United States inflation data has arrived. There is a huge panic around. Because it's a little more than expected, but actually an oddity in a single line is the reason for all this panic. So what's weird about that one line today? What parts of the inflation data bother me, even if only slightly, and what do I expect about the future? What impact will all of this have on stock prices in the United States? I will share my views on this subject. By the way, let me also admit this. I was also wrong about this inflation data, I am generally good at inflation. From here I realized that I had neglected this a bit. That's why we'll be back today and do a detailed inflation review. We will reveal the expectations for the coming months.
Year-on-year inflation was expected to be 2.9% and came to 3.1%. Monthly inflation was expected to be 0.2 and came to 0.3. These are the headline numbers. It was the core party that the FED gave real importance to. Things didn't go so well. Monthly core rate was expected to be 0.3, but it came to 0.4. I thought the core annual rate would decrease to 3.7%, but it stayed at 3.9% and of course the market panicked. Looking at these data, it is natural for the market to panic. But there are so many strange things going on in the details that you shouldn't make big decisions without looking at them. Let's go pen by pen.
Eating at home has increased significantly. 0.1 last month, 0.4 this month is not nice at all. Eating out was 0.3 last month, 0.5 this month. However, when I look at these home-eating items, I see that almost all the increase comes from non-alcoholic beverages, that is, soft drinks. Other than that, there is no significant increase in food products. So there is nothing that would disturb the citizens much. Those who wish can look at the details of the data of the American statistics group.
When we look at the energy side, the decline has accelerated. The previous month the price of commodities was 0.7, this month - 3.2. On the other hand, on the service side, there is an increase in prices in energy services. Especially this comes from natural gas. I don't know, maybe this is because the winter conditions in America are harsh. Because natural gas prices normally decrease in the world. There is such a leap here. When we look at the products that are the areas where the FED mainly affects the interest rates, there is a decrease in inflation in almost all of them. In household goods, the previous month was - 0.3, this month -0 1. In clothing, the previous month was 0, this month - 0.7. For new vehicles, the previous month was 0.2, this month was 0. For second-hand vehicles, the previous month was 0.6, this month - 3.4. In other words, prices for second-hand vehicles are going backwards. We already know this closely from the Tesla example. There is an increase in spare parts. - There is an increase from 0.3 to 0.8.
In health products - we decreased from 0.1 to 0.6. There is some increase in entertainment products. But the interesting thing here is that when the stock markets rise in America, there is also an increase in entertainment products. The citizen probably spends some of the money he earns there on entertainment. In education and communication products - there is an increase from 0.2 to 0.6. There is an increase from 0.1 to 0.3 in alcoholic beverages and -0.5 to 0.3 in other items. So when we look at the whole, but actually product inflation is still negative, this is the place that can most directly affect the FED, and the big items here, namely vehicles, second-hand vehicles, clothing, serious inflation in all of these is going negative. There is no inflation, there is deflation here.
So where does this inflation come from then? It comes from services. While we say it comes from services, it mostly comes from rents. Let's look at housing and rent first. Same as last month. So this really made me a little tired, too. It would be better if there was a decline here. But at least it stayed in the same place. So, there is no inflationary effect here. Staying outside jumped from 0.2 to 1.8. There is some serious jumping here. So people probably went on holiday a little more. I interpret it as snow holidays etc. But this has little effect on inflation. So it has an effect of 1.33 out of 100.
We come to the big part. The item that alone determines 26% of inflation. It increased from 0.4 to 0.6. When tenants are asked or when they look at their rental agreements, inflation is stable, but when homeowners are asked through a survey, it has increased. I don't know what kind of account this is. Now imagine that you are looking at real contracts. In fact, inflation is at least stable. You go to the landlord and ask, "If you were to rent the house you live in today, what price would you pay it for?" There inflation jumps to 0.6.
Now, some may interpret this as the FED is cheating. I mean, because we know that the FED has been arguing with the American government for a while. The American government now expects serious interest rate decreases. Yellen made a statement that inflation is going back very quickly. They want interest rates to decrease, but on the other hand, the FED does not want to reduce interest rates. Either I lower the interest rate or if inflation goes up, this will be a problem. In this case, you would show the inflation of this period a little higher than it is, so that the pressure from the American government will decrease. Because the impact is huge. If we reduce this to 0.4 instead of 0.6, as in real lease agreements, our inflation will suddenly decrease to 0.25.
In other words, we are going down from 0.3% to 2%, where if you put some fractions together, it becomes equal to the expectation of 0.2. This is a single pen and the feature of this pen is that it can only be purchased with a survey. I don't know how right or wrong they are with this survey. Maybe there is an error in the survey, if we look at it with good intentions. Perhaps we see the result of the scuffle between the FED and the American government here. But a single item radically affects everything. Let's look at the numbers in a little more detail.
Where else are there increases? There is a serious increase in transportation services. from 0.1 to 1.0. But the main reason for this is automobile insurance. Automobile insurance is rising very quickly. There is no significant increase on other sides. Entertainment services decreased from 1.1 to 0.4. Education and communication increased from 0.2 to 0.4. There are also other personal services. There is a serious increase here. Although the inflation rate is low, the main reason for this increase is unfortunately the events in the stock market. Because among other personal services, financial services are a predominant item, and that predominant item, of course, goes up when the stock market rises.
To summarize, when we look at it item by item, there are increases in many items. So, we cannot say that there is no increase for this inflation report. But the increases in most of these items are interesting. Because there is no problem with inflation in core products other than food and energy, which are the items that the FED will affect the most. We are actually continuing deflation there. On the food side, there is a serious increase in soft drinks. There is an increase in eating out. The big deal is the rent, and there is no decrease in the rent and the rents asked to the tenants. But more importantly, I don't have any information on why the inflation rate is 26.769% because of such a strange item as if the homeowner had rented it out. There is a strange leap here, and for the first time, the gap between real contracts and the answer to the question asked to homeowners has widened so much.
In this case, I don't panic too much about inflation. Because we can basically reduce it to three items. The oddity about the if the landlord had rented issue, the oddity about automobile insurance, and the increases in entertainment and financial expenses brought about by the rapid rise of the stock markets. Apart from this, inflation does not seem to be a big problem. As a matter of fact, if we look at the data published by the American Statistical Institute, when we subtract rent from all inflation items, inflation in America is 0.1. If you annualize this, that is, if you multiply it by 12, it comes to 1.2. It was like this last month. The month before that was 0. Actually, the decline continues here and I think 0.1 is a very healthy inflation rate. In this context, I do not panic about inflation.
The market already evaluated this during the day. First we received a harsh correction. We were already expecting this. I guess there needs to be a correction somewhere, but I was thinking let's stay long and hedge ourselves. An excuse was found for that correction. However, towards the close, the stock markets started to move upwards. When you look at the Nasdaq and S&P 500 charts, they started the day with a sharp decline when the data was announced and that decline continued throughout the day. But towards the end of the day, 45 minutes before the stock market closed in the USA, high and hard upward candles started to appear. When I look at the futures indices right now, there is a 0.11% increase in American technology companies. We had a very sharp decline in small stocks. There is an increase of 0.5%. So it seems like there's nothing to panic about here.
Dow Jones fell 1.35%, S&P 500 fell 1.37%, Nasdaq fell 1.8%. Small caps were most affected. They were actually doing well since Thursday last week. Why were they so impressed? Because these are smaller companies, more indebted companies, their financial structures may be a little more problematic. That's why there was a sharp decline in these. Of course, I'm always interested in details. When I looked at the details here, I came across something interesting. Inflation increased faster in January last year compared to December and November. We are going with a similar trend. After the rise in January, there has been a downward retreat.
In this context, there may be a decline in monthly inflation after this month. By the way, inflation was 0.4 in February last year. So, at the beginning of next month, it will reach 3.1 - 0.4 = 2.7 as a base if inflation reaches its normal monthly trend of 0.2. Next month we will encounter inflation below 3% for the first time and I think this is frankly highly likely. Because I don't think homeowners will continue to bullshit like this, and now what's even more interesting is that inflation in America actually continues to fall.
In this period last year, inflation was 6% and now it is 3.1%. There are fluctuations in between. There are places where it goes from 3% to 3.22% and 3.7%. We're back to 3.1. I hope that next month we will go below 3% for the first time. Will we get down to 2%? Our deadline for 2% is 2026 anyway. So we are in no rush. Therefore, things are going as the FED expects. But this trend has put a weapon in the hands of the FED regarding interest rate cuts. The FED does not want to reduce interest rates and now they have a weapon in their hands. There's an excuse they can use. As a matter of fact, this was immediately reflected in the stock markets. For example, the interest rate cut expectation in March was 23%, but it has now reached 9%. The interest rate cut expectation in May has increased from 54% to 35%. The interest rate cut expectation in June was 52.2%, but it has now reached 51.2%.
In other words, the market has largely given up on March. Maybe May, the main issue is left to June. I haven't given up on March yet. But it is useful to accept that the probability is weakening. I also think that the FED will use yesterday's data as an excuse. Unless shocking data comes in February, the March interest rate cut is off the shelf. We were wrong about this. Now we will look at May. We will see what will happen in the following months. But the interesting thing is that the market had already priced them. If you remember, at the beginning of the year, the market was expecting 6 interest rate cuts this year. The president of the FED insisted that no, we will cut it three times at most, and where we are now, the market is in agreement with the FED.
But it was already going upwards despite the fact that the market had priced in the FED's 3 interest rate cuts for a long time. For this reason, I do not expect a strange decline in the stock markets. As a matter of fact, when we look at the futures right now, I see that we are 0.15% positive in technology stocks. So everything seems to open today on a positive note. Because the market looks at the issue like this. Okay, so yes, inflation is a little higher than expected, but ultimately it is 3%. The American economy will not collapse with 3% inflation. This may be an excuse for the FED to keep interest rates a little higher, but the economy will not collapse. In addition, the economy is vibrant and company balance sheets continue to be extremely good.
Almost all of the companies I like have opened their targets. Companies are being somewhat conservative in their expectations for the future. Their stocks can be punished harshly in the market. But generally good results always come. Secondly, it is clear that there is no recession in America. In this situation where employment is strong, as an investor you look at the issue this way. What if there is 3% inflation, what if it is not 2%? It is heading there, in fact, the downward trend continues, there is no recession and the market is alive. There is enthusiasm in brand new technologies such as artificial intelligence and growth is currently visible. Then I won't panic. For this reason, I do not expect such a radical withdrawal in the markets right now.
If there is a bad surprise in inflation in February, we will experience a sharp decline. March is generally a month when markets go backwards. This is a place where the market will now look for an excuse for a sharp correction. But I guess this correction will not be too harsh. It's like we're standing around here somewhere. Maybe a little lower, but there is no situation that will scare the markets yet. As we enter March, markets may find an excuse.
If February inflation does not fall below 3% annually, there will be a reason for that panic. Of course, there is a possibility, I did not like the numbers on many items this month, as I have just stated. But if homeowners stop bullshitting, we will see 2.9% for the first time in February. Some may remember that I stated that there would be very sharp inflation drops in January and February. It happens, so we came to 3.1 from the previous 3.4. I would prefer between 3 and 2.9. For February, I was predicting somewhere between 2.9 and 2.7. I think we will be happy if we go down to 2.9, as it is obvious that we cannot go to 2.7.
But there is another interesting sign that the American stock market will not fall. That is the leveraged transaction rate. In other words, we are not in a situation where people say that the stock market will rise very high and they should enter the market with leveraged transactions. Look, there was this incredibly leveraged transaction in 2008, people made transactions with incredible debt, and then the collapse came. There is no such fomo right now. Currently, most of the rise in the markets comes from spot purchases. So yes, I am still waiting for a correction, but that correction is technically the result of going too fast.
Secondly, companies are profitable, there is no problem with company balance sheets. Therefore, I see no reason for an overly harsh correction. We will definitely make a correction. Technically it requires this. The current correction is not quite that. This looks like a slight fix. I expect it in March, but I don't expect much downward movement in stock prices until then. There is no change in my S&P 500 5200 target for the end of the year. In fact, the market is so strong that I may even consider raising that target by looking at the movements in the coming days. Now, of course, it is very possible for me to be wrong about all of this.
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