“A man asked Mozart how to write a symphony.
Mozart replied, “You are too young to write a symphony.”
The man said, “You were writing symphonies when you were 10, and I am 21.”
Mozart said, “Yes, but I didn't run around asking people how to do it.””
No cutesy intro or analytical foreplay this morning. Lets just get into it…
Back to the Global Macro Grind...
I’m a fairly impassioned proponent of Socratic dialogues and rhetorical analysis.
The use of the particular to reach universal consensus is uniquely suited to the mosaic crafting inherent to macro analytics.
It’s also a particularly effective framework for crafting of a cogent narrative without much actual narrative while implicitly shifting the burden of proof to the other side.
Let’s give it a go here this morning using the incremental domestic high-frequency data over the last few days.
We won’t lead with any pre-text so as not to bias the interpretation. Simply internalize the data symphony below & see where your balance of risk assessment falls out at the end:
Prices across the goods and industrial-manufacturing economy have been near cycle/all-time highs for 7 months now. Is 7-months ‘transitory”? With pervasive demand-supply imbalances still defining the labor market and supply chain conditions both locally and globally, is it reasonable to assume this (fully) resolves in the next month … or the next quarter?
Household spending realized an anomalous shift in the direction of goods consumption during the peri-pandemic period. Alongside mass inoculation, domestic services activity saw step function improvement and while Services spending remains depressed on both an absolute and relative basis, Consumption renormalization remains very much in progress. In other words, the demand and price dynamics that characterized the Goods economy in 1H21 remains the rough template for the Services economy over 2H21. Indeed, Prices Paid in the ISM Services series hasn’t even peaked yet. Is it reasonable to assume the prevailing demand-supply imbalance – and the attendant implication for prices – fully resolves over the next month … or the next quarter? (Hint: if Services is following Goods on a lag and Goods is still at the highs after 7-months, then…)
Now, is it similarly reasonable to assume idiosyncratic pandemic inflation and nosebleed growth across things like Airline fares, Auto rentals and Used Autos will prove transitory? Of course...
But what about things like shipping, trucking and freight costs that have certainly not been passed on yet. Can it be transitory if it’s still going up?
Auto rental demand is elastic and your average person doesn’t care or have a visceral reaction to obscure freight cost indices. Not everyone needs to rent a car, but everyone does need somewhere to live. Home Prices are up a rate-of-change record +16.6% Y/Y according to Case-Shiller with Median Sales Prices up a cartoonish +24.4% Y/Y according to the NAR. And according to yesterday’s data from the Fed, 1Y Rent price expectations just made a new all-time high.
Yes, but expectations are finnicky and survey data should generally be passed through some version of a “watch what I do, not what I say” filter. In this case, renter’s know the squeeze is coming. As we’ve harped on recurrently, deurbanization and eviction moratoria drove shelter inflation to multi-decade lows in 1Q. The trend has now inflected and will continue to accelerate as moratoria end and OER/Shelter inflation plays catchup to purchase HPI (chart below). That dynamic is now in motion and will not be transitory.
What do consumers think of all of this? Well, the NY Fed and Univ of Michigan are excited you asked ….
- 1Y inflation expectations (Univ of Michigan) = +50bps to +4.7% Y/Y = 156-month high
- 3Y inflation expectations (NY Fed Survey of Consumer Expectations) = 3.8% = all-time high (back to 2013)
Here’s the thing: When pundits and policymakers talk about transitory inflation, they are generally talking about the elevated rate-of-change in price growth being transitory. But to the extent wage/income growth doesn’t see a commensurate acceleration, then the spread between the rate of change of “transitory” inflation and wages represents a loss of purchasing power. While the rate of change of inflation may moderate and prove transitory, the loss of purchasing power is permanent.
So, is the investible future likely to be characterized by sticky high prices or marked disinflation?
Now that I’ve purposefully led you down the stagflation insinuation path, allow me to present, for proper consideration, a non-tail prospect for a bit of potential Macro Serendipity:
- The Fed wants further substantial progress in the labor market in order to convictedly begin any tapering or tightening campaign … but, in the present instance, further large-scale labor improvement ↑ = Production ↑ = Supply Constraints ↓ = Inflation Pressure ↓ = Need to tighten ↓.
- Given the unique macro condition set prevailing currently, the supply impact associated with labor market improvement may overwhelm the demand impact.
In effect, achieving the threshold criteria for tightening may, in fact, propagate conditions that obviate the need for tightening with the Fed unwittingly ushering Goldilocks in through the side door.
Moreover, the staggered cadence of the global recovery with global reopening efforts following the U.S. in variable succession, helping drive progressive renormalization in global supply chains and a progressive build in external demand, would support the prospect for a lower-amplitude, longer-period cycle.
The realization of the above is, of course, fraught with uncertainties and layered with assumptions, but it’s at least worth considering as the doom narratives proliferate while our model signals a rising probability for a return to domestic Quad 2.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.17-1.39% (bearish)
UST 2yr Yield 0.17-0.26% (bullish)
SPX 4 (bullish)
RUT 2180-2262 (bearish)
NASDAQ 14,606-14,941 (bullish)
REITS (XLRE) 46.10-47.12 (bullish)
Tech (XLK) 152.05-155.47 (bullish)
Utilities (XLU) 65.95-67.94 (bullish)
Energy (XLE) 47.99-51.02 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 27,0 (bearish)
DAX 15,436-15,837 (bullish)
VIX 15.44-19.90 (bearish)
USD 91.77-93.02 (bearish)
EUR/USD 1.173-1.191 (neutral)
Oil (WTI) 65.31-75.23 (bullish)
Nat Gas 3.86-4.25 (bullish)
Gold 1 (neutral)
Copper 4.23-4.60 (bullish)
To growth,
Christian B. Drake
Macro analyst
