Core inflation is at its lowest 1.74 (need 2.0). The Fed inflation forecast is bad. In January, they talked of rising inflation and in March when rates went up last time:
“Janet Yellen, chair of the Fed’s board of governors, said the economy is on a healthy footing as unemployment is falling, and so rates need to go up to limit rising inflation. She expects the central bank to increase rates twice more this year, accelerating from the single rate hikes in both 2015 and 2016.”
“The median projection noted by Ms Yellen indicates the target rate will rise to 1.4pc by the end of the year.”
This implies one more rise this year so there will be a “pause” in September and a rise in December to 1.3 or 1.25.
See Fed Futures chart below:
Today VIX is low at 10.11. The low inflation and vix will pressure SPY higher and the ‘wealth’ effect (staircase up). The Fed will pause no doubt.
Rising Fed rates means accelerated lending supporting the economy:
- Fed Raises Rates
- Borrowing Accelerates
- Oil goes down stimulating ‘core’ economy
- SPY goes up as ccpi < 2.0, momentum (staircase up continues)
- ‘Wealth effect’ increases
The USD should also start to rise.
See below in 2014, gas drops and core inflation rises from Jan 2015-onwards and reaches the magical 2.0 Nov 2015 reported in December. The Fed raises rates in Dec 2015 and market falls 10% in Jan 2016.
Next, we need to see core inflation rising to 2.0 (by October). The market would then fall 10-12% after the Nov. 1 Fed Mtg.
Credit Flow Investor 