“I think over the medium term, we’ll see inflation decline back toward normal levels.”
- Janet Yellen, 7/15/21
Janet served up that slight of tongue back in July in a subtle attempt to begin verbally reframing and slow-walking the narrative around prospective prices away from “transitory”.
“Medium-term” is, of-course, similarly, and as exquisitely, nonspecific as “Transitory” and in the pantheon of purposefully non-descript milestones policy makers are looking at with respect to calibrating policy, it can be slotted in adjacent to…
“substantial further progress’ …. which, by design, is analytically amorphous and meant to be malleable to whatever form the narrative happens to be tilted.
Remember, policymaker double speak master-crafted to say nothing substantive while at the same time placating markets is the game.
Don’t hate the player, hate the game … or just chuckle and accept the game you’re in while pocketing an appreciation that over the “long-term”, serial-intervention, like the market volatility it attempts to stifle, cultivates a stability breeds in instability dynamic (h/t McElligott).
That is, volatility (social-cultural, financial market, etc) suppression masquerading as stability generally represents a slow cumulation of latest risk that carries a not so sneaking tendency to emerge in explosive, slowly-then-all-at-once fashion.
Back to the Global Macro Grind…
In the face of now overwhelming obviousness, Bostic capitulated on the covert reframing of the Transitory narrative ahead of yesterday’s CPI acceleration.
As we highlighted again post-release, it’s hard to know what to say at this point.
It’s been 17 glorious months since we made the long inflation pivot and we’ve performed some commendable linguistic acrobatics in the serial attempt to re-paraphrase the same messaging for quarters as this has literally been the most asymmetric, slowest moving #StickyHigh inflationary train in a generation.
Now, quickly, and because we’re obliged to do the bean counting, let’s both state and visual the obvious.
- Headline CPI = accelerating to +5.4% Y/Y = 159-month high
- CPI, 2Y Avg Growth = accelerating +10bpst to another higher-hihg at +3.38%. Recall, using the 2Y avg growth rate is the lowest intensity means for normalizing comp distortions and getting a clean read on underlying trend.
- How about actual underlying inflation … as in the series actually called “underlying Inflation” by the NY Fed and meant to reflect the broad sweep of price trends domestically. We’ll, that accelerated again, also.
- Underlying Inflation = +4.05% Y/Y = another Fresh RoC ATH.
- Median CPI = accelerating +36bps to 2.78% Y/Y = the breadth of inflation is widening despite ongoing moderation in idiosyncratic Pandemic impacted series.
Rent/Shelter Inflation: “We’re Just Going to Keep Showing This Chart” is how we intro’d the Home Purchase HPI vs Shelter Inflation (12M lead) chart again in the last 4Q Macro themes deck (after showcasing it every quarter this year). Again, the call for the largest component on the CPI basket to begin/continue accelerating was about an easy a call as it gets in macro … and it remains in motion.
Rent of Primary Residence jumped 0.5% M/M while OER increased 0.4%. M/M, helping drive a +40bps acceleration in Shelter Inflation to +3.2% Y/Y. The trajectory here is not going to reverse near-term.
So, New Month, Same (Rhetorical) Question: We are peaking on a RoC basis although many indicators have not even topped yet. Even if we realize a collective cresting over the next month(s), given prevailing conditions, do you really think there is a reasonable chance existing demand-supply imbalances (and the associated impact on prices) fully resolves over the next month or the next quarter(s).
If you ask business … which the Regional Fed’s do for you …. the prevailing expectation according to yesterday’s Fed minutes was:
“Participants noted that their District contacts generally did not expect bottlenecks to be fully resolved until sometime next year or even later.”
And if you ask households, which the Fed also does for you … you get a further baby-stepping in the direction of “un-anchored” in September:
- 1Y Inflation Expectation = +12bps acceleration to +5.31% Y/Y = ATH
- 3Y Inflation Expectations = +20bps acceleration to +4.19% Y/Y = ATH
And if you ask the media … which no one does but that somehow never succeeds in slowing the unsolicited punditry parade …. They are more than happy to force-feed you some stagflationary sensationalism ….
To summarize: Next (analytical) Verse, Same As The First → Inflation = #StickyHigh. TRENDING, not transitory.
Now, quickly on the Growth Side of the Quad equation:
- Covid Case Counts are now down >-50% off peak.
- Mortgage Purchase Applications showed a mini step-function increase over the past 4-weeks (since delta Peak) = +10% and tracking at the highest level since April.
- TSA Traffic (7DMA)= +19% off the mid-September low (Delta (the airline) reporting above estimated load factor and increase in domestic business travel yesterday)
Covid ↓, Activity ↑.
That is about as straight-forward as it gets. And fabricated over-analysis and anchoring on nuance has not been an alpha source pool for macro.
Now, and wrt macro alpha source pools, to close with a notable update: With the incorporation of yesterday’s CPI print our forecast for inflation is for acceleration in 4Q, which (officially) pushes us into Quad 2 to from a GIP standpoint.
To be clear, our Macro call has been for Quad 2 in Q4 based on the signals, and now we’re also seeing the GIP Model migrate into Quad 2 in Q4 as well.
The Signal leads the Quads. The Risk Management view front-runs the GIP inflections.
It’s not analytical slight of hand. It’s just #process.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.46-1.64% (bullish)
UST 2yr Yield 0.28-0.38% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
NASDAQ 14,295-14,817 (bullish)
Tech (XLK) 148.17-154.35 (bullish)
Utilities (XLU) 63.28-65.89 (bearish)
Energy (XLE) 53.27-58.34 (bullish)
Financials (XLF) 37.51-40.17 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 27,111-29,328 (bearish)
DAX 14,989-15,477 (bullish)
VIX 16.76-22.86 (bearish)
USD 92.95-94.56 (bearish)
Oil (WTI) 75.81-82.07 (bullish)
Nat Gas 5.19-6.21 (bullish)
Gold 1 (bearish)
Have a great day out there,
Christian Drake
Macro Analyst
