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CIO Thoughts: Inflation is Down but Not Out – How to Prepare Your Portfolio

Astoria recently paticipated in a webinar discussing inflation (click here to watch the full recording). The content in this blog was used to provide insights on the current state of inflation and what asset classes/investments have historically performed well during past inflationary regimes.

Aside from October Producer Price Index (PPI) data, all of the below material uses data accessed on November 14, 2023. October PPI data was accessed before market open on November 15, 2023.

Inflation Readings: Personal Consumption Expenditure (PCE), Consumer Price Index (CPI), and Producer Price Index (PPI)

  • All core annualized measures are above the Fed's 2% target

    • Core CPI and PCE are both nearly double (4.0% and 3.7%, respectively)

    • Core PPI sits above it at 2.4%

  • Core annualized readings also appear to be stubborn

    • Core CPI: Jun = 4.8%, Jul = 4.7%, Aug = 4.3%, Sep = 4.1%, Oct = 4.0%

    • Core PCE: Jun = 4.3%, Jul = 4.3%, Aug = 3.8%, Sep = 3.7%

  • Amid rising energy prices in Aug/Sep, headline annualized measures rebounded higher after reaching lows

    • Headline CPI Low = 3.0% in Jun

    • Headline CPI for Oct = 3.2%, but was 3.7% in both Aug and Sep

    • Headline PCE Low = 3.2% in Jun

    • Headline PCE now = 3.4% in Jul, Aug, and Sep

  • October CPI: On the back of falling gasoline prices, inflation continued to cool in October the CPI release. All measures came in slightly cooler than expected

    • Headline CPI

      • YoY: +3.2% vs +3.3% est & Sep’s +3.7%

      • MoM: +0.0% vs +0.1% est & Sep’s +0.4%

    • Core CPI

      • YoY: +4.0% vs +4.1% est & Sep’s +4.1%

      • MoM: +0.2% vs +0.3% est & Sep’s +0.3%

    • Month over month measures are stabilizing

      • Headline MoM was flat while the month prior was +0.4%

      • Core MoM was +0.2% while the prior month was +0.3%

    • YoY Core CPI of +4.0% was the lowest since Sep 2021

    • Prices for gasoline and used vehicles fell in October

    • Relative to their large contribution in throughout prior months, shelter costs grew at a notably slower pace in October

  • October PPI: Amid declining energy prices, inflation eased in October via the PPI release. All prints came in below expectations, with the headline MoM measure posting its largest decline since April 2020

    • Headline PPI

      • YoY: +1.3% vs +2.0% est & Sep’s +2.2%

      • MoM: -0.5% vs +0.1% est & Sep’s +0.4%

    • Core PPI

      • YoY: +2.4% vs +2.6% est & Sep’s +2.7%

      • MoM: +0.0% vs +0.2% est & Sep’s +0.2%

    • A meaningful amount of the decline can be attributed to the decline in gas prices

    • Core MoM was unchanged

Macro Indicators Astoria is Actively Monitoring

  • US Treasury Yield Curve (2s10s)

    • Its lows/largest inversion was in March (SVB collapse) at -107 bps and July -108 bps

    • Has un-inverted since July (rising bond term premium, markets accepted higher for longer but moreso now think the Fed may be done tightening)

    • As of Nov 14, was at -36 bps

    • When this spread turns positive again, it has historically signaled a recession is close

  • Conference Board Leading Economic Index

    • Has declined for 18 straight months; longest streak of declines since GFC

  • What are we looking at for a sign of recovery?

    • Un-inversion of yield curve

    • Profits recovery

    • Leading economic indicators troughing / PMIs above 50 / housing recovery

    • Improvement in credit standards/lending

    • Increasing breadth (S&P Equl Weight vs. S&P Market Cap Weight)

    • Reset in valuations

  • Odds of a rate hike?

    • As of Nov 15, 0% for a 25 bps hike at Dec meeting (100% chance of Fed keeping rates steady)

  • How many cuts are priced in for 2024?

    • At least 4; also up to a 5th rate cut (23% chance of this)

    • Was 4 cuts previously, but then again 3 cuts with first one to happen in May, but Powell recently had a more hawkish statement last Thursday

      • “We are not confident that we have achieved such a stance… If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

    • Now back to 4-5 cuts after inflation data

Is Strong GDP Growth Sustainable?

  • US GDP grew by 4.9% in Q3 2023, its fastest pace since late 2021

  • More than half of the growth can be attributed to consumer spending, which rose 4.0% versus a gain of 0.8% in Q2 2023

  • However, Americans saved less than their incomes, with consumer spending increasing over the past quarter and incomes falling over the same period

  • This, along with excess pandemic savings running out, relying on debt with higher interest rates, the resumption of student loan payments, and materialization of lagged tightening effects imply that such growth may not be sustainable

Equity Sector Sensitivity to Inflation Movements

  • Over past 20 years, Energy, Materials, and Industrials have historically shown the most positive correlation to inflation movements relative to the S&P 500

    • Energy 70%

    • Materials 30%

    • Industrials 20%

TIPS vs. Other Fixed Income Performance in Inflationary Regimes

  • During past inflationary periods, TIPS generated both a positive real return and the largest hit rate

    • +2% ann. in inflationary regimes only; all other fixed income negative

    • 60% of the time produced positive real returns in inflationary periods

Commodities Performance in Inflationary Regimes

  • During past inflationary periods, various commodities have produced both positive real returns and high hit rates

    • +14% ann. in inflationary periods only

    • 60-100% of the time produced positive real returns in inflationary periods


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