Goods Inflation Likely Moderating — Inflation Focus Shifts to Services and Wage Costs — Economy Slowing-Mild or Deep? — Fed Must Avoid 70’s Stop-and-Go Rate Policy Errors — Equity Market Hopes – Is That a Strategy?

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GDP Second Quarter Decline — First Real Signs of Economic Slowing — -First Quarter Quirky Decline Masked Internal Growth The government’s “advance” estimate for second-quarter GDP showed a 0.9% decline. In comparison, GDP for the first quarter of 2022 declined 1.6 percent. This would suggest first quarter GDP showed weaker results than in this most recent quarter. However, because of …

Russo-Sino Alliance-Post-Post-Cold War — Erodes Globalization-Russian Control of Gas Supplies May Force Germany to Ration — German Economy Suffers Next Winter

Gregory Nardiello

Russo/Sino Alliance — Post-Post-Cold War — Erodes Globalization — Russia’s Control of Gas Supplies to Europe — Germany May Ration — German Industrial Production Suffers—Increase Depth of European Recession—European Central Bank Will Face a Dilemma The global economy faces inflationary pressures from the Euro-Asian alliance formed by China and Russia. During the first Cold War, both Russia — behind the …

Sharp Market Declines — Negative Wealth Effect — Underwrites Fed Policies – Strong Employment Gives Fed the Umbrella for Aggressive Policies — QT Pressures Multiples — Refocus on Earnings Leads to Stock Selectivity – Less Focus on Broad Indices — Negative U.S. and China Workforce Demographics Changes Globalization

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Current High Levels of Inflation — Broadening Impact With its May meeting, the Fed announced more aggressive tactics in its war to diffuse inflation. Figure 1 provides an updated map of that battlefield. That map shows Median CPI which, in the Cleveland Fed’s view, provides a better sense of underlying inflation than does either headline or core CPI. The chart …

Fed Policy — Dancing Between Raindrops — Fed Tightening and Fiscal Policy Drag Tests 2023 Economic Outlook — Wage Pressures a Secondary Inflation Impact Could Lengthen Higher Inflation — Accelerating World Food Inflation Could Affect Emerging Market Debt Obligations — Fixed Income View Change

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Current High Levels of Inflation—effect Broadening According to the Cleveland Fed, the median Consumer Price Index (CPI)  provides a better sense of  underlying inflation then either headline CPI or CPI excluding food and energy. Median CPI, represented in Figure 1 by the orange line, shows half of CPI components experienced annual price gains of 4.9% or greater—the highest rate since …

“Putin Shock” — Financialization of Warfare Threatens “Risk-Free” Status of U.S. Govt. Debt — Can the Fed Thread the Needle Between Soft Landing and Disinflation? – Will Planned Rate Increases Achieve Sufficient Positive Real Rates to Lower Inflation? — Will Eroding Consumers’ Real Incomes Lead to Slower Economic Growth and Shift Away from National Brands? – Will Tight Labor Markets Lead to Higher Productivity? –Displacement and Replacement?

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“Putin Shock” Underlines Eurasian Threat to Western World—U.S. Global Military Power and U.S. Dollar Reserve Status Go Hand-In-Glove We titled our last commentary The “Putin Shock” Could Create Shocking Changes –  unfortunately, that proved too true. The “Putin shock” plus the pandemic changed our world for the foreseeable future. “The world has entered a new period of turbulence and change,” …

“Putin Shock” May Create Shocking Changes – Inflation Becomes Viral? — Quantitative Tightening (QT) Lower Multiples? –Wage Pressures and Tight Labor Markets Lead to Higher Productivity?

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COVID Variants Lower Forecast Confidence — Greater Market Volatility Americans entered 2021 with the hope that the miracle of vaccines would lead to an “end” to COVID as a major concern. A year later, with Omicron spreading rapidly, albeit a milder variant, that hope remains unanswered (see Figure 1). With that, government leaders suggest Americans will need to prudently live …

Fed Rate Liftoff and Balance Sheet Runoff (QT) Difficult to Pull off in Parallel — Produces Heightened Policy Risks — QT Could Reduce Market Liquidity — Earnings Growth Then Key to Equity Performance Rather Than Multiples — Negative Real Rates Remain — Result Limited Economic Restraint — Consensus Expects Inflation to Moderate Around Mid-Year — Risk to That Consensus Potential Extended Wage Pressures

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COVID Variants Lower Forecast Confidence — Greater Market Volatility Americans entered 2021 with the hope that the miracle of vaccines would lead to an “end” to COVID as a major concern. A year later, with Omicron spreading rapidly, albeit a milder variant, that hope remains unanswered (see Figure 1). With that, government leaders suggest Americans will need to prudently live …

COVID Variants Lower Forecast Confidence — Greater Market Volatility

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Fed Rate Liftoff and Balance Sheet Runoff (QT) Difficult to Pull off in Parallel — Produces Heightened Policy Risks — QT Could Reduce Market Liquidity — Earnings Growth Then Key to Equity Performance Rather Than Multiples — Negative Real Rates Remain — Result Limited Economic Restraint — Consensus Expects Inflation to Moderate Around Mid-Year — Risk to That Consensus Potential …

2022 – the Year Ahead Living With COVID Variants – More Mini-Cycles Transitory or Persistent – How Long Will Inflation Take to Return to Low 2%?

Gregory Nardiello

Living With COVID Variants — Both Long-Lasting and More Mini-Cycles The economic outlook for 2022 and its future path depends, in part, on the likelihood of unpredictable breakouts of new COVID strains such as Delta and Omicron. Such outbreaks will lead to more mini-cycles. At the same time, we continue to live with the impact of earlier COVID strains (see …

Inflationary Supply Shocks – Will the Fed’s “Largely Transitory Inflation” View Prove to Be Transitory as Well? COVID Health Risk Gap – White-Collar Health Risks Compared to Blue Collar Workers – Will It Lead to Structural Changes in Job Markets?

Gregory Nardiello

Worker and Product Shortages — the Outcomes Will Help Determine How Long “Largely Transitory Inflation” Will Last This year provided investors with extremes of euphoria and worry. With 2021 moving into its final weeks, the outlook for 2022 will play an increasing role in near-term financial market performance. The fallout from the pandemic, including backlogged supply chains and worker shortages, …