2022-05-27

Stocks Bounce on PCE Price Index

Stocks are rallying today based on one factor and one factor alone: declining inflation. This is mainly caused by the PCE price index. If the government economists accurately calculated inflation, then consumer spending increased at a healthy clip. Whether that was due to wages or tax refunds and consumer debt can be debated, but if the government got inflation right, then there was at least growth in activity. By accurate, I am not talking about the "real" inflation rate. I'm speaking only of the government's own formula. They revise their own numbers all the time. With supply disruptions, high inflation and so on, their models are being tested like never before. Economic growth depends entirely on the inflation calcualtion because it is small enough to where calculation errors will wipe it out. The first quarter GDP number was negative because of inflation among other factors. The rebound in crude this month will bump the June PCE deflator reading up.
It's also worth noting that the response to lower inflation is to increase the price of everything from copper to gasoline. This is not a sustainable rally. Either commodities have to selloff when QT hits or stocks have to find a low far lower than the 3800 area.

As for an upside target, the 2000 bear market peaked at a 50 percent retrace and 2008 (from Bear Stearns low)at 61.8 percent.

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