One Bank Spots A “Major Development” In Today’s Inflation Report
The latest CPI report came in hotter than expected, with Core CPI rising 0.24% mom in September, bouncing back from the 0.1% rise in August, and keeping the Y/Y rate steady at 4.0% (4.03% unrounded) yoy. Headline inflation rose 0.41% mom, above the 0.3% consensus estimate, which bumped up Y/Y to 5.4% from 5.3%. Energy prices soared 1.3% mom and food spiked to 0.9% mom.
Taking a closer look at the report, BofA’s Alex Lin writes that “a major development in this report was a notable acceleration in OER to 0.43% mom and rent of primary residence to 0.45% from its prior 0.2-0.3% mom trend.” To be sure, this is hardly a surprise, with this website warning last month that the surge in rents meant an OER spike was just a matter of time.
Lin echos this today and writes that “given strength in the high frequency rent data, we believed it was only a matter of time before the CPI rent components broke out higher. While one month does not make a trend, this is an early signal of stronger persistent inflation pressures materializing, ultimately supporting continued above-target inflation over the medium term.”
All we can add to this is that if OER simply follows already realized rental price increases, OER is set for an orbital liftoff similar to that enjoyed by William Shatner just now.
Going down the list, BofA notes that medical care was an underwhelming -0.1% mom as health insurance remained a drag of -1.0% mom; to BofA, this indicates the BLS did not begin to incorporate the 2020 data just yet, but instead delayed it to October which means even more pent up official price increases on deck. Outside of health insurance, hospitals cooled to a 0.1% clip and professional services declined by -0.2% mom.
Surprisingly, core commodities were mixed this month suggesting muted transitory inflation from supply shortages. On one hand, both new cars and household furnishings & supplies rose 1.3% mom, education & communication commodities increased 0.6%, and medical commodities were up 0.3%. On the other hand, used cars fell -0.7% mom, apparel tanked -1.1% mom amid unfavorable seasonals, and recreation goods decreased -0.2% mom.
As we discussed earlier, used cars will turn higher in coming months as Manheim wholesale prices rebounded, ending a 3-mo streak of declines and modestly surpassing the prior high.
Meanwhile, reopening pressures were a drag as lodging declined -0.6% mom, airfares slid -6.4% mom, and rental prices fell -2.9% mom (looks like nobody at the BLS tried to book a flight last month). Broader transportation services were down – 0.5% mom, with motor vehicle insurance of +2.1% a positive offset.
As BofA summarizes, “overall the positive surprise in persistent inflation suggests we remain in a hot economy, which could prompt the Fed to move sooner.” Meanwhile higher energy and food prices but mixed core commodities may ease some recent concerns about “slowflation.”
Adding to price pressures, transitory prices can turn higher going forward, however, both from supply-shortages and reopening as high frequency data point to an inflection in activity especially with covid fears fading from consciousness.
In short, the print reflected that while transitory factors continue to roll-off, stickier more persistent factors are becoming more prevalent, which the Fed is more likely to respond to.
This helps explain the market reaction – the market reaction was as expected: nominal rates in the front-end to belly of the curve rose as much as 6bps, though the move has partially retraced, while longer dated tenors were little-changed; the sharp bear flattening as short-term yields rose but the 10Y tumbled as the market braced for another rate hike into a stagflation/recession.
The move was concentrated in inflation breakevens though real rates also initially moved higher on the back ofthe print. Market-implied longer term inflation expectations measured by five-year, five-year inflation breakevens were less than 1bp lower following the print. Policy-sensitive rates rose 4 to 5 bps across 2023 expiries, with the market pricing a modestly steeper near-term trajectory of rate hikes.
Finally, here is the M/M heatmap…
… and the YoY.
Failure To Bury “Transitory” Inflation Narrative Risks Sparking Biggest Fed Error In Decades: El-Erian Warns
Failure To Bury "Transitory" Inflation Narrative Risks Sparking Biggest Fed Error In Decades: El-Erian Warns
Authored by Tom Ozimek via The…
Failure To Bury “Transitory” Inflation Narrative Risks Sparking Biggest Fed Error In Decades: El-Erian Warns
Failure on the part of the Fed to toss its stubbornly-held “transitory” inflation narrative and act more decisively to rein in persistently high price pressures raises the likelihood the central bank will need to slam on the brakes of easy money policies much more forcefully down the road, risking avoidably severe disruption to domestic and global markets, according to Queen’s College President and economist Mohamed El-Erian.
“In stark contrast with the mindset of corporate leaders who are dealing daily with the reality of higher and persistent inflationary pressures, the transitory concept has managed to retain an almost mystical hold on the thinking of many policy makers,” El-Erian wrote in an Oct. 25 op-ed in Bloomberg.
“The longer this persists, the greater the risk of a historic policy error whose negative implications could last for years and extend well beyond the U.S.,” he argued.
Consumer price inflation is running at around a 30-year high and well beyond the Fed’s 2 percent target, to the consternation of central bank policymakers who face increasing pressure to roll back stimulus, even as they express concern that the labor market hasn’t fully rebounded from pandemic lows.
The total number of unemployed persons in the United States now stands at 7.7 million, and while that’s considerably lower than the pandemic-era high, it remains elevated compared to the 5.7 million just prior to the outbreak. The unemployment rate, at 4.8 percent, also remains above pre-pandemic levels.
At the same time, other labor market indicators, such as the near record-high number of job openings and an all-time-high quits rate—which reflects worker confidence in being able to find a better job—suggest the labor market is catching up fast. Businesses continue to report hiring difficulties and have been boosting wages to attract and retain workers. Over the past six months, wages have averaged a gain of 0.5 percent per month, around twice the pace prior to the pandemic, the most recent jobs report showed.
Besides measures of inflation running hot, consumer expectations for future levels of inflation have hit record highs, threatening a de-anchoring of expectations and raising the specter of the kind of wage-price spiral that bedeviled the economy in the 1970s. A recent Federal Reserve Bank of New York monthly Survey of Consumer Expectations showed that U.S. households anticipate inflation to be 5.3 percent next year and 4.2 percent in the next three years, the highest readings in the history of the series, which dates back to 2013.
El-Erian, in the op-ed, argued that the Fed has “fallen hostage” to the framing that the current bout of inflation is temporary and will abate once pandemic-related supply chain dislocations will abate.
“It is a framing that is pleasing to the ears, not only to those of policy makers but also those of the financial markets, but becoming harder to change,” he wrote.
“Indeed, the almost dogmatic adherence to a strict transitory line has given way in some places to notions of ‘extended transitory,’ ‘persistently transitory,’ and ‘rolling transitory’—compromise formulations that, unfortunately, lack analytical rigor given that the whole point of a transitory process is that it doesn’t last long enough to change behaviors,” he wrote.
El-Erian said he fears that Fed officials will double down on the transitory narrative rather than cast it aside, raising the probability of the central bank “having to slam on the monetary policy brakes down the road—the ‘handbrake turn.’”
“A delayed and partial response initially, followed by big catch-up tightening—would constitute the biggest monetary policy mistake in more than 40 years,” El-Erian argued, adding that it would “unnecessarily undermine America’s economic and financial well-being” while also sending “avoidable waves of instability throughout the global economy.”
His warning comes as the Federal Open Market Committee (FOMC)—the Fed’s policy-setting body—will hold its next two-day meeting on November 2 and 3.
The FOMC has signaled it would raise interest rates sometime in 2023 and begin tapering the Fed’s $120-billion-a-month pandemic-era stimulus and relief efforts as early as November.
Some Fed officials have said that, if inflation stays high, this supports the case for an earlier rate hike. Fed Governor Christopher Waller recently suggested that the central bank might need to introduce “a more aggressive policy response” than just tapering “if monthly prints of inflation continue to run high through the remainder of this year.”
“If inflation were to continue at 5 [percent] into 2022, you’ll start seeing everybody potentially – well, I can’t speak for anybody else, just myself, but – you would see people pulling their ‘dots’ forward and having potentially more than one hike in 2022,” he said in prepared remarks to Stanford Institute for Economic Policy Research.
The Fed’s dot plot (pdf), which shows policymakers’ rate-hike forecasts, indicates half of the FOMC’s members anticipate a rate increase by the end of 2022 and the other half predict the beginning of rate increases by the end of 2023.
For now the market is pricing in a more hawkish Fed response in 2022
Kimberly-Clark Forecasts Price Increases as Inflationary Pressures Accelerate, Supply Chain Disruptions Worsen
In yet another sign that inflation pressures are proving to be a lot more than just transitory, Kimberly-Clark (NYSE: KMB)
The post Kimberly-Clark Forecasts…
In yet another sign that inflation pressures are proving to be a lot more than just transitory, Kimberly-Clark (NYSE: KMB) — the maker of staple household goods such as Kleenex tissues, Huggies diapers, tampons, and toilet paper— has sounded the alarm over impacts of rapidly accelerating prices and supply chain headaches.
Shares of Kimberly-Clark tanked to a six-month low after the company cut its annual forecast due to rising inflation and supply chain disruptions. Third quarter net income stood at around $469 million, which equates to approximately $1.39 per share, against the $472 million— or $1.38 per share reported during the same period one year ago. The company reported an adjusted earnings per share of $1.62, which failed to meet consensus estimates calling for $1.65.
“Our earnings were negatively impacted by significant inflation and supply-chain disruptions that increased our costs beyond what we anticipated,” said Kimberly-Clark CEO Mike Hsu. As a result, Hsu warned that the company will be implementing price increases across a variety of goods in an effort to offset implications of supply chain woes and subsequent acceleration in commodity costs. “We are taking further action, including additional pricing and enhanced cost management, to mitigate these headwinds as it is becoming clear they are not likely to be resolved quickly,” he added.
However, Kimberly-Clark is far from being the only households goods company to sound the alarm over the effects of global supply chain disruptions and a persistent inflationary macroeconomic environment. Recall, General Mills, P&G, among others, have all issued warnings about impending cost-push inflation, as companies contend with margin compression that is further exasperated by ongoing labour shortages.
Information for this briefing was found via Kimberly-Clark. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
Oil Prices Soar Above $85 as OPEC Continues to Restrict Global Supply
The price of oil soared to $85 per barrel on Monday, as OPEC members continue to restrict supply despite growing
The post Oil Prices Soar Above $85 as…
The price of oil soared to $85 per barrel on Monday, as OPEC members continue to restrict supply despite growing global demand for crude as skyrocketing natural gas prices prompt gas-to-oil switching.
US benchmark WTI futures hit a high of $84 per barrel at the time of writing, while benchmark Brent crude soared to just above $86 per barrel on Monday morning, marking the highest since 2014, as the growing global energy crisis continues to send commodity prices accelerating.
The latest rally comes after Saudi Arabia informed its oil producers that the current jump in oil prices will subside, and that demand for crude could soon crash given growing uncertainty over the Covid-19 pandemic. “We are not yet out of the woods. We need to be careful. The crisis is contained but is not necessarily over,” Saudi Arabian Energy Minister Prince Abdulaziz bin Salman told Bloomberg TV.
However, with natural gas prices repeatedly hitting new record-highs around the world— particularly in Europe, gas-to-oil switching has been on the rise, further contributing to the growing demand for crude just as economies reopen from the Covid-19 pandemic. As a result, Goldman Sachs forecasts that the acceleration in gas prices could boost oil demand by 1 million barrels per day, especially if there is an unseasonably cold winter in the months ahead.
Information for this briefing was found via Bloomberg and Goldman Sachs. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
The post Oil Prices Soar Above $85 as OPEC Continues to Restrict Global Supply appeared first on the deep dive.
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