pebblewriter

Tag: fed

  • Still Not Transitory

    At some point – perhaps after six months of hot inflation data – the Fed will be forced to admit that inflation pressure are not transitory. This morning we saw evidence that March personal incomes spiked by 21.1%, the most since 1946. Personal spending for the month shot up 4.2%, the most since last June. And, PCE’s 2.3% is the biggest since 2018.

    S&P futures are calling BS on the whole modest/transitory inflation story – off over 20 points so far.

    And, VIX’s bullish (bearish for stocks) 10/20 cross hasn’t gone away.

    continued for members… (more…)

  • Not Transitory, Not Even Close

    If gasoline prices remain where they are or continue to rise, Powell will be just plain wrong about inflation being transitory. This is what to expect if gas prices were to flatline at this level through December. Unless most of the other components of inflation were to nosedive, CPI will remain well above 2% for the remainder of the year.

    Persistent enough for you, Mr. Powell?

    But it doesn’t matter. At least not yet. Although the (flawed) CPI data is more relevant to almost everybody, the Fed focuses on PCE, which mutes the reported inflation even more than CPI.  March PCE is due out tomorrow, and should continue not to alarm anyone.

    In addition, the blowout 3%+ April CPI won’t be reported until May 12. The Fed might roll the dice and leave prices where they are, hoping that they can control the fallout from truly alarming numbers.

    Or, we could see some preventative price action in the futures starting as soon as Sunday. The third option, of course, is the good old “miscalculation” of oil/gas prices, resulting in a CPI print that’s not so scary. They’ve done it plenty of times before.

    continued for members… (more…)

  • The Fed’s Clever Misdirection

    If you were playing a drinking game this morning keying off the word “transitory” you’d have passed out by now.

    Seemingly everyone is talking about inflation these days. They all want to know whether inflation will be transitory (as Jerome Powell repeatedly insists) or persistent. When it comes to markets, this is the wrong question. I’ll explain.

    The federal government threw ordinary Americans under the bus 40 years ago when it began altering the process by which inflation is measured and reported [for more, read John Williams’ excellent primer HERE.]  Cost of living increases (and interest rates) have been tied to this muted CPI data, meaning that consumers have had trouble keeping up with actual increases in rent, food, gas, medical care, etc. which have run about 10% lately. It’s a key reason the middle class has been steadily shrinking.

    If the Fed/government were determined to keep actual inflation at or near 2%, they would simply limit the increases in oil/gas prices which are largely to blame for runaway inflation as they’ve done quite successfully in the past.

    Since CPI data collection and reporting has become so convoluted, though, the MoM and YoY increases in oil/gas prices have been the primary drivers behind the reflation narrative which is responsible for this past year’s margin expansion/recovery. In other words, the Fed has needed these sharp rises in energy prices to avoid disappointingly low inflation.The other issue, of course, is that stock market performance is joined at the hip with oil and gas prices. Crash them, as was done in late 2018 or early 2020, and you’re likely staring down the barrel of a equities correction.

    Let them spike higher, though, and you run the risk of soaring inflation and interest rates. At least that’s the way it used to work.

    Over the past 10 years, however, there have been many disconnects. Importantly, they have much less to do with the ebbs and flows of economic activity than they do with managing (usually suppressing) interest rates.

    Regular readers know that the Fed now faces an important test. Thanks to last year’s crash, April’s YoY increase in gasoline prices should be around 60% and that (after averaging 1.2% since the May 2020 lows) CPI could top 3-3.5%. What might this do to interest rates?

    CPI has climbed nearly back to its 2018 highs. But, despite quadrupling over the past year at a rate of increase which has never been seen in our lifetimes……10Y yields (1.6%) are still less than half their 2018 highs (3.25%.) How could this be? Hint: it’s not because the increase in inflation is transitory.

    Here’s another little hint.

    Bottom line, whether or not inflation is transitory doesn’t matter nearly as much as whether or not the Fed can convince bond investors algos to ignore the sharp rise in inflation that will be reported in two weeks.

      *  *  *

    The 10Y has been vitally important to markets and the Fed. So, it wasn’t about to leave things to chance, for instance, when it nearly broke out of a very long-term channel in October 2018. As we expected, oil/gas prices not so mysteriously crashed in the nick of time – causing interest rates to also crater.continued for members…
     (more…)

  • What Inflation?

    The Case-Shiller Home Price index rose 12% YoY – the fastest pace since February 2006 – meaning even fewer Americans have a shot at purchasing or renting a house. Ironically, the burden falls mostly on the low-income families that the Fed claims to be most concerned about. Thank goodness we don’t have an inflation problem.

    In unrelated news (not), futures notched a new all-time high overnight and have essentially busted the little H&S Pattern that might have resulted in a massive (sarc) 1.8% selloff.

    continued for members… (more…)

  • Update on Oil & Gas: Apr 26, 2021

    March durable goods orders disappointed this morning, coming in at 0.5% versus the 2.3% rebound expected after February’s -1.2% flop.

    We couldn’t help wonder whether the data were somehow related to the first (tiny) breakdown in RBOB prices since the Mar 23 lows.

    Given that oil and gas are poised to deliver a huge increase in CPI for April, this might be a good time to review where we are and where we’re headed.

    continued for members… (more…)

  • Charts I’m Watching: Apr 21, 2021

    Futures are backtesting the 10-day SMA this morning in the wake of the first two day decline since March.

    Look for more to come.

    continued for members… (more…)

  • Moment of Truth: 2021 Edition

    With various indices reaching or nearing important overhead resistance, today is shaping up as a moment of truth for a market which has delighted in head fakes.continued for members… (more…)

  • CPI’s Head Fake

    This CPI data is significant in that it shot up over 2% – the highest since 2018 when the prints of 2.95% (July) and 2.70% (Aug) sent the 10Y up to 3.25%. But, it’s the inflation happening right now, which will be reported next month, that the Fed is worried about.

    As we’ve anticipated, March’s 2.6% YoY print was largely the result of a large (22%, should be 28%) increase in gas prices. Though clearly non-transitory food, utilities, used cars and medical services all played an important role. The data next month, however, will put this to shame. As things stand now, April 2021’s gasoline prices (2.77) are up a whopping 60% over 2020 prices.

    As we’ve discussed many times, this should put CPI at over 3% – perhaps closer to 4%.

    The Fed seems to be betting that it can divert attention from the coming data. And, maybe they can, as bond prices seem to be immune to this data and the recent blowout PPI.

    But, it remains to be seen whether the usual algo tricks will be able to handle a CPI print of over 3%.

    continued for members…

    (more…)

  • Calm Before the Storm?

    There are many parallels between yesterday and Jan 26, 2018 – the calm before a vicious 10-day 11.8% storm.  The obvious one is that SPX is back to the top of the large yellow channel dating back to the 2009 lows.  Then, as now, this occurred shortly after SPX had bulled its way through a notable Fibonacci extension.There are other significant similarities.  Recall that then, as now, inflation was running hot due to a dramatic, extended rise in oil and gas prices which accompanied a dramatic, extended drop in the US dollar.  From US Dollar: Capitulation posted on Jan 26, 2018:

    …inflation fears remain a problem. In order to relieve those fears, oil and gas would need to drop — especially from the BoJ’s perspective. …they’re both far enough above Jan 2017’s prices to have generated adequate inflation for Jan 2018.  Needless to say, a 10-15% decline in CL/RB would be a drag on stocks, which are no doubt considering a backtest of the 2.24 Fib extension.

    The “inflation problem” in January 2018 was somewhat different from the one facing the Fed now. After months of CPI exceeding 2%, rising oil and gas prices threatened to push it and the 10Y up to 3%. It finally topped out at 2.95% and the 10Y reached 3.25% a few months later.

    Now, we face a dramatic spike from below 2% in February to over 3% in April unless oil and gas prices plunge right away. I remain convinced they will, but the clock is ticking.

    The Fed has said it sees the rise in inflation as transitory and is thus not concerned. More importantly – we should not be concerned. True, the YoY spike in gas prices will pass as the April 2020 plunge falls out of the comps. But, thanks to the Fed flooding the zone with cash, oil and gas aren’t the only problems. Most commodity prices are back above where they were in 2018 and are still rising.

    And, of course, the national debt that weighs in the balance is now over $28 trillion compared to only $20 trillion back then.

    Ordinarily, I might be tempted to ignore such patterns as the rising wedge in place in ES. Maybe not this time…

    continued for members… (more…)

  • Known Unknowns Strike Again

    I’ve glanced wistfully over the years at announcements of runs I’ve enjoyed in the past: countless 5Ks, 10Ks and a handful of marathons. Together with high school football, college rugby and too many pickup basketball games to count, they had bestowed me with the knees of a senior citizen well before any gray hair clocked in.

    But, 2020 was a transformative year. I had one knee replaced, then the other – which of course made my shoulders jealous. Two shoulder surgeries later, I felt better than I had in years – racking up 40-50 miles per week during which I occasionally snuck in a few miles of running (okay, shuffling.)

    When the UCLA Anderson School of Management email arrived announcing a virtual run for charity, I figured it was time to put my surgeons’ handiwork to the test and signed up for the half marathon.  Though it was 24 degrees when I laced up the Sauconys Saturday morning, I felt fantastic.

    The knees were rock solid, barely raising a fuss. The most recently repaired shoulder – still in a sling – grumbled a bit under its breath, but acquiesced.  At the halfway mark, I even picked up my pace. That, as it turns out, was a mistake.

    The known risks weren’t a problem. It was the known unknown ones  – the Morton’s neuromas I had forgotten about because they stopped hurting years ago when I was forced to stop running – that blew up my performance. I walked the final five miles, wincing with every step.

    So it was with the Archegos fiasco. Without a doubt, someone at Credit Suisse and Nomura had given at least some thought to the size of the virtual position Archegos might have amassed and the possibility that it might have made similar bets at rival banks. Certainly they had done the math on their own position. So why the billions in losses?

    Could it have anything to do with this guy?

    For the past 12 years, the Fed has offered an implicit (and often explicit) assurance that nothing bad will happen to equity investors. That’s the carrot. The stick is that bond returns have been pounded into the proverbial dirt, offering negative nominal yields in many cases and negative real yields in even more.

    Together with other central bankers, treasuries, and their proxies, they have backed up that assurance with intervention that was once considered unthinkable except under the most extreme circumstances.  Consider the March 2020 lows.  Is it a coincidence that the Dow bottomed out at 18,213.65, a meager 39 points (0.2%) from the lows registered on Nov 9, 2016, the day after the presidential election?

    And, while we’re talking about November 9, 2016…how is it that VIX suddenly collapsed even as the futures screamed southward, off 4.5% in the wake of the news that Trump had won?  This would be tantamount to calling your insurance agent to cancel your flood insurance as a hurricane is bearing down on your beachfront cottage.

    VIX had spiked 55% within an hour or so. But, it suddenly reversed and gave up all that and more even as ES was still melting down. It even managed to break down from the rising channel it had established 4 months before.

    After a few weeks of being mercilessly hammered at every turn, VIX would reach levels not seen since February 2007. Its “breakdowns” would eventually become commonplace whenever stocks reached significant resistance or needed help in the face of inconvenient news or economic data.The Fed’s message is clear, and the algorithms have taken it to heart. But, it is not without consequences.  Many stocks have risen well above their Feb 2020 highs even though their earnings are nowhere close to where they were a year ago. The prices of many commodities have also soared, spawning a coming spike in inflation to over 3%. Ultra-low mortgage rates have driven housing prices out of reach for many.

    Perhaps most concerning, the Fed is playing a dangerous game of chicken with the bond market in the midst of an unprecedented explosion of debt. New issuance is running about $650 billion per quarter.  Who’s going to buy all those treasuries, knowing that they’ll receive negative real yields now and face substantial interest rate risk as inflation spikes higher and the Fed has to taper or even [he shudders] raise rates?

    continued for members… (more…)