In section VII of Psychopathology of everyday life (1905), entitled “The forgetting of impressions and intentions”, Sigmund Freud, the founder of psychoanalysis describes the mental process by which a person can sometimes reject the reality of a perception, on account of its potentially traumatic associations, despite overwhelming evidence. In that specific section, he recalls how he became angry with his wife during a visit to a restaurant. She was listening to a gentleman’s conversation with his neighbors and asking him (Freud) questions that took up the thread of their discussion. A few weeks after the incident, Freud complains to a relative about this behavior, but he is not able to recall even a single word of the conversation of the gentleman – an amnesia undoubtedly determined by respect for his wife.
Sometimes, we, investors, have to endure too much. We prefer to forget. Forgetfulness of lingering price pressures, erasure of painful market drawdowns, dismissal of central bankers’ warnings. If Sigmund Freud had seen January’s “everything rally” (S&P 500 +6.2%, Nasdaq-100 +10.6%, Stoxx Europe 600 +6.7%, Xover/CDX 5yr -60bp/-54bp), he would have screamed Verleugnung! Denial! U.S. inflation is admittedly moderating, but the January CPI showed that the disinflationary process is far from being smooth. The gauge rose 0.5% in January after posting smaller 0.1% and 0.2% gains in December and November, respectively. On a year-over-year basis, headline/core CPI advanced 6.4%/5.6% (consensus +6.2%/+5.5%). Besides energy, several components showed some unexpected strength lately, such as prescription drugs (+2.1% month-over-month) or apparel (+0.8%), in addition to labor-reliant categories like nursing homes (+1.4%) or car repair (+1.3%). Inflation also rebounded at the wholesale level, with the PPI rising 0.7% in January, higher than the 0.4% estimate. The January core PCE price index came as a confirmation of the overall rebound, advancing by 0.6% month-overmonth on both the headline and core (consensus +0.5%/+0.4%, respectively).