By Yasin Ebrahim
Investing.com — Inflation is widely expected to show further signs of easing on Thursday, and could fall by a staggering 76% in this cycle and fall to 2.2% by year-end, helping stocks charge higher in the second half of the year, Wells Fargo said in a note on Wednesday.
“While the market is expecting a sizable year-over-year fall in CPI from the November to the December reading, our analysis is suggesting that inflation will fall to 2.2% by the end of this year,” Wells Fargo said in note on Wednesday, ahead of the December inflation report.
The bold call on inflation has raised some eyebrows on Wall Street as is forecast to cool to just 6.5% December – still some ways away from the Wells Fargo’s 2%-ish year-end estimate.
Wells Fargo, however, appears to have history on its side. Over the last eight economic cycles – as far back as the late 1969/early 1970 – the average decline in the pace of inflation has been 70%, the bank said.
“We are expecting a decline of almost 76% in this cycle, so just slightly above the eight-cycle average [of 70%],” Wells Fargo added. With the fed determined to stamp out red-hot inflation, expectations for inflation to fall significantly will likely play a major role in boosting risk assets.
“The inflation story has been the main focus because that is what would change the Fed from a posture of trying to decrease the prices of the things that we own [risk assets], to either a neutral stance or a posture of trying to keep them up like they have during the last 15 years,” Phillip Toews, CEO & Portfolio Manager of Toews Asset Management told Investing.com’s Yasin Ebrahim in a recent interview. “It all hinges on that,” Toews added.
The Fed’s expectations on inflation don’t even come close to the dramatic decline estimated by Wells Fargo. The Fed’s latest projections from its December meeting, showed members estimated , the Fed’s preferred measure of inflation to fall to 3.5% this year from 4.8% in 2022.
The biggest thorn in the Fed’s efforts to ease inflation has been red-hot demand in the services sector, excluding housing, spurred by robust wage growth. But a recession, expected to occur in 2023, Wells Fargo estimates, is likely to do a lot of the heavy lifting on cooling inflation as weakening demand for services and goods comes underway on the economy.
As the economy recovers and progresses through the second half of 2023, “we believe equity markets will react positively to an improved economic outlook and likely Fed rate cuts,” Wells Fargo said.
The debate on potential rate cuts hasn’t yet been settled, with some warning that the strong labor market propping up wages and consumer spending will keep the Fed’s monetary policy measures tighter for longer.
Markets are refusing to embrace the fact that “the Fed which has been for so long, a proponent of market prices, always pushing them higher…but now is doing just the opposite,” Toews added. “We probably still haven’t internalized that the Fed has an interest in keeping financial assets [including] stock prices lower.”