Gas and food prices are going back up

Outlook

First year international affairs students know about the Strait of Hormuz. The man on the street knows about the Strait of Hormuz. Shippers, insurance agents and oil companies know about the Strait of Hormuz. Trump and his gang didn’t know about the Strait of Hormuz because they are far too important to read and they sneer at experts. Now they are being educated by newspaper headlines.

Trump had tossed off the promise to have the Navy escort tankers through the Strait, which he misnames the Straits, but then he found out the Navy was not going to do that because it would be stupid. The excuse is the ships are too far away right now. The real reason is the Navy is not murdering its seamen. Trump’s call for tanker captains to man up were universally derided as coming from an ignoramus.

Reuters notes “This is the first time the Strait of Hormuz – the vital waterway through which 20% of the world's daily energy use passes – has effectively been closed. No previous conflict in the region, including the Iran-Iraq War of the 1980s, the first Gulf War in the early 1990s or the Iraq War of the 2000s, has brought oil tankers to a virtual standstill.”

In other words, closing the Strait is a Very Big Deal. As we wrote earlier this week, even if Trump TACO’s today, Iran will not accept it and engage in a ceasefire or talks. Trump says he can end the war whenever he wants. This is not true. And that’s not even the most important point to economists, who universally agree that it will take months or possibly years to restore output, refining and delivery.

For the average person, this means gas and food prices are going back up. Gasoline is already up over 50 cents. Food will go up twice, first because of transportation expense and then because farmers can’t get fertilizer. Even the most sophisticated cable TV shows are featuring farmers. Everyone notices that the billions in war costs (of varying amounts but in the billions) could have easily paid for the health insurance subsidies the Trump party said we can’t afford and pay for farm equipment to improve productivity. We await the documentary (it must be in the works) about how the cost of corn and soybeans will wreck inflation—next year.

You can’t evaluate today’s PCE data without factoring in these new facts. Whatever the data turns out to be, it’s out of date more than usual because of these extraordinary conditions. The Fed can’t possibly cut rates under these circs, and may feel compelled to say so when it meets next week.

Next week also brings the BoE, the ECB and the RBA meetings. The RBA is expected to hike. What will happen for sure is close examination of every blessed word out of central bankers’ mouths.

We tend to prefer the year-over-year data to the month-over-month, Remember that when the m/m is annualized, it’s always far higher than the y/y. (You need a PhD to make Excel annualize, BTW). See the charts from Trading Economics. In December, the core PCE rose 3% after 2.8% in Nov. Expectations are for a rise to 3.1%. We await new forecasts of how high it will go by this time next year.

Today we also get durables and JOLTS, but we guess inflation will rule.

Forecast

US yields are rising, as expected, and will lead the dollar up, along with risk aversion. Commentators note that US equities “should” be exhibiting more fear than we see so far. Many imagine that Trump’s TACO will take place when the stock market decline scares him sufficiently. We are not so sure this time. He is still digesting the Strait of Hormuz. All the same, remember—no straight lines in FX.