I Never Promised You a Rose Garden

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The CPI came in higher than expected - to hit 2.1% YoY on the headline and 1.8% YoY on the core measure. At first blush on Wednesday I thought I’d find the markets reduced to ashes, but then I reminded myself the core CPI inflation rate has averaged 2% since late 2015. More important from the Fed’s Phillips Curve framework, real average weekly earnings are up by just 0.4% and that’s off from 0.9% YoY in December. So if the market gyrations were coming in a straight line from the unemployment rate to higher wages to inflation to a more aggressive Fed, then I’d expect to see some evidence of tightening being priced in somewhere - but I just can’t find it yet. The dollar index remains 5% below December levels. Oil prices have slipped this year, yes, but remain 20% above late-September levels. Gold prices are up from the Q4 lows and stand 4% above the one-year moving average. And the likelihood of a fourth rate, while a bit more likely, still remains low. Taken together, it’s a combination I think we all love. To wrap it up, both the NFIB Small Business Indices were like valentine's cards to the economy, as its Optimism Index hit a 30+ week high and a 45-year high on “it’s a good time to expand." Clearly there’s room for inflation to disappoint, but at barely 2% it still looks like there’s no need to see the FOMC hitting the panic button. There’s going to be higher volatility after the spate of unusually low volatility, yes. But the markets never do promise us a rose garden.

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