StagDeflation Call Validated by PPI

We reiterate our StagDeflation call as after PPI was released, we now estimate that core PCE will print at 0% at the end of this month and Y/Y core inflation will come in at 2.4%.  We estimate that headline inflation will not be significantly impacted over the next two months by tariffs as the decline in energy prices will more than offset the increase in tariffs.

We continue to believe that the Fed will cut 3 times this year and that the 10-year yield will end the year in the 3.5%-4.0% range after the Fed cuts rates. US economic growth is decelerating rapidly with growth likely to drop from over 3% into the 1-2% range as the effects of the Fed’s ultra-tight monetary policy impacts the residential and commercial construction industries and the deflationary/recessionary impacts of Trump Administration tariffs and DOGE layoffs impact the economy.  We do not expect a US recession as the economy is supported by the fact that the bond market has cut long-term rates for the Fed, oil prices have dropped 20% this year and tech spending is likely to remain strong.  The current tariff increase will generate less than $200 billion in tax revenue which is only .7% of GDP and less than the benefit of lower energy prices for the US consumer.