Good Wednesday AM on this best day of the week,
Some great insight from Bloomberg this AM on inflation. Keep in mind that despite CPI coming in as expected, the big news weeks will come at the end of the month and it is the biggest week we see happen only four times a year. We will get both GDP and the FED rate decision within the same two day period. That is still a couple weeks away and it does give us time to spark at least a small come back.
Happy CPI day. The consensus estimate is for an acceleration of the headline number from 6.8% to 7.0% was right on the money. Core is expected to rise from 4.9% to 5.4% (it actually came in at 5.5). While a 7% number got a lot of attention, at this point, the sequential pace is probably more important to watch. As mentioned, with each succeeding month on a rolling 12 month basis, the previous 13th month which had lower inflation drops off. Economists expected a 0.5% gain month-over-month, which would match last month. Regardless of expectation, that is a very hot number. CPI Day really is the new Jobs Day. That’s been true for a while, but it’s only getting more obvious that this is the main event right now, in terms of what people are thinking about in markets and at the Fed, and arguably among the general public. At the end of last year, there was a lot of attention paid to when Jerome Powell said the word “transitory” had outlived its purpose. In his testimony yesterday, Powell said this: “We can begin to see that the post-pandemic economy is likely to be different in some respects.” To some extent, this could be interpreted as a signal that even when the pandemic fades, it’s not so obvious to him that inflation will come down. Many parts of the market are still running crazy hot. Apparently it’s almost impossible to get a new garage door right now. If you wanted to make the case that rate hikes are helpful, perhaps you could argue the housing market is insane and that higher rates would cool things down. The counterargument is that raising rates at the short end wouldn’t necessarily make mortgage rates go up, and as such it’s hard to surgically strike housing. Before the financial crisis, some of the craziest years for housing activity occurred during the hiking cycle. And what’s more, the U.S. is arguably extremely underhoused (and under garage doored etc.) and so slowing things down might discourage investment in the space, which would be a long-term blunder. Prices for transportation continue to rise. Trucking prices are going up, and shipping rates from Shanghai to Los Angeles are up over the last month, after a slight dip in 4Q.
An interesting point that Powell made yesterday (as well as in other venues) is that higher labor costs are not driving inflation. In other words, higher prices are not the result (by and large) of companies passing on the cost of labor. However, to the extent that supply is having trouble catching up with demand, higher wages (particularly at the low end) may be helping to spur persistently booming demand. Speaking of rising wages at the low end, I’ve been thinking about something that Goldman’s top commodity strategist Jeff Currie said in an Odd Lots interview back in October. He noted that previous commodity supercycles have been driven, in part, by booming demand among lower income groups, whose consumption (he argues) is more commodity intensive than the consumption of wealthier consumers. BTW, if you haven’t seen the chart, it’s really striking the degree to which the 1st quartile (the lowest) of wage earners are seeing gains rapidly oustripping the other quartiles. You can see this is basically the opposite of the several years post-Great Financial Crisis. There’s an interesting question of whether this is a new normal, or something distinct to the pandemic economy, and the difficulty it’s created in hiring for things like restaurants, warehouses, and elder care homes.
A quick note on cars. Used car prices (white line) continue to go straight up (though the pace is slowing a bit). Meanwhile, due to the the chip shortage, U.S. new car sales (yellow line) are way below pre-pandemic levels. This is probably one of the cleanest examples of something that should “normalize” at some point, as the big manufacturers catch up on production.
Finally, it’s striking to me (and I mentioned this yesterday) how hard it is to anticipate the relationship between inflation/Fed/macro and the markets. Despite rocketing inflation, and the Fed changing its posture over the course of 2021, the stock market did fantastically. Yes, a lot of growth tech got clobbered, and higher rates may be part of that, but also a lot of that is just crowd behavior. There’s only so far you can go connecting the performance of various SPACs, AMC, and Dogecoin to increases in the dot plot.
Please remain safe and healthy.
