Inflation May Be Peaking

The headline and core PCED inflation rates both edged down in April to 6.3% and 4.9%, raising expectations that inflation is peaking. That's consistent with our view that the headline PCED inflation rate should peak between 6%-7% during H1-2022 and fall to 4%-5% during H2-2022, and 3%-4% next year.The FOMC is still likely to raise the federal funds rate by 50bps at each of the next two meetings, as widely expected. The 10-year US Treasury should remain around 3.00%. (Remember that QT2 starts in June.) The S&P 500 should continue to move mostly sideways this year, consolidating its gains since the start of the bull market in 2009 and correcting the pandemic's valuation excesses. Technically speaking, the bull market in the S&P 500 isn't over yet; it's still a correction. We expect to see the S&P 500 making new highs next year. Energy, Financials, and Tech remain our overweight recommendations.

The charts below show that the improvement in the core PCED inflation rate is attributable to durable goods inflation, especially used car prices, as we've been expecting. Core inflation in both nondurable goods and services remains troublesome. Prices of essentials are still soaring, led by gasoline (42.9% y/y) and groceries (11.2%). Rent-of-shelter inflation moved higher (4.8%), and is likely to continue rising.