Citi: S&P Goldilocks Scenario Looks Hard as Dollar Rises

When you look actually at the inflation figures, and again we spoke to the Chancellor yesterday, Andrew Bailey was also speaking at the IMS. I don’t know whether that narrative really goes out the window or needs to be repriced, but a lot of it has to to to do with fuel. Yes, I think you’re right. I think the good news from to even today’s inflation numbers in the UK are speaking to Bender, borrow our economist this morning, under the hood, actually it’s not as bad as the headlines suggest. You know, we’d hoped it would be nearer the 3% overall level for CPI and we’d hope that services component would be below that, you know, well below the six really. And I think that is what you probably need to see to start that June cutting. And again, it’s a little bit like the US story, you know. And for us, we’re gonna be really looking very closely at core PCE next week in the US And I think that number is really critical and we think it probably has to come in at 2.7%. Otherwise, I think that our expectation that you could still see those June cuts in the US probably starts to get really challenged and then you get into a very difficult period for the Fed to cut, particularly with the election cycle then coming up. And like if you start cutting in say September, it’s really probably very close to that election window. I mean Larry Summers is definitely not liar, but he’s also, you know, saying we can’t undress night, the fact that the next move could could be higher. Yeah, I think there is definitely some risks that that that that could be the case because that stickiness and I think when you and I spoke a while ago, some of the easing in financial conditions that we’ve seen at the back end of last year has perhaps triggered some of this stickiness and some of this re acceleration in certain pockets of the economy. But what I would just say with the US in particular is some of the labor market data perhaps isn’t as good as as perhaps even Powell thinks it is or at least the narrative suggests they believe it is. There are definitely cracks forming and I think even if you look at like part time jobs versus full time jobs, that’s a sort of set of data that tends to lead payrolls. And I think again that is suggesting some of those cracks are likely to come through more substantially to the US And to our mind, the risk is the longer we see these central banks waiting to cut rates, the bigger the risk to the underlying economy, probably the more easing then needs to happen if it’s later. And the risk that you do really start to see a few recessions kicking in morning meaningfully around the world, I think grows Francine. So I guess that’s a problem for the end of the year is, is the dollar strength or more problematic for certain, you know asset classes. Yeah, I think as we’re seeing even this morning like that sort of FX Vol is really likely to pick up. You know you’re going to see that risk for emerging markets growing. It’s going to be very difficult for them to perform with that dollar strength. And I think you know the dollar strength narrative had been something we’d expected to see at the back end of the year, but now we’re obviously getting that earlier on. Like I agree with you, I think there’s going to be certain asset classes that are really going to find it difficult to perform well and certain companies of course are going to see their earnings downgraded on the back of that, which makes the Goldilocks scenario that many people have been expecting particularly for the S&P really difficult to achieve. Now you know our Goldilocks scenario is 5700, but that is predicated on those rate cuts coming through, which is we’ve discussed a being priced out by the market, but also better growth coming through from these companies. And I think to get those two things together is looking more and more challenged. Of course, I think if you’ve got a better growth narrative for the markets, equity markets can cope with rates being priced out. But if if those rate hikes being priced out are really because inflation is incredibly sticky and problematic and growth isn’t as good as we think or hope, that’s a really big challenge to hold even these levels.