Inside Markets — Inflation, Recession and Eurozone

Over the last two years, Truflation, a private company that provides real time/high frequency inflation data, has generated inflation forecasts that lead official BLS CPI data with a 0.1% average deviation. As of today, the Truflation index published a +1.32% YoY inflation number, potentially indicating further future disinflation in the official government data. The Truflation index integrates over 30 million real-time data points, compared to the CPI’s 80,000 lagging datapoints, and correctly predicted the 2022 rise in inflation. Note, the Truflation estimated inflation peaked at +10.4% in June ’22 compared to official BLS data which peaked at +9.1%.

Most US recessions over the last 40 years (not including the 2020 pandemic recession) have started with consumer credit issues. Staying with high frequency inputs, V and MA both spoke at an industry conference yesterday, and each said consumer spending trends are holding steady/tracking in line with expectations despite all the noise and volatility. Tariff uncertainty is clearly weighing on consumer confidence and corporate capex plans with some widening in credit spreads. But it’s important to recognize that Investment Grade and High Yield credit spreads remain below the recent highs from October when tariff-driven recession worries weren’t part of the conversation. High Yield spreads should be biased higher amid ongoing macro uncertainty, but still strong balance sheets (consumer and corporate) will likely keep credit spreads and recession risk relatively contained.

Assuming passage, Germany’s new fiscal spending plan (defense and non-defense) should be a strong tailwind for Eurozone GDP and Eurozone EPS estimates. The Euro Stoxx 600 Index (SXXP) has outperformed the SPX by ~11% YTD but almost all the outperformance has been driven by a relative re-rating rather than EPS upgrades. That’s not an issue so long as 10-year bund yields remain contained. Ten-year bund yields are now at 2.88% with closing levels above 3% becoming a headwind for the SXXP that is currently in short-term overbought territory.

Any relief rally in the SPX will face near-term volatility headwinds with the VIX north of 22 (now 24.6). While we don’t expect it in the near term, any sustained VIX close below 20 would be a bullish technical development.