A Hot CPI Report Causes Problems for Fed, Caron Says

• Wednesday's CPI data is critical for determining whether the Fed will hike rates in September, especially if core CPI comes in hot.
• Higher nominal growth (6.1% in Q1, 7.9% in Q2 via GDP deflator) is driving higher earnings and equity prices, making Fed rate hikes less impactful on equities.
• The 60/40 portfolio is 'dead' due to fixed income's zero to negative returns over the past 5 years and high correlation with equities, reducing its hedging benefit.

Jim Caron of Morgan Stanley discusses the critical importance of upcoming CPI data for the Federal Reserve's September rate decision, noting that strong nominal growth is currently driving higher equity prices. He argues that Fed rate moves are more of a bond market event than an equity market event, and that the 60/40 portfolio allocation is challenged due to poor fixed income returns and correlations.