Inflation just hit a 40-year high, and everyone is panicking. Markets were expecting inflation to be transitory, and the CPI print seemed to kill that notion. The S&P500 fell 50 points on open.
But we think that yesterday’s CPI print was misleading.
Time for a 🧵
But we think that yesterday’s CPI print was misleading.
Time for a 🧵
2/
Headline inflation was 8.2% in the year through September.
The numbers aren’t looking good.
Headline inflation was 8.2% in the year through September.
The numbers aren’t looking good.
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But that’s not the full picture - and markets know it.
In fact, after the S&P500 sunk to 3520 - well below its 3600 resistance levels - it mounted a midday rally, ended the session up with a 2.6% gain, and up 4.8% from morning lows.
But that’s not the full picture - and markets know it.
In fact, after the S&P500 sunk to 3520 - well below its 3600 resistance levels - it mounted a midday rally, ended the session up with a 2.6% gain, and up 4.8% from morning lows.
4/
The Dow Jones mounted one of its largest one-day turnarounds ever, driven by bank, energy, and tech stocks.
The rally was partially driven by the view that higher numbers in September mean inflation is peaking.
Traders might also have been covering short positions.
The Dow Jones mounted one of its largest one-day turnarounds ever, driven by bank, energy, and tech stocks.
The rally was partially driven by the view that higher numbers in September mean inflation is peaking.
Traders might also have been covering short positions.
5/
Oil stocks were driven by higher oil prices, which is mostly to do with OPEC policy.
But the bank and tech stock rally is a green flag.
Markets are pricing in a 75 bps hike at the next Fed meeting, on November 2.
But there’s more to the story.
Oil stocks were driven by higher oil prices, which is mostly to do with OPEC policy.
But the bank and tech stock rally is a green flag.
Markets are pricing in a 75 bps hike at the next Fed meeting, on November 2.
But there’s more to the story.
6/
CPI is a backward-looking measure.
The 8.2% figure is how much prices have risen since September 2021 - a very long time ago.
Since then, we’ve had a supply chain crisis, a war, an energy blackout in Europe, and (maybe) a recession.
CPI is a backward-looking measure.
The 8.2% figure is how much prices have risen since September 2021 - a very long time ago.
Since then, we’ve had a supply chain crisis, a war, an energy blackout in Europe, and (maybe) a recession.
7/
In fact, on a month-to-month scale, CPI rose only 0.4% in September and just 0.1% in August.
Yesterday’s numbers are equivalent to a 4.7% annual rise - much closer to the Fed’s 2% target.
In fact, the three-month average annualized inflation rate is almost exactly 2%!
In fact, on a month-to-month scale, CPI rose only 0.4% in September and just 0.1% in August.
Yesterday’s numbers are equivalent to a 4.7% annual rise - much closer to the Fed’s 2% target.
In fact, the three-month average annualized inflation rate is almost exactly 2%!
8/
Now let’s look at what’s actually driving prices.
Food was up +0.8% in September.
New goods prices rose by +0.7%.
But used goods fell by 1.1%.
So there’s something more complicated than an across-the-board price spike.
Now let’s look at what’s actually driving prices.
Food was up +0.8% in September.
New goods prices rose by +0.7%.
But used goods fell by 1.1%.
So there’s something more complicated than an across-the-board price spike.
9/
Remember what the lead cause of the 2021 inflation spike was?
Here’s a graph of used car prices to remind you.
But now, we’re starting to see a reversal of the used-goods boom that was sparked by the supply chain crisis of late 2021.
Remember what the lead cause of the 2021 inflation spike was?
Here’s a graph of used car prices to remind you.
But now, we’re starting to see a reversal of the used-goods boom that was sparked by the supply chain crisis of late 2021.
10/
The chaos of last year’s inflationary spike is starting to calm.
There’s no doubt we’re still seeing rising prices - but it's manageable.
Another Fed rate hike, alongside more stability in energy markets, and this whole nightmare could be over sooner than you think.
The chaos of last year’s inflationary spike is starting to calm.
There’s no doubt we’re still seeing rising prices - but it's manageable.
Another Fed rate hike, alongside more stability in energy markets, and this whole nightmare could be over sooner than you think.
11/
One last thought.
One of the strongest contributors to yesterday’s CPI print was housing.
Rent rose by 0.8%
OER (owner’s equivalent rent - a rent-tracking metric for people who own their own home) rose by 0.8%, its highest since the 90s.
One last thought.
One of the strongest contributors to yesterday’s CPI print was housing.
Rent rose by 0.8%
OER (owner’s equivalent rent - a rent-tracking metric for people who own their own home) rose by 0.8%, its highest since the 90s.
12/
So core inflation might be coming down when the Fed hikes rates, but that might not calm down the household market chaos.
Markets believe the inflation crisis is coming to an end.
They might not be prepared for the ensuing housing crisis.
So core inflation might be coming down when the Fed hikes rates, but that might not calm down the household market chaos.
Markets believe the inflation crisis is coming to an end.
They might not be prepared for the ensuing housing crisis.
13/
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