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Thoughts From Last Week
While inflation is moving away from its firmest period, risks for Fed overtightening still linger. Against this backdrop, investors should continue remaining defensive with well diversified portfolios
After peaking at 9.1% y/y in June, inflation has slowly been receding. The October CPI report confirmed this trajectory as headline CPI surprised to the downside at 7.7% y/y – its smallest y/y increase since January. Core CPI also moderated to 6.3% y/y, down from 6.6% y/y in September.
We are seeing gathering evidence of disinflationary forces at play, the most notable being a cooling economy and improving supply chains. First, the Fed’s aggressive rate hikes appear to be working and October’s CPI report should give the Fed confidence to slow to 50 bps in December. Second, easing supply chains are acting as disinflationary tailwinds for core goods. The Global PMI suppliers’ delivery time index has returned to its pre-covid norm as 1) inventories have matched up more evenly with demand and 2) demand has cooled modestly due to higher rates. Global PMI input and output prices have also moderated, down 7.7 pts and 8.1 pts from their springtime peaks respectively.
Beyond PMIs, port congestion has also improved. In January 2022, there were 100+ ships waiting to get into the Port of Los Angeles. Now, it hovers below 10 – a welcome sign of collapsing bottlenecks. As illustrated in the chart, the October 2021 peak in delivery times preceded the February 2022 peak in core goods inflation. As such, further improvements in supply chains should continue to act as a dampener on core goods inflation, albeit on a lag. In October, core goods inflation came in at 5.1% y/y, down from 6.7% y/y in September and its smallest y/y increase since April 2021. We expect this trend to continue as supply chains retreat to status quo. While inflation is finally moving away from its firmest period, risks for Fed overtightening still linger. Against this backdrop, investors should continue remaining defensive with well diversified portfolios at this time.
Source: BLS, S&P Global, J.P. Morgan Asset Management.