In the run-up to U.S. CPI data for August, Credit Suisse forecasts that inflation will fall and that the Federal Reserve will pause rate hikes earlier than expected.
Credit Suisse U.S. equity strategist Jonathan Golub said the market has actually reacted. “When we go to the gas station, we see gasoline prices go down, crude oil prices go down. We even see food prices go down. Those are all positives.”
Golub believes an inflation “collapse” will occur within the next 12 to 18 months. He pointed to futures data suggesting that food and energy prices will fall by 5.7% and 11.8% by the end of 2023, when commodity inflation will fall to 7% from 12.3% in February.
With inflation falling sharply, Golub expects the Fed to stop raising interest rates in the next four to six months.
The market is widely expected that the August CPI report will cement the Fed’s decision to raise interest rates by 3 yards next week, but some economists believe that if inflation is worse than expected, the Fed may only raise interest rates by 2 yards. The futures market is estimating that the Fed’s endpoint rate will hit 4% early next year.
A survey by the Federal Reserve Bank of New York released on Monday also showed that consumer expectations for U.S. inflation in the next three years fell to 2.8% in August, down from 3.2% in July and 3.6% in June; Growth expectations fell to 5.7% from 6.2% in July.
When it comes to investment options, Golub said he prefers consumer, industrial, refining and processing stocks. Golub also sees a year-end target price of 4,300 for the S&P 500, implying about 5% upside from Monday’s close. The index has risen nearly 8% over the past two months. However, it is still down about 15% from its all-time high.