Brace For Rate June Cuts: Inflation Moderated

Last Friday, the government posted the core Personal Consumption Expenditures index at 2.8% in February. This inflation measure excludes food and energy due to their volatility.

The weaker inflation rate supports the stock market's view that the Federal Reserve would cut rates in June. The long-term U.S. treasury bond markets disagree. The 20+ year Treasury (TLT) peaked at over $100 in January. It closed at $94.62, continuing a downtrend, as the debt market prices in no change in interest rates.
Last week, the upward revision for Q4/2023 GDP suggested that it is too soon for the Fed to cut interest rates. Doing so would worsen inflation.

June Rate Cut

Stock markets are forward-pricing machines. Participants believe that by the time the Fed meets in June, the inflation and jobs data will provide convincing evidence to normalize interest rates. Still, this argument is weak. Over the last three decades, the normal interest rate is at current levels. Additionally, central banks have no plans to bring back ZIRP (zero interest rate policy).

Today's Investments

Be wary of small-cap stocks on the Russell 2000 (IWM). Speculators will continue to dump companies with a failed business model. That includes avoiding Nikola (NKLA), biotech firms like Akebia Therapeutics (AKBA), and Chinese EV firms including NIO Inc. (NIO) and Xpeng (XPEV).

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