Can the US stock market stand 3% US inflation?

Episode Summary

Executive Summary: The episode examines a modest but meaningful uptick in US inflation and why it matters for Fed policy, markets, and rate expectations. Katie Martin and Rob Armstrong argue inflation may be stuck near 3% because the economy remains hot, services inflation is sticky, and housing may not rescue disinflation as hoped. Despite this, stocks have largely shrugged it off thanks to strong earnings and AI enthusiasm, especially NVIDIA.

Main Topics: US inflation has stopped falling (Priority: 5/5): The hosts discuss February CPI at 3.2% year over year and a broader pattern of inflation indicators flattening out rather than continuing to decline toward the Fed’s 2% target. Sticky services inflation and a hot economy (Priority: 5/5): Inflation pressure is attributed less to energy or supply-chain disruptions and more to services such as car insurance, hospital prices, and restaurant food, alongside strong job growth and wage gains. Housing may not deliver the expected disinflation (Priority: 5/5): A key debate is whether lagged official housing measures will soon bring inflation down. The hosts note timely private data had suggested easing rents, but newer house-price indices are rising again. Fed rate-cut expectations keep getting pushed back (Priority: 4/5): Markets have reduced the number and timing of expected Fed cuts, and the conversation considers whether rates might need to stay high longer or even rise again if inflation reaccelerates. Stocks are being driven by earnings and AI, not the Fed (Priority: 4/5): Unlike in prior periods, equity markets appear relatively unfazed by inflation data because dominant narratives have shifted toward strong corporate earnings, tech, and AI, especially NVIDIA. Long/short segment: Greggs and Tesla (Priority: 2/5): In the lighter market-picks segment, Rob goes long UK bakery chain Greggs, while Katie goes short Tesla, citing recent underperformance and a downgrade from Wells Fargo.

Key Arguments: Inflation is not collapsing; it is hovering sideways around levels above the Fed’s target. A hot labor market and wage growth make it hard for inflation to fall quickly. Core inflation is being driven by sticky consumer services, not by energy. Official housing inflation measures lag market reality, but there is risk that housing may no longer be a clean disinflationary force. Central banks fear being remembered like Arthur Burns if they fail to defeat inflation, so they are cautious about cutting too soon. Equity markets currently care more about strong corporate earnings and AI enthusiasm than about marginal inflation surprises. The market could tolerate delayed rate cuts, but a renewed hike cycle would likely be much more disruptive.

Data Points: US CPI (February, year over year): 3.2% - Headline inflation reading discussed as slightly above market expectations and above the Fed’s 2% target. Market expectation for February CPI: 3.1% - Consensus forecast before the data release. Prior CPI reading: 3.1% - The previous month’s year-over-year CPI rate. Fed inflation target: 2% - The level policymakers want inflation to reach. Job creation: 200,000 to 300,000 jobs per month - Evidence that the US economy remains hot. Wage growth: over 4% - Used to argue inflation pressures remain persistent. Expected Fed cuts at one point: 6 cuts this year - Earlier market optimism about aggressive easing. Current Fed cut expectations: about 3 cuts this year - Market expectations have moved closer to the Fed’s own guidance. Later expected Fed level in early next year (prior optimism): 3.5% - A prior market view during the ‘everything is perfect’ phase. Current implied Fed rate: about 4.5% - Described as the market’s more realistic current pricing. Tesla stock performance: down a third this year - Used to support the short thesis on Tesla. Equity index performance: up 8.5% - Contrasts with Tesla’s decline despite a rising broader market.

Pivotal Quotes: "The word is NVIDIA" — Rob Armstrong: His one-word explanation for why markets are not reacting much to the inflation print. "Nobody wants to be Arthur Burns, least of all Jay Powell." — Katie Martin: Discussion of central bankers’ reputational fear of allowing inflation to persist. "If they start raising rates again, then we're just going to have to burn this podcast" — Rob Armstrong: Hyperbolic comment on how damaging a renewed rate-hike cycle would be for markets.

Implications: Inflation’s failure to fall cleanly keeps the Fed cautious and rate cuts uncertain. Markets may stay resilient if earnings and AI remain strong, but a rate hike or renewed inflation surprise could quickly shake risk assets.