CPI Prints In Line and Validates Bullish Market View

CPI printed in line at .2% on headline and .3% on core.  The above trend core print was driven by volatile components including airline fares up 3.2% and used cars up 2.7%. Importantly, auto insurance was down slightly after being up 14% year over year.  Shelter was higher at .4% driven by the owner’s equivalent rent up .4% vs. .3% last month.  We remain bullish on inflation declining as LTM CPI is heavily distorted by the flawed shelter component and the Pandemic impacted auto services inflation.  Removing these two components CPI would be at zero Y/Y. We expect the heavily lagged shelter component to eventually reflect market conditions and auto services to also continue to cool as the auto market stabilizes after the shock of the chip shortage that limited auto productions.

We remain bullish on bonds.  We expect interest rates to decline as the $56 trillion global pension assets are rebalanced at month-end and quarter-end, reflecting strong increases in stock prices and declines in bond prices.  In addition, we expect cooling inflation over the next two quarters to drive interest rates into our target range of 3.5%-4.0% in 2025.  We forecast that the Trump administration’s fiscal policy is actually disinflationary as the corporate tax rate cut will spur economic growth, productivity gains, and tax revenue from increased hiring.  The administration is also targeting spending cuts that would reduce the budget deficit.  Inflation is caused by excessive monetary growth relative to GDP increases and by major supply shocks such as energy shortages, not by strong economic growth. 

We have a 7,500 target on the S&P 500 Index for 2025 assuming the corporate tax rate is cut to 15%, spurring an increase in S&P earnings and the expected growth rate as earnings growth is driven by the after-tax return on invested capital.  Our target multiple is 23x S&P adjusted EPS of 328.  The high multiple reflects higher expected growth in earnings from both lower corporate taxes and deregulation and is supported by lower interest rates in the 3.5-4.0% range.