January 6, 2020
US-China trade is clearly the short-term focus for markets. But not too far behind is US inflation data following the recent core PCE reading of 1.5%. Another month of core PCE at these levels would probably increase expectations for an ‘insurance rate cut’, which could allow for a higher forward SPX PE multiple. The market has been comfortable with a ~16x multiple given the current backdrop, but a rate cut or cuts could see that number approach 17x. Expectations for a rate cut fell last week following Powell’s press conference where he characterized the inflation undershoot as “transitory.” Upcoming inflation data to watch includes: 1) April CPI this Friday; 2) Michigan inflation expectations for May next Friday 5/17 and; 3) April PCE Friday 5/31.