Do not forget the Federal Reserve’s “pause.” With the May consumer price index report, the peak inflation narrative suffered a blow. Year-over-year CPI rose 8.6%. This was higher than the Dow Jones forecast of 8.3%. It was a new record high. Core CPI (which excludes energy and food) was 6.0% higher than the 5.9% predicted. S & P 500 futures fell after the announcement. The CPI’s components shelter, food, and gasoline account for half. There are not any signs that these are in decline. The opposite is true. The S & P 500 rallied nearly 10% from its intraday low on May 20 to its recent closing high on June 1. The rally was predicated on two beliefs: that the China lockdown was slowly easing, and the Fed would consider a “pause” after two 50-basis-point hikes in June and July. These narratives are difficult to maintain, unfortunately. The Fed’s end-of-the year futures are at a record high. This means that market participants don’t anticipate a Fed “pause.” Michael O’Rourke from JonesTrading summarized the dilemma for the Fed in a note to clients last night: “The market is not upset about the ECB being hawkish, it recognizes the central bank has been way too dovish and is even further behind the curve than the Federal Reserve. Investors are aware that neither the Fed nor any central bank is willing to swiftly move to neutral. This means policymakers will pursue inflation, tightening their policies for longer periods than they should. Mismatched policies increase the risk of making additional policy errors. The other major market mover – the China reopening story – has been slipping and sliding, as Shanghai and Beijing both reimposed restrictions. Still, hope springs eternal. China’s stocks saw a noteworthy rally as the country began a slow process towards reopening. While Shanghai closed at its best since March, Hong Kong fell only fractionally. A broad basket of Chinese stocks, the iShares MSCI China ETF (MCHI) was outperforming the S & P 500 this year, and up nearly 15% in the past month, while the S & P 500 has been flat.