There's Always Something To Worry About

The stock and bond markets are marking time. They might continue to do so during the first half of this year. The stock market should resume its advance during the second half of the year. The 10-year bond yield may continue to hover around 4.00% +/- 25bps this year. Here are the major issues hanging over the markets currently:

(1) Inflation. December's CPI release showed a slight uptick in the headline rate to 3.4% y/y, while the core rate edged down to 3.9%. The markets are coming around to our view that while inflation remains on a downward trend, the Fed is in no rush to lower interest rates. The problem is that rent inflation as measured in the CPI remains sticky. Excluding shelter, the headline and core CPI inflation rates are down to1.8% and 2.2% (chart). That's really good news, but the Fed wants to avoid a rebound in inflation, which is why we expect fewer-and-later rate cuts this year.