Forget the Federal Reserve “Stop.” The extreme inflation narrative was dealt a blow with the May Consumer Price Index report: The CPI was up 8.6% year over year, higher than the 8.3% expected by the Dow Jones, a new high. Core CPI, which excludes food and energy, is 6.0% year over year versus 5.9% expected. The S&P 500 futures declined after the announcement. Shelter, food and gasoline constitute half of the CPI, and there is no sign that they are showing a significant decline. Quite the opposite. The S&P 500 rose nearly 10% from its intraday low on May 20 to its most recent closing high on June 1. The rally was based on two assumptions: that China’s lockdown was gradually easing, and that the Fed would consider a “pause”. After two 50-basis-point increases in June and July. Unfortunately, these narratives have proven difficult to maintain. Fed futures for the end of the year are hitting a new high, meaning market participants no longer expect the Fed to “pause”. JonesTrading’s Michael O’Rourke summarized the dilemma for the Fed in a note to clients last night: “Markets are not bullish on the ECB, believe the central bank has been too sluggish and too ahead of the curve.” The Federal Reserve. With neither central bank ready to take decisive action to move policy closer to neutral, investors believe that policy makers will chase inflation and tighten policy longer than necessary. Such mismatches The policy also increases the potential for additional policy errors.” The other major market mover – the China reopening story – is slipping and slipping, as both Shanghai and Beijing reimpose sanctions. Nevertheless, hope springs eternal. Shares in China have staged a remarkable rally in the past month as the country begins an appropriate process toward reopening. Shanghai markets closed near their highest level since March, although Hong Kong was partially down. The iShares MSCI China ETF (MCHI), a broad basket of Chinese stocks, outperformed the S&P 500 this year, and was up nearly 15% over the past month, while the S&P 500 remained flat.
