CPI printed in-line at .3 on core and headline. Importantly, rent and owners equivalent rent finally declined to .2 for the month. Other volatile components such as new and used cars, lodging and airline fares were elevated. The decline in shelter is very bullish for long term inflation forecasts as the deeply flawed shelter calculation is the sole reason for core PCE remaining above 2.0%. Our PCE-R real time inflation index, which uses market rents to estimate shelter costs, is running at only 1.8% Y/Y.
We forecast that Core PCE will roll down to 2.3% by the end of Q1 2025 as very high inflation from Q1 rolls off and we get CPI and PCE prints in the .2 area as shelter continues at .2% per month and volatile components mentioned above normalize. Consequently, we are forecasting 4 rate cuts for 2025 as this more dovish inflation outlook is reflected in policy. We do expect PCE Core to print at an elevated at .3 at the end of the month and the Fed to execute a hawkish cut with the SEP showing only 2-3 cuts as this Fed has shown no ability to forecast inflation or adjust for anomalies in the data such as shelter.
We are also bullish on bonds as we expect interest rates on the 10-year to decline into the 3.5%-4% range during the first quarter of next year as inflation prints cool, global rate cuts continue and the $56 trillion of pension assets rebalances into bonds. Most US investors implicitly focus only on US markets to forecast rates with too much focus on the US deficit and fail to recognize that US rates are close to the highest in the OECD and that slow global growth is likely to depress US rates. In other words, the bond vigilantes are already out and have forced US rate premiums to all time highs due to irresponsible fiscal policy.
We remain bullish on stocks with a 7,000 target on the S&P 500 Index assuming an 18% corporate tax rate and bonds in the range mentioned above. If the corporate tax rate is not cut our target would decline to 6,600 and if there is a cut to 15% then our target would go to 7,500.
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