US INFLATION WATCH – Another LOWER than expected inflation print on the cards?
US inflation is likely to show further material signs of deceleration next week, which is of importance to both rates, FX and equity markets. Here is why!
Happy Sunday folks and welcome to an FREE extract from our watch series on US inflation. If you want to join the Steno Research family, you can subscribe here → https://stenoresearch.com/subscribe/
Charts incoming! In this edition of our ‘Inflation Watch’-series, we thought we’d cater to your visual cravings by presenting an abundance of charts for you to get an inkling of what’s to expect come Tuesday the 14th.
Based on our models and indicators - leading as well as lagging - we project the print to come in in the neighborhood of 6.1% and 5.3% for headline and core, respectively.
Goods prices will continue to drop (even used cars) on a monthly basis, while food prices are also likely to show signs of “fatigue”, while contributions from energy will once again be positive on a monthly basis. Wages have decelerated in all meaningful forward looking gauges, while housing is printing at extremes relative to reality in the CPI, meaning that we see a larger downside risk/reward in core relative to headline.
Owing to fertilizers’ important role in agriculture and especially in grain crops, it’s no surprise that rising costs of these inherently spill over and lead to higher costs of food, beverages and other groceries. Fortunately, we see fertilizers (closely correlated to natural gas) coming right down near 2020-levels, which would, according to historic correlation and lag, translate to 6 ppt of disinflation in food and beverages (down to 4% YoY) in a matter of months from here.
Chart 1: Fertilizers’ on food prices
Freight, goods and used cars
Goods prices have been and continue to be decelerating extremely fast as the cooling demand in the Manufacturing sector paired with easing Chinese restrictions have allowed freight rates to normalize. Expect deflation in the goods category overall in just 4-5 months from now.
Chart 4: Freight rates back at pre-covid levels
Implications for markets
Energy stocks bounced towards the end of this week, but if we are right in our dovish lean on the CPI report, we ought to see renewed weakness in Energy and Financials relative to the broader market. If the cyclical rebound has got legs short-term (we think that is a decently probable scenario) and the CPI wanes further, cyclicals/discretionary stocks remain the place to be.
Chart 14: Consumer discretionary stocks LOVE disinflation
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What is your take on the CPI revisions that were announced yesterday? Appreciate all you share. 🙏🏼
Your breezy, sweeping macro-predictions are always well presented as usual here. Shipping container rates have indeed plummeted in the last months. However, Triple AAA this morning is reporting that regular gasoline price in the USA has increased from $3.272 to $3.419 in the last month. Ditto for all other gasoline categories except for the all important retail diesel price which has decreased 5 cents from one month ago, but still remains quite high of course from its retail price of $4.62 a year ago - alas, not much "deacceleration" there. And the CPI revision that revised inflation up not only for December, but also for the previous 2 months? Returning to your sweeping macro-confidence that inflation will inevitably deaccelerate, have you forgotten that there is a rapidly escalating war to your east that could easily reignite a new inflation spike in a 'New York minute'? Perhaps you are watching too much western legacy media which is serially lying about the war's growing threat of open direct hostilities between NATO military forces and Russia and therefore the growing possibility of nuclear war breaking out to not only the global economy, but to all human life on earth? Also, it bears mentioning the unknown impacts that will soon emerge from Russia's unfolding incremental offensive which is now accelerating towards its stated goal of liberating Donetsk & Luhansk Republics from Ukraine that is in sight of being achieved now after Bakmut soon falls, and after, as it appears more and more likely with each passing day, that the Ukrainian military will be forced into a wholesale retreat from its entire front line in Donetsk lest it be completely encircled, overrun and destroyed like Hitler's Panzer tank divisions were at the Battle of Stalingrad. What if the Ukrainian military completely collapses and NATO troops enter into direct combat with Russia in the next months? What will be the impact on the price of oil, the dollar and financial markets? Alas, I hope you have the analytical integrity to rethink and reassess your sweeping inevitable deaccelerating inflation thesis in light of the growing uncertain geopolitical reality now unfolding that has already combined to demonstrate the probability of continuing stickiness of inflation as the revised CPI figures have just revealed because we are moving forward into a period of unprecedented growing geopolitical and therefore global economic uncertainty. Pro tip: Read less Bloomberg and instead juxtapose with a few independent analysts like Dr. Jack Rasmus on economics or Alexander Mercouris on Youtube for better objective analysis of the US empire's proxy war against Russia using Ukraine as its bait. Bloomberg's morning host couldn't even allow Mr. Sachs to state the obvious fact to all who are not indoctrinated with one-sided western State Department narratives that the US blew up the Nord Stream pipelines - an act of war against Germany - by an "ally". Too many analysts on various platforms that you associate with are completely unaware on how limited their understanding of geopolitical realities. My hope for you is you might seek out new views outside of the truly narrow spectrum of western economic and political analysis that are available on western media platforms and channels. And I haven't even mentioned China yet. Well, I will leave that for another time but perhaps you should watch some Chinese state media available on You Tube. It's far more objective in its coverage of the West than NPR or Voice of America is in its coverage of China which is truly State Department stenography.