Morning Notes — Reflation

Today’s in-line CPI report and Wednesday’s JOLTS report that implied tighter labor market conditions won’t change the near-term narrative on inflation. It’s not hard for inflation rates to decline from here given much tougher comps starting in December, but the theme looks like it will stick around a while.  We’ve been forecasting and positioning for a reflation environment since real yields bottomed in September ’20 and our confidence in that call is stronger today.  We didn’t expect inflation to end the cyclical recovery and we still don’t.  But after 12+ years of disinflation and lower nominal bond yields, equity positioning in growth sectors has become crowded and multiples in many pockets are stretched to record levels.  Meanwhile, positioning in reflation beneficiaries is near record lows and valuations relative to growth multiples are the widest in history. Some of these reflation beneficiaries have free cash flow yields >20% and trade at low-single digit EBITDA multiples.