In the US, PPI doesn’t feed CPI

Outlook

Data matters. Yesterday jobless claims intruded on sentiment by disappointing to the downside, despite everyone knowing the data is crummy and riddled with error because of delayed state management, plus a host of other factors. Today the disappointment comes in the form of European manufacturing not living up the purchasing managers indices and coming in below forecast. As always, the actual vs. the expected is what drives the yields and the currencies.

There’s another issue with data–the base effect, and as mentioned before, it’s about to hit us like a ton of rocks. WolfStreet has a dandy story on that, March new vehicle sales, for example, rose almost 60% y/y but that’s from the March 2020 lockdown. Then new vehicle sales had fallen to practically zero. The better number would be a comparison with 2019. On that basis, March 2021 vehicle sales were down 1.2%.

We see the same thing with GDP data, when a rise from a severely depressed number in the prior period looks like a real gain–but it’s not. We see the same thing with airport traffic, which collapsed in April 2020 to practically nothing. Remember all those photos of empty airports? “Compared to 2019, the current 7-day moving average of daily checkpoint screenings is still down 37%, but compared to a year ago, it spiked by 1,168%.

All year-over-year percentage change figures of consumer spending, corporate revenues and profits, traffic, GDP, etc. will produce some truly absurd spikes, many of them without reaching the dollar levels of 2019.” Even Fed chief Powell has noted the base effect, specifically in the context of inflation. Powell will be correct in blaming a rise in CPI when it comes next week as dismissible due to the base effect. WolfStreet is sarcastic about companies trumpeting growth in revenue and earnings that in only the base effect and not authentic performance.

This is a long introduction to today’s US data release–PPI. It is expected to rise by 0.5% m/m in March but deliver a rise of 3.8% y/y. The same thing will happen with CPI next week, more like a jump to 2.5% from 1.7%. Here’s the central question–will we get a knee-jerk action to a higher number even though a 6th grader can grasp the base effect? Past experience suggests the knee-jerk reaction is inevitable, meaning a jump in bond yields, but likely short-lived. For one thing, everyone knows, or should, that in the US, PPI doesn’t feed CPI.

Longer-term, though, the market is convinced the Fed is wrong and will have to capitulate, whatever the inflation data. See the remarkable chart from The Daily Shot. The Fed can have a flat line out for years on end, but Oxford Economics and CME Fed funds futures implied rates are on an upswing. And that upswing is higher now than in mid-Feb.

All the same, aside from the mysteriously selling-off sterling, the dollar is on the defensive against the benchmark euro and most other currencies. We thought it was ending on Wednesday and had to lick severe wounds by end of day yesterday. The retreat against the yen and Swiss franc is especially noteworthy, but the loss against the CAD has yet to be validated--Canada reports jobs today and the BoC’s upbeat readings of late might get retracted now that cases/deaths/hospitalizations are rising and lockdowns starting up again.

Bottom line–we don’t like it. Logic based on data dictates a stronger dollar. If we are getting a pullback, we’d like to see a reason, even a bad one. This one seems to be position-paring and nothing “real.” Be careful.

US Affairs: The trial watched around the world got expert medical opinion yesterday–Floyd died from lack of oxygen, asphyxia, and not from a fentanyl overdose or a pre-existing heart condition. In short, the cop smothered him by pressing 91.5 pounds on Floyd’s neck without respite for 9 minutes and 29 seconds–when he had a “duty of care” for someone in custody. For someone fully restrained to say “I can’t breathe” is not equivalent to “resistance.” This trial is full of appalling, horrible testimony against the cop. It seems he cannot escape being found guilty of all three charges of murder. If somehow the jury finds him not guilty, the US can see disorder worse than in the Rodney King case in 1992.

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