U.S CPI: Has inflation already peaked?

Right, a big week for markets really starts today and inflation will be at the heart of it...

Markets began pricing lower growth based on the dots & Fed tightening earlier than expected to combat inflation.

(i.e. they're so afraid of inflation they will abandon the employment side of the picture entirely to stop inflation from getting out of hand...)

Now, this months inflation data should see a slightly lower print, (both MoM & YoY) but that doesn't mean they're out of the woods.

Team transitory haven't won anything yet and this entire game is not about predicting whether inflation exists in reality, it's only about what is measured and what will cause the Federal Reserve to act.

So let's look at that...

Today's focus will be on the core inflation data for June with expectations of 4% YoY, and 0.4% MoM.

A soft print will go a long way towards easing fears of Fed tightening.

Inflation expectations have turned lower since the recent peak, but remain above 2%...  👇👇👇

The next thing to monitor is how Federal Reserve officials respond and comment in the following days.

If we notice the messaging change to indicate that they are no longer so concerned about inflation then the recent bid in the dollar could (should?) subside as the U.S. loses ground in the rate hike race between G10 central banks...

Of the Fed members commenting yesterday (Williams, Barker, Kashkari), all three agreed that the labour market is not yet healthy enough for the Fed to begin scaling back QE.

Bostic & Rosengren are set to speak today.  

Nordea make the case that rent of shelter (the most dominant component in the core index, accounting for more than 40% of the core consumption basket) is set to increase, and will keep inflation prints high for some time yet.

It's a good point in theory (and should definitely be monitored as such a core component of the core index) but I'm not sure it will be as simple in practice as the guys at Nordea believe... 👇👇

Dario Perkins says that it is possible to show a relationship between almost any two variables in macroeconomics as long as you can display them on two axes and are willing to spend enough time manipulating the second axis, experimenting with data lags, inversions or various moving averages.

Does that apply in this case?

Well... I put it in bold so I think you can guess my answer… 🙂

Obviously there has to be some relationship between house prices and rent prices.

The question is whether that relationship is causal, especially in the current circumstances.

Doesn't it make sense that rent prices will be more influenced by wage growth and a scarcity of alternative options in desired locations?

I mean, if someone is coming to rent your house they couldn't care less how much you paid for it... All they want to know is how much it will cost them to rent it, and then they'll weigh that up along with other costs such as commuting.

Likewise, if it lags by 19 (NINETEEN) months, any potential impact should be smoothed over time (and/or house prices stop increasing at such a rapid pace)

As many people suddenly have more choice and flexibility for their working locations I think we can leave this as TBC, but worth monitoring for now...

Rent prices are rising (on average) according to Apartment List 👆

And this caught my eye too:

Away from the headline, what do we see?

Rents are actually decreasing in the larger cities (where CPI surveys are more likely to focus)

This might end up as just another 'reopening' trade where prices rise all at once, and then people refuse to pay higher prices and look elsewhere...

Or it could prove sticky and keep constant upward pressure on inflation

Summing up, the way I see today's CPI data:

• 'Ignore' the headline and YoY, Core MoM matters most

• In line or below expectations, USD down, long end sells off (yields up), cyclical stocks should see buying

• Above expectations, USD up, long end goes bid (yields down), large cap growth attracts buyers, higher beta, small-cap sells off

• Beyond the headline number, main component to monitor is the rent of shelter, as the potential 'stickiest' element

• This is not 'new' information to anyone, even Stevie Wonder has seen this coming, so probabilities could favour USD shorts in any case, especially as positioning has now been reset from the previous extremes

'Higher inflation is here to stay for years' 🙄 👇👇👇

So, a little bit higher than it has been for the next two years...

Should we panic buy now or wait for the Christmas sales?

What happened in the bond markets last week?

The U.S. 10Y yield fell to 1.25%, but closed the week yielding over 1.36%.

Some put this down to growth concerns, others said it was a technical driven short squeeze...

If anyone believes that the market focus pivoted 180º from inflation running too hot 🔥 to expectations of economic growth in the doldrums 🥶 in a single month, I'd love to hear them explain what drove it.

Longer term we have to expect the return to the previous trends (nothing has structurally changed) but we probably have a few years growth first.

For all the talk, the market has never truly priced runaway inflation (repeating the earlier chart below) and the inflation expectations in this chart are probably a fair reflection of the new AIT regime. 👇

Talking of central bank tightening or easing, the graphic below is a good visual of the risk curve and how it is affected by central bank policy. 👇👇👇

And it's also a good way to frame earnings season...

Starting with this question

Do small cap equities offer relative value?

Full disclosure: I'm not a fan of small-caps generally BUT there's no denying they have been left behind as tech stocks have rallied, especially in the past six weeks or so.  

The disconnect has been magnified since the June FOMC meeting, as the potential for QE withdrawal saw flows moving back down the risk curve into large cap tech stocks...

If today's CPI data is not too hot and QE withdrawal can be postponed a while longer, will small caps rally as funds flow further out on the risk curve again?

I'm not so sure about the bold part...

JPMorgan and Goldman Sachs are the highlights today...

And they're expected to report a big jump in profits...

This is already known 👇

For me, the forward guidance is most important.

Are banks keen to lend, and is there demand for credit? 👇👇