in at 5.4 percent whereas the estimate was Five point or just five percent and then Core pce came in at 4.7 percent within With the previous estimate at 4.3 Percent so it did come in somewhat hot Now the point is is not that it just Came in above what the consensus was Because there's been plenty of times Where it comes in above consensus and Risk assets tend to bounce but I would Argue one of the nuances this time is That technically speak King and of Course being technically correct is the Best way to be correct technically Speaking you actually saw the yearly Change go up a little from where it was Last month and I think that is is why You're sort of seeing some of these risk

Assets like the S P 500 and and Bitcoin Move back to the downside a little bit One of the things we've spoken about for For quite a long time is that risk Assets are holding okay because we're in This sort of transitionary phase where We've seen some level of disinflation But the economy has not really gotten Completely wrecked yet and so what as Long as you see the unemployment rate at Secular lows and and things like initial Claims continuing to remain at low Levels or pushing lower as long as you Don't see a material change in the Economy to the downside then rest then Risk assets were willing to Rally but on The other hand the other thing we said We need to be cognizant of is not just The economy deteriorating but inflation Re-accelerating and and the reason why This report I think is is going to at Least catch the eye of the Federal Reserve is that again technically Speaking inflation year over year pce Which again is the preferred measure of Inflation by the FED it actually went up Now we do know that they don't Necessarily put a ton of weight into Just a single data point right so this Data point could in fact be a fluke Right there's there was a time before Where you can see it it ticked up just Slightly so it could be a fluke but be That as it may there still is a risk

That inflation is re-accelerating Somewhat and this is a risk that we've Outlined time and time again as to what Happens if the FED sort of takes their Foot off the gas a little bit too soon And inflation just comes roaring back Very quickly just because people are Just really quick to to get out and and And and buy things again as we get into The new year and now we're at least Starting to see some level of that Re-acceleration of inflation I want to Be clear we've talked about the Re-acceleration of inflation for a long Time and how it is a a you know left Tail risk but one thing that I think About with regards to inflation Is what will it do and how will it cause The FED to react right so what is the Reaction function by the Federal Reserve And I have to think that they will Continue on with their higher for longer Mantra that they've been sort of touting For quite some period of time and if you Go look at expectations for the next fed Meeting there is actually a slightly Higher chance now than a week or two ago Of a 50 basis point rate hike 27 chance Still not a huge likelihood of it Happening but it could happen and it's At least something to consider what's More important I think is if you Actually go over to the probabilities Tab you can see that the market is no

Longer pricing in a rate cut this year And in fact the most likely outcome is That the FED just raises 25 basis points In the meeting in March 25 in in May 25 Basis points in June to get us to a Terminal rate of five and a half percent Followed by holding it there for the Rest of the year and this is now what The market is expecting and is what we Talked about in in the recent jobs Report when we put out a video on the Jobs report we talked about CPI is that With such a strong economy you're likely Going to see the repricing of the Terminal rate and I do believe that is Now underway and it has been underway For quite some time what's interesting Is that six and a quarter has even Entered the conversation now I'm not Speculating that we're necessarily going To go that high but just the fact that Some people out there are speculating That the FED could reach six and a Quarter you know as early as July does Show you there has been a a relatively Swift and rapid response to repricing The terminal rate not only after a hot Jobs report and and Um and the the most recent inflation Report but you're also You're also just sort of in this in this Dilemma where we're not really sure is The Fed gonna go 50 basis points again Um and and go higher than people are

Thinking or are they not and I think This uncertainty is is of course Negatively affecting risk assets so so One thing to consider you know if you go Over to the trading economics website And you look at United States core pce Price index month over month you can see That this month came in at point six Percent month over month which the Consensus was 0.4 and and this is Quite a strong move here right to be up 0.6 percent I mean you'd have to go back To about half a year ago to find it to Find it really that strong and if you Also go look at the the index annual Change so year over year again it was at 5.3 last month but now you're sort of Seeing it tick back up to 5.4 so there Is at least some element of Re-acceleration of inflation uh but it It remains to be seen how long that will Be sustained so my sort of thinking About this Is along the lines of It could make The Fad go too high or Hold rates At high levels for too long simply Because there is some level technically Speaking of re-acceleration of inflation Which might actually increase the Likelihood of unfortunately a a hard Landing and so that I think is what we Need to be on the lookout for is is the Fed because again if you look in the in

The context of History it's the FED Remaining hawkish for too long that is What sends us into a hard Landing we put Out a video yesterday on the S P 500 we Looked at soft Landing scenarios and Hard Landing scenarios and it's those Hard-landing scenarios they're caused When the FED goes too far and if there Is a temporary surge in a Re-acceleration of inflation then it it Could certainly push the fed too far so One potential outcome here that I'm Thinking about is is you know this Temporary surge in inflation and causing The FED to go too high or hold hold Rates at a high level for too long Followed by a recession and and a rapid Disinflationary process so recessions Are are of course difficult in the fact That a lot of people lose their jobs but One benefit of them is they have the Ability to quickly bring down inflation And therefore you can hope to go into Another phase of economic expansion After inflation's back down and we've Gone back to quantitative easing so that Is sort of the path that I think you Need to think about as as a potential Outcome here And again you know it doesn't Necessarily mean that that this is is is Going to continue going up but it's Certainly not going down in a linear Fashion and because it's somewhat

Stochastic it does sort of throw some Uncertainty into you know into financial Markets and of course in into risk Assets in general so I think that's Something that is is going to be Important to watch and you know one Thing that I talked about not too long Ago was how copper seems to you know be Leading inflation right and and we've Seen that for quite some time and it's Actually moving down right now Um but you can see that it's really been Moving up in a sustained way since October okay now if we were to Overlay The United States inflation rate year Over year this is not core this is just The um headline inflation year over year If you do that you'll see that copper Has been leading it right so copper Bottom tier and then core or sorry yeah Copper sorry copper bottom tier and then Headline inflation bottomed a little bit Later and then copper topped here and Then inflation tops a little bit later But here you can see the copper bottomed You could argue that it bottomed here Right but it it did it then came back Down put in a higher low but despite the The fact that copper has been moving Higher we've seen this headline Inflation moving lower and so the Question is is this pce report giving us Some insight into what's likely going to Occur in the march in CPI report and is

It going to start going back up Chasing this cop you know the copper Chart which has been a leading indicator For for quite some time note that if it Does turn back up to the upside I think You're going to see the further Repricing of the terminal rate and I've Been vocal I've been vocal for a long Time that the Fed was likely going to Get to at least five percent I think There's a good chance they're going to Get to five and a half percent but when You get to the point where a lot of People are calling for six and a half Percent or seven percent I think that's When you really have to start sorry not Financial advice but that's when I would Personally think about sort of fading That move and not really thinking that It's going to go up as high as people Think because I I do think there is some Concern Um by by some that you could see Inflation year over year actually go to New highs uh compared to where it was Back in 2022 I don't really think that's The likely scenario I think you could See it bounce back up and then sort of Then roll back over again but this part Right here if that happens the FED is Not going to be really in a position to Predict it rolling back over their Reaction function just typically is Likely going to be well it's not coming

Down just yet so we got to keep hiking We got to keep hiking another 25 basis Points another one right another one Right so you just keep going on and on And They could push us too far push us into A recession lead us into a hard landing And if you do go into all hard Landing That's the point where the people that Have had you know that have have saved Up some cash will benefit the most right Soft Landings are are difficult in the Sense that neither really the Bears nor The Bears or sorry the Bears nor the Bulls are really right because you just Chop within a range for a long period of Time hard Landings the people with a lot Of cash obviously can take advantage of That and no Landing which again was the Sort of the uh what people were talking About a couple weeks I don't really Think is is a is a very likely outcome And you can see that yields continue to Go higher and you know if you take a Look at the two-year yield you can see Historically the two-year yield when It's breaking out like this it's not a Good thing for the S P 500 it just Simply isn't you know when it was Breaking out last year it when it was Breaking out the s p was going down yes When it when the s or when the two-year Yield was consolidating the s p was Going up but now the two-year yield is

Breaking back out again so again it's One of those things that it's not a Great thing for risk assets When you see the the the quick repricing Of the terminal rate you're seeing Yields go go higher and furthermore You're also seeing the dollar the US Dollar currency index continue to push Higher and one of the things we've Spoken about is that as long as this Keeps pushing up it's going to be harder And harder for risk assets to ignore it And again one of the things we've talked About is going back to the 1980s where You saw a very similar move coming out Of a period of high inflation where you Know we have that rally up to 114 115 we Had to pull back down to almost it was About 103 and then the dollar took back Off now I'm not really thinking the Dollar is going to go all the way up to 164 I'm not of that opinion but there is A risk here that the dollar is not Necessarily done And one reason for that and I I think if You had to think about like what's the Narrative behind it the US economy in my I mean I I it's like it's the strongest Economy right it just simply is and so I I think the U.S economy can absorb more A more hawkish uh Central Bank than some Of the other economies so while there Are other central banks that are hiking As well I think the FED will likely be

Among the most hawkish and because the US dollar currency indexes of the US Dollar is just measured against a basket Of other Fiat currencies there's the Narrative there right to send the dollar Much higher and there's also the Narrative there to send it higher if if Risk assets are going to continue going Going down and and putting in new lows So These are the things to think about The new inflation report is important Because we've talked about this exact Scenario for what half a year now or Around that like the idea that if Inflation re-accelerates it's going to Throw a wrench into this transitionary Period for for risk assets and so we Have seen it move up slightly it just Depends on is it going to be a sustained Move my guess and again I mean not Financial advice and guesses are are you Know everyone's got one everyone can Assume certain things I'm kind of Thinking that if we if we're going to See [Music] Um With the inflation re-accelerating I Think it could last a few months tops But I think as you get into the second Half of the year you're going to see it Start to come back down so I don't think You're going to see inflation go higher

Than where it was you know in the sort Of the the middle part of 2022 I don't Think you're going to see it go higher Than that but it could go high enough to Scare the FED into doing more than they Really need to do to bring it back down Because there's a lot of lagging a lot a Lot of lagging effects and so by the Time you see the the loosening up of Labor market conditions it's already too Late right and and of course the FED Will pivot at some point but but Normally by that point markets are sort Of thrown in the towel and said well you You've done it now right you vote you Overdid it and and Um and and now we're going to have to Sort of reprise everything so I think That's where we are today I think what We need to keep a look out for is where Does inflation come in in March because We are going to get one more CPI report And we're going to get another job Support before the next meeting by you Know before the next fomc so we should Get both of those for the next fomc and And that should help guide us as to Whether the fed's going to be 25 or 50. I mean clearly the market is still Thinking 25 basis points is the most Likely outcome Um I know I know some people are Thinking 50. it's still hard to think They would flip-flop because I it seems

Like that would send a really weird Signal to markets Um so that's why I still think you're Going to see 25 basis points be the base Case but where that could change is if If the headlines the Earth core CPI Comes in very hot next month and if the Jobs numbers come in extremely hot again It's you know anything's possible so I Think we'll wrap it up there Um and uh you know we'll we'll of course Provide follow-up videos to this Inflation data when we when we get more Data thank you guys for tuning in make Sure you subscribe give the video a Thumbs up and I'll see you guys next Time bye