On of the biggest leading into 2018 was to get ahead of the consensus and go bearish on emerging markets, particularly China, Turkey and Brazil.
Typically, in higher inflation environments, money flows head to emerging market assets; and it's particularly why EEM has had such a great run since China induced the largest stimulus known to man in 2016.
When taking this into account, we'd expect continued money flows into emerging markets and that tends to keep interest rates elevated.
There is a strong relationship of these flows into EMs and Chinese monetary policy. When policy remains loose and accommodation, EMs get a boost and inflationary pulses spread. When they tighten, the opposite happens.
However, given the outlook on many EMs, I knew that U.S. inflation was likely playing out its late cycle movement.
The problem now is China is trying to deleverage their banking system, which is roughly 400 percent to GDP, while loosen enough to keep the economy from a tail spin.
Here's the kicker: EEM peaks, on average, 6.5 months prior to U.S. inflation peaking which is how I top-ticked headline at 2.9 percent.
EMs peaked in January, and headline inflation peaked in July. It's now down three consecutive months to 2.3% My call is it falls below two percent by the end of Q4-2018.
Just take a look at me calling the top in oil too: