Just before the stock markets open today, the United States February inflation data comes out. The markets are in fear, will there be high inflation and will the markets begin the long-awaited decline? Or continue on your way? I interpreted it for you. Let's remember the main trend of inflation. Headline inflation continues to decline. The decline continues in 2024, although the decline has slowed down. The decline in core inflation continues. It has also tended to slow down a little in the last 2 months, but the decline continues and the indicators we have reached now are not far from the FED's 2% target. We started from 10% and went up to 3%. So, there is nothing to be afraid of, that issue is clear in inflation right now. But February inflation seems to be a bit unpleasant. First, let's look at market expectations. When you go to investing.com, you can see the average expectation of economists.

Here, monthly inflation of 0.4% is expected for February. The annual reflection of this will be 3.1%. The way of calculation is, first of all, you look at the January 2024 headline inflation, which is 3.1%. From there, you deduct the February inflation of 2023, you deduct the base, so it was 0.4%. You add the expectation for February 2024 to 0.4%. So 3.1 - 0.4 + 0.4 equals expectation 3.1%. Thus, inflation remains at the same level annually for 2 consecutive months. When we look at the core, the FED gives more importance to the core. Energy prices and food prices are not taken into account here. Because the FED thinks that the volatility in them is too high and does not reflect inflation well. The expectation here is a slightly more positive expectation of 0.3% for February. When we look at the previous month, annual core inflation was 3.9%. We will drop from there again in February 2023. Core inflation in February 2023 is 0.467. In this case, economists say we will reach 3.7% inflation. This is above the Fed's 2% target, but it was 3.9% last month. From there, as long as the downward trend continues, there is nothing to panic about.

On the other hand, Truflation says that inflation is actually at 1.66%. This last number, of course, was giving a little higher in February, close to 2%. Not even close to 3%. Truflation is a private organization and tries to collect inflation figures from the market on a daily basis. He was previously quoting numbers much higher than the FED, and Truflation was eventually proven right. It has been quoting numbers well below the FED for a long time, and the FED is getting closer to that point step by step. But now the gap has widened considerably: 1.66% to 3.1%. So there is quite a difference. Another institution whose inflation forecasts have been quite successful recently is FED Cleveland. They predict inflation based on Nowcasting, that is, today's data. They have a methodology close to Truflation, but the results are very different. They expect February monthly inflation to be 0.43. In this case, we will come to 3.12% annually. They expect the core to be 0.32%. In this case, we will reach 3.7% in annual core.

So which one of these should we believe? Truflation or economists and Fed Cleveland? If we look at some details, it seems like we can develop our own opinion more easily. I study inflation line by line and therefore have a deep understanding of many details. The most important thing is this: If we exclude housing in the United States, monthly inflation is 0.1%. It was 0.1 in the month before that. In the month before that it was 0.0. When we look at the average of these 3 months, there is 0.1%. When we annualize it, we come to an inflation rate of 1.2%. In other words, America has actually already achieved its inflation target when we leave aside accommodation. But when housing comes into play, the numbers suddenly deteriorate and we encounter higher inflation like last January. So, what is housing and where is the problem with the housing item and, in my opinion, where does the difference between Truflation and economists come from? Now let's go into some detail about this.

First of all, when it comes to housing, there are three basic items that concern us. One of them is rent of primary residence, that is, they go here and ask the tenants who have signed a new contract, how much has your rent increased compared to last year, and the tenants say 0.4 per month. It has been going like this for the last 3 months. Before that it was 0.3. In other words, it is steadily going to the level of 0.4. Frankly, I'm a little disappointed here. We were expecting this to drop, but we'll get to that in a moment. The second important item is lodging away from home, that is, shelter outside the house; Like hotels and motels, there is a pretty high monthly inflation there. But it has very little effect. I'll come back to it later. Also, owners equivalent rent of residences go here and ask people living in their own homes. If this house was not yours but a rental, how much do you think the rent would increase? And they say here it is 0.6% per month. Now, if you pay attention, the number 0.6 when asked to homeowners and 0.4 when asked to tenants are very different from each other.

One reason for this is that homeowners always consider their properties to be more valuable than they are. But actually, when we looked at it on a monthly basis, there was not that much deviation. For example, when we went to the previous month, the rent of primary residence was 0.4. The homeowners thought the same way. The month before that, homeowners were thinking 0.5. By contrast, tenants were reporting 0.4. So there was a difference, but 0.6 versus 0.4. So there was no 50% difference. Where does the difference come from? Very interestingly, we have just learned that in the last month's reporting, while in the past, mostly apartment owners were asked for their opinions on inflation, this month it was mainly asked to people living in villas. We don't know why it is done this way, but it has the following effect. Houses in villas do not change hands easily. Apartment rentals change much more frequently. First of all, in this respect, it is quite normal for villa owners to say a higher number.

Because they've been sitting there for a long time and they're not super aware of the market. They only hear that inflation is high. Second, those living in villas do not represent the majority of the American population. In other words, the majority actually live in apartments, and this detail was not given when reporting inflation. Later, when the difference between tenants and homeowners was questioned a lot, the Statistical Institute of America had to make this statement and did not explain much, it said this, this is what we did. They did not say why they did it or why the inflation calculation logic changed. This was an issue that made me super uncomfortable. Because we think that the numbers we see here continue on the same basis, and even if there is a change in this basis, we will be informed. Turns out it wasn't, and its impact on inflation is horrendous.

Because what homeowners say accounts for 25% of the entire inflation calculation. It alone accounts for 1 in 4. So a tiny deviation here changes things completely. As a matter of fact, according to this calculation, if homeowners had said 0.4, that is, if they had thought the same as tenants, annual inflation would have actually decreased significantly last month. I cannot understand this. How did the FED sign such a thing? How those who prepared this report signed such a thing is very controversial. This radically affects inflation calculations. Because if you are making such a change in the item that makes up one quarter of inflation, the rest is already over. It would be beneficial for an institution that provides reports that affect the course of the entire market to be much more careful and transparent.

On the other hand, it is also true that the decline in rents is not going as well as we expected, no matter how we look at it. Because my guess was this. They measure current rent levels from homes listed on their website, and they tell us rents will peak in 2022. We are in a sharp decline from there. However, the rent index used by the FED in its calculations follows this behind. In other words, when it started to rise, it followed from behind, it came from behind, and when it started to decline, it started to follow later. The peak is January 2022. The data used by the FED corresponds to the sixth - seventh month of 2023. The main reason for this delay is quite simple. In one of them, listed houses are checked daily. In the other case, contracts are examined.

It is normal for contracts to arrive a little late, but the annoying issue is this; I thought that this sharp decline would be quickly reflected in the reports used by the FED. It was not reflected in any way, and the worst part is that, as of now, the decrease in rent inflation in the three indices seems to have stopped. Their inflation levels seem to be slightly above the FED's 2% expectation, around 3.5%. In this case, the decrease in inflation that the FED includes in its calculations may stop completely or slow down. So, frankly, there is still a possibility that it will drop a little more due to the delay. But since the decline in real numbers here has now stopped, this is a factor that breaks our positive expectations for rents.

I have to be honest about this, frankly, I thought that the sharp decline in inflation in January and February 2024 would continue. Since base inflation was also high, I believed that when the two combined, we would experience sharp inflation declines. I can say that I am disappointed here. One reason for this is probably the increase in the number of immigrants in America. They have literally crossed the borders and many immigrants are pouring in. This does have a positive impact on the labor market though. But it negatively affects rents. Because there is a very high demand for houses, I guess that's one reason.

The second reason is that 3% - 4% inflation has become fixed in people's minds, and therefore they do not accept lower rents. But in any case, this is an issue that slightly distorts our expectations regarding inflation. Another negative news regarding inflation in February comes from oil prices. At the beginning of February, oil prices were around 73 dollars. When we look at the closing date of February 1. As February ended, they approached 78 dollars. So, there is an increase of almost 10% here. It can be argued that it is immediately reflected in the pump. But this is also one of the issues that will put pressure on inflation.

We had two items that kept inflation high last month. Automobile insurance. There probably won't be much of a decrease in auto insurance. Because these are the numbers that insurance companies know at the beginning of the year and they do not move downwards easily. Also, inflation in health expenditures was high. Frankly, I do not foresee a serious decline there either. Health expenditures depend on the relationship with the state and the contracts, and they do not go back. In other words, there seems to be no decrease in rents, which are the three main items that kept inflation high last year. I don't expect much from auto insurance and health expenses anyway. The price of oil has risen. This may push inflation up slightly in many items. There is also positive news about this.

For example, the price decline in second-hand cars continues at full speed. On the other hand, we know that there is deflation in China. Therefore, inflation decreases may occur in products imported from China, and on the other hand, there are also increases in labor productivity. They may also be positive, but it is frankly difficult to expect a very positive inflation in February. All numbers show us that, unless there is a big surprise, inflation is close to January in February. Things could change only if the homeowners relented. We will see that today when the inflation numbers come out.

As of last week, FED Chairman Powell, while giving an account to the American Congress, said that we are not far from a decrease in interest rates. We need some more evidence. He said that as we gather evidence, we can initiate interest rate cuts. This is what caused the stock markets to go up very quickly at the opening on Friday. Then technically they touched some tops, some resistance, and they let out a little bit from there. There is also this week's inflation fear. With them, the market ended slightly negative.

But actually what Powell said was super positive. He also made a detailed statement and said that we do not need more positive news that inflation will fall even faster. If the current level of news continues, it is sufficient. The last news about inflation came in February. He says they are enough for us. So, according to my prediction, March will not be much worse than February. It looks like we'll be arriving somewhere close. In this case, the FED chairman is actually giving his message. He says if we stay at these levels, we can reduce the interest rates. We don't need to wait for 2%. The news that we are heading there is enough for us. We don't need super new good news for this either. The current level of news is sufficient.

I think this is of course a super positive message and the stock market was already falling that day. But on the other hand, 10-year interest rates were also falling. Because the market interpreted what Powell said very carefully. Another good news that pleased the markets on Friday was about employment data. In terms of employment, unemployment in the United States has increased slightly. There is an increase from 3.7% to 3.9%. Markets love this because the FED, remember, has two priorities. On the one hand, it is struggling with inflation. On the other hand, unemployment should not be allowed to increase excessively. There is a belief that a slight increase in unemployment will put pressure on the FED on the interest rate side.

The second good news is that there is not much increase in wages. The expectation told us that there was a 0.2% increase in wages month on month, while hourly wages came in at 0.1%. It was expected to be 4.4% year over year, but it came to 4.3%. On the one hand, there is a strong employment market at 3.9%. Actually, unemployment is a very good number when we look at the basics. But this has little inflationary effect. Because there is no significant increase in salaries. Weekly working hours remained stable compared to the previous month. Again, this was pleasing, but now let's look at the numbers a little more carefully. Because strange things are going on.

Firstly, when we look at it month by month, there is a serious jump in employment. 200000 was expected, 275000 came. On the other hand, there is an increase in unemployment from 3.7 to 3.9. The reason is retroactive corrections. America's statistical agency said that there are errors in the data of the past months. "When we correct them, we see that the unemployment situation is actually worse than we thought," he said. I can't understand these unemployment data numbers anyway. We are hearing very contradictory numbers from different institutions. But eventually the truth comes to light.

Employment in the United States is weaker than we expected. This is a good thing because not only is it weaker than we expected, but it is not a disaster and is on a deteriorating trend. These are issues that will pressure the FED to reduce interest rates again. There are rumors that at least increasing the interest rate will completely reset it. Because there is currently a deterioration in employment markets. There is distortion, but it's not too terrible. In other words, unemployment is at its lowest levels since 1969. They may leave unemployment rising a little further.

So even if it exceeds 4%, I don't see anything that would cause much panic. This brings us to the super positive scenario that there is no recession in America, inflation continues its basic downward trend, but on the other hand, as there is some fluctuation in unemployment, the FED's hand in increasing interest rates is completely weakened, making interest rate decreases necessary. Yet another number we like is the increase in workforce participation rates. This is good because even if the market is lively and the need for employees is high, participation in the workforce is increasing. Therefore, it does not create inflationary pressure again. It is also an issue that makes us happy in terms of supply and demand balance. There is no such strange dismissal either. So drastic waves of layoffs could be a sign of recession. There is no such thing. Layoffs continue at a certain average. There are slightly more in the information technology sector. I think it is an issue caused by artificial intelligence. Increasingly, artificial intelligence is taking more and more of people's jobs.

Also, PMI data came last week in America. In other words, the vitality and activity in the production and services sectors in America causes people to go here and ask questions to purchasing managers in these sectors. We are at the level of 47.8% in production. As long as it is below 50%, it means the economy is shrinking. We are at 52.6% in the services sector. This is positive but there is a decrease compared to the previous month. In other words, there is no such vibrant economy in America. We are now seeing signs of slight deterioration in employment. This is again pleasing. On the other hand, there is no recession. When all these come together, we actually get to where we want to be. We are at a level where the FED can start reducing interest rates step by step.

If inflation does not make a dramatic upward jump today and if the increase remains at the levels we expect, based on all this, my expectation is that the market will probably give a downward reaction when inflation becomes high tomorrow. But I think the reaction will not be very permanent. As long as there is no very high inflation. Because there is no disruption to the main story. Our main story continues at full speed. Inflation is downwards, the economy is not collapsing, but it is slowing down, and the FED says we will cut interest rates anyway. Yes, 6-7 interest rate cuts were expected this year. It's clear that it won't happen. It would be better not to expect a decrease in interest rates in March. I thought it might be me before, but the numbers don't show us that.

Inflation remained a little sticky in a few items, although it collapsed in all others. But still, there is no super negative scenario. That's why markets continue to maintain their power. However, if you want to be cautious, I may have a few suggestions. One can switch to some cash. If you want to switch to cash in the American stock markets, you can do this by selling your shares directly or you can go and buy an ETF. These ETFs are among those that invest in money funds in America, for example Schwab has one such abbreviation, SNAXX. Interest rates in America are around 5.5% - 6%, you can earn an income close to that, it can be considered that you deposit money to this ETF annually.

Of course, it would be useful to mention a few alternatives. This could be a way. You can hedge yourself. One way to hedge would be to sell some shares short. I won't do these things. I will buy VIX. VIX American volatility index can protect you well if there is a sharp volatility. I'm thinking of buying a few small options on it.

The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.