{"id":60389,"date":"2025-01-16T08:06:34","date_gmt":"2025-01-16T08:06:34","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=60389"},"modified":"2025-01-16T09:59:42","modified_gmt":"2025-01-16T09:59:42","slug":"inflation-dips","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2025\/01\/16\/inflation-dips\/","title":{"rendered":"Inflation dips?"},"content":{"rendered":"

The 10-year Treasury yield retreated after the release of December CPI data, with breach of the rising trendline signaling a correction to test support at 4.5%.<\/p>\n

\"10-Year<\/p>\n

However, the monthly chart below shows the long-term uptrend is unchanged, with the 10-year yield expected to reach 5.0%. Breakout above resistance would warn of an advance to 6.0%.<\/p>\n

\"10-Year<\/p>\n

CPI Inflation<\/h2>\n

Core CPI (ocher) dipped slightly to 3.2% for the twelve months to December, while headline CPI (red) increased to 2.9%, holding stubbornly above the Fed’s 2.0% target.<\/p>\n

\"CPI<\/p>\n

Monthly data shows a sharp spike in headline CPI in December, increasing at an annualized rate of 4.7%. Core CPI, however, slowed to 2.7% (annualized).<\/p>\n

<\/span>\"CPI<\/p>\n

Energy<\/h3>\n

The difference is energy costs, excluded from core CPI, which jumped 2.63% in December, warning of rising energy prices in 2025. The December increase equates to an annualized rate of more than 30%.<\/p>\n

\"CPI<\/p>\n

Energy prices are a key vector for transmitting inflation. Prices rise steeply during a boom as expanding demand outstrips inelastic supply, and the opposite occurs during a recession when falling energy demand causes a surplus. Energy prices (orange below) rose ahead of headline CPI (red) in 2021 and fell ahead of its subsequent decline in 2022 – 23.<\/p>\n

\"CPI
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Services<\/h3>\n

CPI for services (excluding shelter) was a low 0.099% in December or 1.2% annualized. Services generally indicate more persistent inflation, so the Fed will likely treat this as a win.<\/p>\n

\"CPI<\/p>\n

Long-term Inflation Outlook<\/h2>\n

Long-term inflation expectations are rising, with the University of Michigan 5-year outlook climbing to 3.3%.<\/p>\n

\"University<\/p>\n

We do not anticipate a significant hike in CPI in early 2025, but there are warning signs of a rebound.<\/p>\n

\"Brent<\/p>\n

Brent crude has climbed to above $80 per barrel on fears that new sanctions on Russian shipping will impact supply. Retracement that respects support at $80 would confirm another advance.<\/p>\n

\"Brent<\/p>\n

Stocks<\/h2>\n

Mega-cap technology stocks rebounded from yesterday’s fall, with the two most volatile Nvidia (NVDA) and Tesla (TSLA) showing gains.<\/p>\n

\"Top<\/p>\n

The S&P 500 index recovered above resistance at 5850, indicating another test of the high at 6100.<\/p>\n

\"S&P<\/p>\n

Large caps also enjoyed support, with the equal-weighted index ($IQX) testing resistance at 7200. Breakout would indicate another test of 7600.<\/p>\n

\"S&P<\/p>\n

Growth stocks rebounded from their recent sell-off relative to defensive stocks. However, the Russell 1000 Large Cap Value ETF (IWD) has outperformed the Russell 1000 Large Cap Growth ETF (IWF) over the past month.<\/p>\n

\"Russell<\/p>\n

Financial Markets<\/h2>\n

Bitcoin is again testing resistance at $100K. Reversal below $90K would warn of a liquidity contraction likely to affect stocks and bonds, but there are signs that financial conditions are easing. Breakout above $100K would confirm.<\/p>\n

\"Bitcoin<\/p>\n

Expanding liquidity is partly attributable to a $350 billion fall in Fed overnight reverse repo operations in January after an equally sharp rise in December caused a contraction.<\/p>\n

\"Fed<\/p>\n

The Chicago Fed National Financial Conditions Index declined to -0.63 on January 10, suggesting similar financial easing to 2021.<\/p>\n

\"Chicago<\/p>\n

Moody’s Baa corporate bond spread has also narrowed to 1.44%, the lowest since the 1990s, which indicates ready credit availability.<\/p>\n

\"Moody's<\/p>\n

Gold<\/h2>\n

Fears of persistent inflation drive gold and geopolitical tensions fuel further demand. A higher Trend Index trough indicates rising buying pressure and a breakout above $2,725 per ounce would signal another test of $2,800.<\/p>\n

\"Spot<\/p>\n

The monthly chart below shows the long-term view, where breakout above resistance at $2,800 (green) would offer a target of $3,600.<\/p>\n

\"Spot<\/p>\n

Conclusion<\/h2>\n

Our three pillars supporting financial markets are 10-year Treasury yields, crude oil prices, and financial market liquidity.<\/p>\n

Financial market liquidity is strong and supports demand for stocks and bonds with easy access to leverage.<\/p>\n

Crude oil prices have been subdued since 2023, with strong production from non-OPEC+ producers (especially the US) and weak demand from China. However, geopolitical tensions now threaten supply, with Brent crude rising above $80 per barrel. The risk is that higher energy prices cause a resurgence of inflation and drive up long-term interest rates.<\/p>\n

Inflation concerns over a tight labor market were temporarily allayed by December’s weak core CPI and services CPI growth. However, rising energy costs will likely increase input costs, causing a rebound in the months ahead. Market concerns over inflation are expected to grow as the incoming administration attempts to stimulate an economy already at close to capacity. The 10-year Treasury yield may briefly retrace to test support but is then likely to continue its long-term uptrend. Breakout above 5.0% would offer a target of 6.0%, which would be bearish for stocks and bonds.<\/p>\n

We are underweight growth stocks trading at high earnings multiples and are avoiding financial instruments with a duration longer than two years.<\/p>\n

Gold will likely benefit from a higher long-term inflation outlook and rising geopolitical tensions. We are overweight gold and defensive stocks trading at reasonable multiples relative to earnings.<\/p>\n

Acknowledgments<\/h4>\n