Yesterday the Dollar lost so much ground on the CPI data

Outlook: We get PPI and retail sales today, along with a fresh GDPNow from the Atlanta Fed. Retail sales are thought to nourish the same sentiment as CPI yesterday—sales forecast down 0.2% in Oct from +0.7% in Sept, due in part to weak auto sales and the first drop  since March. Ah, but then comes the holiday season. The National Retail Federation expects spending to rise by 3-4% this time (defined as the Nov and Dec months). This is a bit less than last year (5.4%) and the abnormal 12.7% post-pandemic jump in 2021.

Yesterday the dollar lost so much ground on the CPI data that heads are still spinning, especially because the data is full of wormholes and it’s not even the data the Fed uses. Analysts persist in calling for the first cuts in the next six months, no matter what the Feds have to say about “caution” and unforeseen reversals.

Bloomberg reports Fed-swaps traders priced in a half-point of rate cuts in July. Feds Goolsbee and Barkin were subdued and sticking to the “bumpy road” yet to be travelled.

Besides, it ain’t so, at least with respect to some critical sectors. Energy fell, hurrah. We can’t count on that continuing. And housing is still up in the high numbers. Year-over-year, the rent CPI increased by 7.2%. “Owners’ equivalent of rent” CPI rose 5% in Oct annualized and 6.8% y/y. (This is the unbearably stupid homeowners’ imaginary guess about what their houses would rent for).

See the services sectors one by one, from Wolf Street. Car insurance, up 19.2%. Pet services, 7.3%, personal services (haircuts), up 6.7%. Recreation, 5.7%. For more detail,

Remember supercore? It’s core services less energy, food and shelter. Bloomberg’s Authers notes that supercore from a Pimco economist is up 4.9% annualized on the 3-month basis. MarketWatch reports supercore up 0.2% in Oct or 3.7% y/y from 3.8%, the lowest in nearly two years. As we usually complain, the supercore number is really hard to find … but if this is right, it’s still way above the Fed’s 2% target.

So, while various regional Fed adjusted measures and supercore are falling nicely, none of them meet the 2% target even if the Fed were using them to set policy, and the Fed is not using them. Guidance of unknown weight, yes. Setting, no. A final note of caution—things can change. The cost of energy can go back up while the cost of housing continues to fall. Are just those two things comparable offsets? This is more than a quibble.

Fussy detail matters because if reveals the extent of overreaction in the markets. Reuters reports the futures market has removed virtually all bets on another Fed rate hike in the cycle, and that includes the influential Bank of America. “What's more, a quarter point rate cut by May is now 80% priced and 100bps of easing through 2024 is now baked in.”

Getting to 2% is still a bumpy road and unlikely to be met by May/June unless the economy really does falter, and by “economy” we mean jobs and wages.

Forecast: Rule One in trading is “Don’t fight the tape.” The apparent drop in both headline and core inflation set off a firestorm of equity buying, bond selling and dollar dumping. As the charts show, the rally in all the currencies was abnormally big, exceeding B bands and channels and surpassing more than one 50% retracement line. 

We say it’s almost certainly the wrong interpretation of the data and how the Fed is going to act, but never mind—the move is so big it must be respected. We can now expect a little more of the same before the inevitable pullback, but that’s several days away. The normal amount of time is 3-5-7 days, but it could be longer this time, depending on other important data, like retail sales. If as weak as expected, the pullback could get pushed out even further.

Tidbit: WolfStreet is incensed by incompetence at the BLS. The BLS tweaked the methodology after letting it go haywire for two years. He writes “This whole fiasco should be a career-ender for the top of the BLS.” 

The BLS now calculates health insurance CPI rose 1.1% m/m, “But this 1.1% jump came after 12 months in a row of month-to-month plunges of about 4% per month, ultimately a 37% collapse in the health insurance CPI in 12 months through September, that took the health insurance CPI back to where it had been in August 2018, even though health insurance expenses have skyrocketed.

“And it’s from this August 2018 basis that the health insurance CPI increased by 1.1%.” Huh? What happened to the 5 years in between? Going forward the BLS plans on using moving averages, so accuracy is out the window. Bottom line: don’t believe the numbers. The housing data has a ton of basically stupid processes, too.

Critically important tidbit: We got the results of the New Zealand “bird of the century” contest, which was on billboards everywhere around the planet. It got 350,000 votes from 200 countries. John Oliver's pūteketeke won!

Global inflation comparison: To see relative rates of inflation (and fool around with the chart interactively), Here is the main chart but you could add (say) Australia.

Tidbit: The Economist is appalled that PM Sunak appointed former PM Cameron to the post of Foreign Minister, vilifying him as having had a disastrous effect on multiple fronts while in office, not least Brexit. Having alienated Europe, now he’s foreign minister? The article is more than the usual snarky stuff—it’s outright, full-throated opposition.

Bloomberg reports numerous Tory leaders are equally outraged—and may go as far as plotting to remove Sunak from office. The appointment “opened a Conservative Party split that could dog him all the way to a UK general election. Sunak’s shocking decision to bring back ex-premier David Cameron as foreign secretary led Tories from across the party to question Sunak’s political direction. Members of Parliament on the right of the Conservative Party spent Monday plotting their response, with one saying options under discussion included an attempt to remove Sunak from office before the election.”

In the same vein, BritBox has a lengthy 6-part fictional show about Boris and Covid by Kenneth Branagh. It’s titled “This England” and is a lesson in British politics. Boris is depicted as unbearably boorish, quoting Greek aphorisms in Greek to people who don’t speak Greek, among other obnoxiousness. His conduct in his personal life is downright disgusting. Then he gets Covid and is really very sick. Branagh leads the audience to applaud.

Dominic Cummings, the Brexit architect, is shown as politically astute and actually correct about bureaucrats, as least at the National Health Service, which treated some Covid victims especially badly, mostly the elderly, and let emergency pop-up hospitals go empty because of arbitrary rules. But a gadfly and not adept at management. He had to resign eventually because he violated the Covid lockdown rules.

For someone who is just a political strategist and designer of focus groups, Cummings gets special attention. A few years ago the UK delivered another fictional treatment of what is really a documentary with Benedict Cumberbatch as Cummings—“Brexit: The Uncivil War.”

It should go without saying that comparisons with Trump are not appropriate. Both are clownish but Boris is educated, if obnoxious. He reads. Trump never reads, and his final advisor in office and current strategist used to be his golf caddy. Boris never threatened to put political enemies in concentration camps or called some citizens “vermin.” You do have to wonder who will play Fat Donny on the big screen when all this is over.

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