CPI - The Hottest Topic North Of The Tropics
Seasonality simply cannot be ignored going into the summer months
We have to be ready for more pain before this ends. CPI seasonality shows an increase of CPI into the summer months with reductions starting as late as May/August/October.
But it’s not just seasonality that the fed is fighting. Consider also the mentality that low interest rates will return sooner rather than later. SVB fell prey to this, CS this week, and I expect they will not be the last. We haven’t even seen any real impact on the retail market yet either.
If you’ve been around markets for more than a decade you’ve seen what happens when the fed hits the brake pedal. Some poor sods go flying out the windshield. My hypothesis is that the Fed needs fear to keep capital from flowing back into assets, and what we have seen the last couple of weeks might be the beginning of that shift.
Diatribes aside, lets look at the CPI data…
The interesting bits:
Food although not accelerating is still increasing month over month. This is bad for all of us and worst for the most vulnerable
Gov’t needs to step in here and protect the cohort of people impacted most by this. Instead of grandstanding behind their seats, grilling CB heads on their policies…maybe they should do their jobs instead of finding someone else to blame for their own incompetence (and greed)
Energy!! its back, perhaps not with a vengeance, but it’s got a pulse again
why? summer ramp up, china reopening, generally improving market sentiment over the Jan/Feb period. Brent futures were actually starting to dip their proverbial toes into backwardation territory although this has changed drastically in the last 5-10 days
Interestingly piped gas dropped off sharply likely due to the mild winter across the board (also unfortunately one of my worst trades of the year so far but that’s for another post)
If you need a new car, get a used one instead…this market segment is continuing to take an absolute thrashing
Finally, Services and Shelter continue to lead the charge
While house prices may be flattening, the cost of higher interest rates is being passed into rents. And with jobs continuing to grow, demand for housing is not going anywhere any time soon
Note that housing deals tends to accelerate into summer months for outright buying/selling. Individual job changes, bonus payouts, raises etc. tend to happen in March/April…all these point to demand growing for housing, which would continue pushing inflation higher into the summer months (which aligns with the seasonality outlined in fig 1)
Increased demand for services = more people with jobs = more $ flowing = more inflation (unless GPT4 replaces us sooner than we think)
Was there something I missed? Will CPI seasonality predict the future? Will used cars ever recover? Drop a comment and let me know what you think!
Until next time friends. Stay cool + good
I think with the seasonality seen here there's a good chance inflation keeps rising and the fed must keep at the rate hikes. If/when the fed re-asserts that they WILL use the balance sheet to pick up the broken pieces (re: SVB et. al.) and WILL NOT drop rates given an overall strong jobs rate + consistently high PCE...then we will see how the mkt reacts
My guess is that market want the fed to indicate rate drops / start rate drops / at least pause. And if/when they don't there will be a bit of a sell off.
Let's see what the fed does on Wednesday
From CPI forecasts, do you think Risk-off will happen sooner or later? If the market starts to bake in interest rate reduction, will it move to risk-off territory?