- A telling sign as to the future direction of risk assets occurred this week when CPI and PPI surprised to the upside. Though immediately markets sold off, it was clear that a pricing out of rate cuts is not a reason to derisk, but rather the opposite. Markets rightfully recouped all losses before adding additional gains to reach prior all time highs.
- The economy is expanding without risk of Fed intervention. Industrial production came in above expectations, inflation outlook remained anchored at 3%, and employment data was strong. Complemented by last week’s ISM data crossing the 50 threshold, it’s clear that barring a black swan the equity market is well positioned for price discovery beyond prior highs.
- When trying to establish an analog to today’s markets, I was initially stuck between a 1970’s inflationary spiral and equity chop vs the 1990’s stop and go parabolic bull market. I’m now more convinced than ever that we are dealing with a 90’s cyclical boom. This entails a rapid rise in risk assets and tech speculation (think AI instead of .Com). Assuming the economy continues to expand, it’s likely all rate cuts will be priced out with the potential for a brief rate hike cycle in 2026. We will need to revisit this possibility later.
- Next week’s economic data is far from important compared to the direction of broad assets classes. I expect to see further deterioration in the DXY and long dated treasuries while equities break new highs. A subdued energy sector will provide further tailwinds.
