By Michael Every of Rabobank
Let’s have a World Cup update with the same level of detail as much market data analysis: a Latin American team won, and a European team lost.
Let’s have an update with the same level of detail as better market analysis: Argentina 3, Croatia 0. Even better, let’s show who scored, and when: Messi - 34; Alvarez - 39, 69. We can even add the number of yellow and red cards.
Do you understand football now? Do you know who will win France-Morocco or, most likely, Argentina-France? You don’t? That analysis lacks something? I am shocked, shocked! After reading all that you still can’t predict football results or manage a football team?!
And so to predicting US CPI and managed money, where the Bulls won 3-0 against the Bears after headline inflation rose just 0.1% m-o-m vs. 0.3% expected, taking the y-o-y rate down from 7.7% to 7.1%, and core CPI rose only 0.2% m-o-m vs. 0.3% expected, taking the y-o-y rate down from 6.3% to 6.0%.
Do you understand inflation now? Do you know where it will be in 2023 and 2024? Of course you think you do: everyone in markets is an armchair manager.
I spoke about the structural, long-term upside risks to inflation yesterday, so won’t repeat them here, but let’s do a slightly better ‘play-by-play’ CPI analysis before looking at the next big match – Morocco-France, or the Fed meeting, which kick off at the same time.
First, a vast amount of the improvement in US inflation across different sectors was about energy, in different guises. Saying CPI has peaked on that basis alone is like saying, “If we score one more than them, we win” at elite managerial level in football. True, but not very helpful. Indeed, do you understand energy now, post-CPI?
On that front, the US officially announced their nuclear fusion discovery yesterday, saying it would transform *US* industry and *US* national security (yes, this is geopolitical and geoeconomic); then adding we are decades away from commercial application; and the lasers used to generate fusion power delivered ~2 megajoules of energy to create ~3 megajoules… but it took ~300 megajoules to power the lasers(!) That’s akin to feeling morally superior driving an EV if it’s powered by a battery made of minerals dug up by child labour and charged with electricity produced by burning coal; or basing energy grids on fluctuating power sources such as wind and wave when they need stable power to match supply and demand; or relying on solar power in countries with peak energy loads in the depths of winter.
Meanwhile, Brent went up 3.5% and US natural gas soared 6.5%. Lots of factors play into energy on the upside (like potential OPEC+ production cuts, having to refill the US SPR, or Dutch warnings of LNG shortages if they don’t build more terminals) and the downside (like ‘green’ Germany preparing another energy subsidy of up to EUR2,000 per household for this winter for families using heating oil, coal, or wood pellets). However, part of the big move up yesterday might be due to markets thinking the US inflation print was so low, due to energy, that the Fed is about to pivot, ironically pushing energy back up again.
Second, in terms of housing and OER’s (owners’ equivalent rent), rental indicators are starting to turn over, which will impact CPI after a lag. Unless financial markets pivot so much that the housing market takes off again as yields tumble, in which case rents and OER will go back up.
Third, food prices were up 0.6% m-o-m and 10.5% y-o-y, and while some categories fell, others rose. That is before we see the good news in some places (i.e., bumper crops) and the bad news in others (i.e., the potential lagged impact of high fertilizer prices).
Fourth, we are seeing deflation in some goods, particularly the used car market, as excess inventories are worked off - that’s how bull-whip effects work. Yet at the same time, the latest PPI report and the NFIB survey yesterday both showed pipeline/wholesale prices continue to rise - that’s also how bull-whip effects work: they aren’t a simple see-saw.
Fifth, services inflation, which rose 0.4% m-o-m, the smallest increase since July, was hugely flattered by November seeing the BLS adjust healthcare costs by -4.3% m-o-m, as it also did in October by -4.0%. That took y-o-y healthcare inflation down from 28% in September to ‘just‘ 13.5%. We have another 10 months of this adjustment process to look forward to, and to look through; because not only is real healthcare inflation not falling like that, but the Fed’s core PCE deflator measures it very differently.
Indeed, summing this all up, the Fed has made it abundantly clear it won’t be fooled by Arthur Burns’ “core inflation” arguments, which are the equivalent of lucky 1-0 wins and the odd undeserved penalty in football. It wants to see real, clear, sustained progress, i.e., a string of good 2-0 wins, in the inflation performance before it changes strategy and tactics. Powell in particular has also made it clear to those who can read the game that he wants to pop inflationary financial bubbles, even at the risk of a real economy recession, even if that is not his actual goal.
The market, for its part, is only interested in inflationary financial bubbles. It is hence behaving the way that fans of struggling football teams do: cheering the opposition in the hope that the worse things get, the sooner their club will fire the manager, and/or see new investors step in and transform things with multi-billion dollar investments. “If we lose the next four games, we will see Messi wearing our shirt!” they proudly say, drawing up their own Xmas wish-lists of Galacticos.
Yet this won’t sit well with the current Gaffer. The more the market does what it did yesterday -- push US stocks up; push US bond yields down, and expectations for the terminal Fed Funds rate, while pricing for 150bp of Fed cuts by mid-2024; push the US dollar down; and push commodities like energy up-- the less willing and able Powell will be to give them what they are demanding.
Superficial reading of stats and booing your own team only works if there is a Saudi investor waiting in the wings with a new world class manager and bags of cash for Carlos Kick-a-balls. If there isn’t, you are just celebrating your own eventual relegation or elimination on a cold, dark, wet December Tuesday evening, which is what most real football is about. The prawn-sandwich eating market glamour-set shouting “Go team!” and “Yay sports!” in Qatari stadium corporate hospitality boxes understand little about that; and even the ‘pro-worker’ Fed doves from the same social circle, who gain a stronger voting bloc in 2024, also fail to understand the Saudis will be actively disinvesting in both oil and all things US if too early a rates pivot is made.
So, will we see offensive or defensive play from Powell and the Fed today? Will the updated dot plot match the multiple own-goals that markets are betting on, or will we see a flat back four and a packed midfield? The market would find anything other than what Sir Alan Sugar once called silly football money ‘prune juice’ both offensive and defensive. But, as they chant on the UK terraces, “You don’t know what you’re doing! You don’t know what you’re doing!”
