Outlook: The usual initial jobless claims this morning are forecast down to 320,000 after higher than forecast numbers recently. Trading Economics has 319,000 thousand, “moving towards a pandemic low of 312 thousand reached in early September, as the steady labor market recovery continues amid a rebound in demand for workers and a slowdown in firings, layoffs and separations. Still, there are signs many individuals remain on the sidelines of the labor force due to lingering concerns over the coronavirus, with the level of new claims remaining well above the average weekly pace from before the virus in 2019.”

Then it’s producer prices, expected up 8.7% after 8.3% in Aug and the highest producer inflation since at least November of 2010. Since a high number is forecast, it’s not clear the markets are going to over-react. Remember that PPI does not include the cost of imports, which is at least a little lower due to the strong dollar. Quite how much PPI feeds CPI is still up for debate. The conventional wisdom has it that PPI tends not to influence CPI all that much. Now that we have the supply chain problem and rising commodity input prices, the connection/correlation might be stronger.

As for yesterday’s inflation story, markets are still trying to digest it. WolfStreet makes the reasonable assertion that even if supply chains get fixed over the next few months, two factors not related to that chain are going to zap us with higher inflation. First is rents, 6.7% of the CPI basket, held down by eviction moratoria and subsidies but already up 10-20% in some cities. So far rents are up 2.5% y/y.

Then there’s home prices. Wolf notes “Owner’s equivalent rent of residences” supposedly tracks the cost of homeownership and constitutes 23.6% in the overall CPI but “doesn’t track actual home-price inflation, but is based on surveys that ask what homeowners think their home might rent for and is therefore a measure of rent as seen by the homeowner. This measure also U-turned and is taking off. In September, it rose 0.4% for the month,” the fastest monthly increase since 2006! This brought the year-over-year gain to 2.9%. We know from the Case Shiller alone that home prices are up 19.7% y/y (the most since 1987) and far more in some places. Note that rents plus home prices together are the biggest CPI component.

Then we come to stuff that is affected by supply chains. Food (13.9% of the CPI) are up 3.6% y/y, with meat up 12.6%. Energy costs have a 7.3% weighting in the CPI and are up 24.8% y/y. Gasoline: up 42.1% y/y. Natural gas 5.4%. for homes: up 20.6%. Electricity: up 5.2%. Add these up and home costs, food and everyday energy costs together are 51.5% of the CPI and they are all up a whole lot more than the overall figure of 5.4%. Before freaking out about this data, consider that the US is both food independent and energy independent, or can be. As for the other stuff—cars both new and used, raw materials, machinery, tools, clothes, etc., we have a dandy remedy no one has named yet—get rid of the tariffs. We should be able to trade ending tariffs for something else we want from China and Europe. 

Fixing the supply chain issues is hideously complicated and twisty, involving all kinds of distantly related sectors. But let’s be Pollyannish and assume that the bulk of the problems get fixed by (say) March 31. On the world stage, this is hopelessly over-optimistic; Ikea said today shortages are likely to last another year. But let’s go with March 31 for the bulk of the problem. Does that mean inflation can fall back by late spring/summer next year? Maybe. It depends on the elasticity of demand and the stickiness of prices. People can put off buying a new car; they can’t put off eating.

See the Atlanta Fed sticky price chart, representing CPI components that seldom change or only slowly and are “thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis. One possible explanation for sticky prices could be the costs firms incur when changing price.” Okay, so let’s look at the costs of firms. The Daily Shot reports “A record share of businesses are boosting wages and plan to keep doing so in the months ahead. The cost of labor is becoming more of a problem.” These charts suggest that in addition to the cost of raw materials rising, labor costs are the biggie and will get bigger. We know a lot about labor costs, but the key thing to know is that they are definitely not flexible to the downside. Once a worker has a raise, it’s well-nigh impossible to take it back, except sometimes in a serious recession to save the job at all and even in the absence of labor unions.

The tapering confirmation and the implications of the CPI report are combining to bring forward rate hike expectations. In June, hardly anyone had a forecast of even a single hike in 2022. Today we have 42.8% seeing one hike by Sept, and 19.9% seeing two. If we have a grip on where inflation is going, this seems about right, or maybe a bit too little.

The original stagflation guy, former TreasSec Summers, says the Fed is already behind the curve on responding to sustained inflation. But inflation is famously hard to forecast. Nobody knows when the supply chains will get fixed or if Covid is really behind us. Summers has to be respected as an economist but he is forgetting that a big piece of the Fed’s job is keeping the confidence and respect of the banks, the bond market and the public. A panicky taper and early rate hikes would damage that confidence. He should know that. Besides, while we are pretty sure inflation is not transient, we don’t yet know it’s toxic, either.

We think the probability of stagflation is not zero but it’s not high, either--not with growth nicely over inflation at a likely 5.9-6.1% by year end and the end of the pandemic here, possibly and in the absence of another variant like Delta. No stagnation, no stagflation. This seems too obvious to mention but we continue to see that word everywhere, even in ideas about retail sales tomorrow. Hello, have you visited America? This is the endlessly materialistic country where little kids have smartphones and tablets and drones and any other toy you can imagine, electronic and otherwise.

The biggest problem for retail in the US is supply chain disruption that will likely lead to empty shelves and higher prices come Thanksgiving and Christmas. With precisely that in mind, Pres Biden announced that the ports of Los Angeles and Long Beach will start operating 24/7, and various companies like Wal-Mart and shipping companies like UPS will do the same. This is called the presidential bully-pulpit and it seems the right time for Pres Biden to have used it.

Then there is the wild card of earnings, with the big banks this week (and Bank of America, Morgan Stanley, Wells Fargo and Citigroup today). Apparently the big question is loan growth, but we wonder if loans are used for those giant buy-backs and thus not a good measure. 

Where’s the bottom line? The correction in the dollar was overdue. For sterling to have been the first to go, so to speak, is a special case—chatter about three hikes being imminent and despite the silly Brexit problems. Then there was the Australian and Canadian dollars with their hawkish central banks and rising yields. Assuming the dip in the US yields—“twist flattening”—is temporary, the dollar should come back and not too far down the road. Having said that, the timing of the correction ending is, as usual, unknown. We could be in for a period of ranginess punctuated by false starts.

Tidbit: Japan’s new PM Kishida invented a new cabinet post for “Economic Security” that will bolster the domestic chip-making industry, among other goals. Bloomberg reports “The government is reportedly set to subsidize half of about 800 billion yen ($7 billion) for a new factory that Taiwan Semiconductor Manufacturing and Sony are planning to build in Kumamoto in western Japan. The factory is said to enter operations by 2023 or 2024 and make chips used in camera image sensors and those for automobiles and other products.” Additional money for chips will be in the next stimulus package around year-end. The new initiative “comes after the government created a new strategy for chips in June, which signaled an openness to collaborate with tech leaders abroad. Prior to this, Japan had focused on trying to make home-grown champions with little success. The nation still has more chip-making factories than any other, but the problem is most of them are not cutting edge.”


This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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