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Cognitive dissonance

US Inflation for the month of January was published yesterday and it came in hotter than expected at 3.1% (vs 2.9% consensus). Core inflation was slightly better at 3.9%, but was not enough to avoid crushing expectations for the first rate cut on March. Furthermore, expectations for a June cut have plummeted too, implying that if inflation does not revert to its declining path, and absent other factors, we may not see official rates decline until Fall. The reaction of equity indices was consistent with expectations adjustment, but it wasn’t dramatic. The combination between persistent inflation (albeit at 3% handle) and surprisingly strong labor data are pushing the data-dependent Fed to hold fire on rate cuts. However, markets keep trading as if the Fed will lower rates this year, and valuations have not adjusted enough to new data. Cognitive dissonance at its best.

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