What’s the True Inflation Rate ?

Bespoke put up a couple of good charts today showing TIPS breakevens beginning to fall and the 5-year breakeven with the conclusion being that “there is no evidence here whatsoever that the market is concerned about a long-term inflation spiral”.

The SP 500 held the 3,800 level last week – a key Fibonacci retracement level for the technically-inclined investor – thus, with falling inflation expectations, the stock market could turn friendlier quickly.

An interesting and somewhat contradictory story from Walmart’s earnings last week was that Walmart said food inflation was running double-digits. Half of Walmart’s annual revenue is grocery so don’t discount that lightly. That means half of Walmart’s expected 2023 revenue of $595 billion (or almost $300 billion) is grocery-driven making Walmart the largest grocer in America by a long-shot.

With Ukraine being one of the world’s largest wheat exporters, it might take a year or two to replace that harvest and the grain price increases we’ve seen. Wheat is up 60% per this year per one source.

In addition to the SP 500’s retracement level retest at 3,800, since the 10-year Treasury yield hasn’t made a new high since May 9th’s 3.17% high tick, if bond prices firm up and yields fall, that’s another positive for stocks.

Finally, the dollar –  as measured by the UUP – which has been exceptionally strong this year, has been weaker the last 3 days.

Summary / conclusion: The Food & Energy components of the inflation indices could remain elevated for a while, but the breakevens are now indicating that inflation is expected to moderate and is expected to return to its traditionally-benign 2.2% annual rate.

As of last Friday, May 20th, the SPY was down 17.71% year-to-date, while the Barclays Aggregate was down 9%, leaving a 60% / 40% balanced account down 14.23% YTD. That’s painful for a lot of investors particularly those in or nearing retirement.

The final thought is that – given the last two weeks data here and here – SP 500 earnings haven’t weakened at all with the stock and bond market weakness. At least not yet.

The TIPS and breakevens were worth noting. The true inflation rate is probably far lower than the headline numbers. Just keep that in mind.

None of this is a prediction or forecast. As year-to-date returns have shown the stock and bond markets can be riskier than you think.

Thanks for reading.

 

 

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