INFLATION UPDATE – ROOM FOR THE FED TO WORK?
Month on month inflation turned negative for the first time in 12 months and full on disinflation came back to the headline CPI figure this month as energy prices have been hammered over the last few months. As I’ve noted previously, the headline figure is being excessively dragged around by the big swings in energy prices. I had expected the headline to remain firm as the year over year comps with last year’s big spike become increasingly difficult, but I didn’t build a 30% collapse in fuel prices into that model! Welcome to the world of forecasting.
More importantly though, the core CPI reading has remained fairly firm. While the headline has fallen to 1.7%, the core is still above the Fed’s comfort range at 2.3%. The Fed’s target is 2%. The odds of QE3 at the June meeting have certainly risen, but I am sticking to my guns on the call for no QE3 at this meeting. We might see an extension of Operation Twist and a change in language, but I don’t think the current inflation readings are making the Fed that much more comfortable. The headline catches all the attention, but the core is what the Fed is reading.
A more disconcerting development is the full blown deflation that crept into my housing adjusted CPI this month. At -0.95% prices are now declining year over year. This is the first negative reading since late 2009. This has been a fairly good leading inflation indicator over the last 10 years and the current negative reading is certainly indicative of a very weak economy.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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16 Comments
“and the current negative reading is certainly indicative of a very weak economy.”
What if it isn’t the economy.What if European events simply drove up buying of the dollar forcing correlated dollar prices energy/commodities down leading to a drop in cpi. Frankly I have not really understood why a lower cpi reflecting lower energy costs is a ‘bad’ thing. Just means people can distribute their disposable income in adiffernt way,pay down some debt,buy some discretioanary stuff etc etc.Indee I would go so far as to say a lot of the world could stand some lowere energy and food prices for “an extended” period,hope you’re listening friend
“friend” being the bearded one of course.
Yeah but everything is so correlated now, lower energy and food prices probably also means lower everything else (stock prices, employment, sales, etc etc).
In my view, expectations for QE next week have risen too high which means Bernanke May Disappoint Pavlov’s Dogs (http://bit.ly/LeX6zL). The market continues to get caught up on headlines and ignoring the underlying data points. Only time will tell but if inflation follows your chart, I think US stock markets will be very disappointed and bonds may have room to run.
Woj-
I agree with you. “In my view, expectations for QE next week have risen too high which means Bernanke May Disappoint Pavlov’s Dogs (http://bit.ly/LeX6zL). The market continues to get caught up on headlines and ignoring the underlying data points”
But the challenge for me is I have to act. This can cause some stress when you have to invest based on the hope/speculation of further easing(and amount of that easing). That’s the problem. I agree with you..and if someone followed up with your post with…”the fed will not change course given the risks here” I would also grudgingly agree with them. So I have choices. Go long..go short…a combination of the two and or stay in cash and miss the first 3-4% of the move up or down. Each one has a price tag. The issue I have is accepting that I am now moving away from any known investment process and I’m walking up to the cashier and telling her…put $100 on Bernanke to ease. Then I sit in the book with all the other gamblers cheering the Fed meeting next week.
This is ONE of the many problems that the Fed has created by supporting Wall St. when they should have been left for dead back in 2009. We had our chance to let all these dicks go under and the Fed saved them and has been carring their dead weight ever since.
Good points. I think the difficulty you outline is faced by many (most)professional money managers. They are being paid to be invested and being judged on relatively short-term performance compared to benchmarks. This creates pressure to effectively place bets on the Fed’s next action, which is probably where very few (if any) hold any real advantage. The herd mentality of these effects can generate bigger price swings since everyone is trying to predict a singular event. The Fed’s more explicit comments about asset prices has only made these matters worse.
spot on!
If markets are designed to fool the greatest number of people as frequently as possible then all I would note is that long USD trades are as crowded as they’ve ever been.
?? but your statement (contrarian that it might be) would then imply a falling dollar, which has been very highly correlated with a rising equities market? Meaning, when do you go with your aphorism and then ignore your data saying lower equities prices ahead??
conundrums……..
Will continue to say what I said before…
Don’t want to be short once we start posting 2 straight days above 1325. That hasn’t happened yet.
What I will point out is that I thought we’d get last week’s rally early in the week and then that we’d break hard late in the week or early this week. Every time that looks like it’s about to happen, the market rallies.
I feel like I have a ton of analytical edge to being short. However, prices dictate all.
In the end I can see the set-up for equities to go higher – everybody hates the dollar, CRB index on huge support right now, bonds just having gone parabolic / yields at all time lows, everybody short the Euro, etc.
But like I said – will let prices dictate.
There are huge, huge lines in the sand for the SPX here and if they break, it’s time to be bullish.
well, you just got one day above 1325. crazy finish too
thanks B Ferro, market rallies on…….G20 coordination?? holy s***. since when can G20 EVER coordinate! n’theless…..price dictates as you say………. I can’t see any of the powers that be having the will to really fix things, so i’m still leaning on a temporary moonshot if it occurs. ‘Course, i didn’t plan on how long the “temporary” LTRO would last back in january…..
best
rhp
CR–One of your best INFLATION reports
What helps the “Consumer”
Lower Fuel prices– now if we can get Lower Food prices
Lower Housing prices are “fantastic”-maybe that will sell some houses!
Strangly this CPI report helps “BO’s” re-election efforts
Thats the negative
So now we need to print real deflation and the game is set. The FED will go wild and buy mortgages and every sort of crapp, then instate banks to do helicopter drops through cutting principals or whatever…
But this will undo all the work done in commodity markets, and inflation eats us alive again in some months. So here we are, second guessing again what central bankers will or will not do, getting bored of this but… my opinion is: in the short term the FED won’t do nothing, they are already buying treasuries with yield historically low; further down the road, with a lower market (disappointment could trigger a crash) and lower commodities they may do something big, equivalent of helicopter drops.
It is crazy time to be either short or long. Purely gambling because both side has good reasons. Seems to me market will rally to Fed’s meeting, then fall to retest previous low,then start a few months rally to break previous high.
Today’s action is interesting, when market started to roll over as they did in this week, rumour came out about central bank action in order to close high than 1325. I have a feeling it may hit Ferro’s 2 day criteria tomorrow, but that does not mean real rally start.
Interesting point about gambling. Ny ou might be right. I get that sentiment is washed out as are internals. SentimenTrader tells me this every day and their “algo” is a buy. That said, I know a high probability long when I see one and while 1,075 on 10/3 was just that, I don’t have the analytical edge believing the same here. Instead I feel like I have the same edge here on the short side now. Look at a long term chart of the Dow – how many bull markets through history have sold hard, (last summer) rallied to a new high (this spring) and then sold hard again to fall so far below that previous high (I.e., 1363 from 4/11). None. Bull markets are about price momo and we have none, especially the RUT. In bulls, new highs stick and last year’s his don’t get blown out. Wake me up at either 1370. Until then, I’ll gladly give up the first few % of any upside, even if I don’t get to be short. Lastly, bot NOK today. Stop below today’s lows a few %.. Start looking at Greece too – as soon as they devalue if they do their equities will end up ~2x-3x in 18 mo I bet (it happened in Argentina 3x, Russia 10x, Brazil 3x, etc).