(Not So) Weekly Signal & Noise Filter
TACO Flavored Kisses
Taco Flavored Kisses is an old South Park Episode, wherein our hero Eric Cartman develops an alter ego that parodies Jennifer Lopez. Recently, parody and Tacos have reached a new cultural high (some would say low) in the aftermath of TACO-gate (Trump Always Chickens Out).
Taco flavored kisses do, however, allow markets to return to their more prosaic job of pricing risk given the forward growth and inflation matrix.
Thus, Friday’s core PCE inflation print, which converged with the Pinebrook projection of .12%MoM, reinforces the view of a disinflation that is still largely intact.
After chopping around between a 2.8%YoY and 2.9% YoY level between October 2024 and February 2025, core PCE YoY now sits at 2.52%. This is a full 42-basis points lower than the 2.95% level from April 2024. Recall, YoY is the Fed’s preferred gauge for tracking the evolution in inflation. Disinflation is not dead, tariffs be dammed.
This is the noise, as some of this is seasonal and some of this is from the distributional effects of front running tariffs (with the caveat that we only have one month of Q2 2025 data).
On a forward-looking basis, Pinebrook expects May core PCE to capture, and be weighed down further, by the volatility of April financial services prices. These will likely be offset by tariff pricing volatility resulting from trade policy uncertainty.
The data bullwhips will continue until trade policy morale improves.
By June, financial services inflation is likely to pop back up. With the labor market still holding up and not showing signs of meaningful deterioration, this means is that the window for a June cut is closed.
Pushback from some quarters could argue that it was never seriously open to begin with, but this would be at odds with financial conditions in late April or early May and the attendant target probabilities from the CME’s policy probability history.
Thus, the modal expectation is for the Fed to remain on hold through summer, if not the rest of the calendar year.
This is also noise. The signal comes from the underlying economic fundamentals that support this view, informed by asset prices. We start with this table from FactSet.
Despite the popular view that firms are playing the tariff card to downplay earnings, the number of firms increasing their 2025 earnings outlook is almost double those that are lowering their 2025 outlooks (64 to 37). The other 139 firms (out 251 in total commenting on 2025 earnings) have an unchanged outlook.
At the margin, firms are raising their outlooks.
At the margin, this argues for an expansion in market breadth.
This thesis can be tested by looking at the relative performance of large cap growth stocks over large cap value stocks.