CPI TOMORROW
Many expect tomorrow’s to be the peak YoY print around 7%. The bull case from David Rosenberg:
The dollar bottomed in early August. The Baltic Dry Index peaked in early October and commodity prices in late October. The various manufacturing surveys have shown a peaking-out in goods inflation and the pressures (vendor performance, backlogs) behind this inflation are also subsiding.
Not to mention that pent-up demand for durable goods is in the rear-view mirror. So from my lens, the 40% of the goods side of the CPI swings back to price stability (albeit at a higher level than before, but inflation is all about the rate of change). For sure, rents will have an influence on service sector prices but there will be offsets from a wide array of other prices in this segment of the CPI, and a flood of new apartment supply is set to hit the multi-family housing market in the second half of 2022. So when I do both a bottom-up and top-down view on where the inflation rate is going to be a year from now… plus-or-minus 2%.
Goods are 38.7% of the CPI but Core Goods are 20.7% with Durables at 11.7% including new and used cars and trucks at 7.3%. In fact, Rosie’s lens is really looking at 20% of the CPI that might get relief from lesser demand and increased supply as bottlenecks ease off.
Everybody now agrees that rents will be a growing statistical problem.
But the “wide array of other prices in this segment of the CPI”, 29% of the CPI, is up 3.6% YoY and 4.9% a.r. in the last 2 months. These 3 next items are about half of this “wide array”.
- Energy Services: +10.7% YoY, +20.0% a.r. in the last 2months.
- Medical Services: +2.1% YoY, +4.2% a.r. in the last 2 months.
- Transportation Services: +3.9% YoY, +6.7% a.r. in the last 2 months.
As to the “flood of new apartment supply set to hit the multi-family housing market in the second half of 2022”, I see more supply but not exactly a flood, and at what cost?
My own lens is not on goods inflation which will naturally subside. Trends in wages are much more worrisome:
David is right, however, to point out that “We have never before seen the central bank tighten into such a massive withdrawal of fiscal policy stimulus, which could end up totaling 4% of GDP (with an estimated decline in the cyclically-adjusted budget deficit to 8% from 12%).”
This could well solve the inflation problem, but the very hard way, particularly if the Chinese economy also suffers from reduced liquidity and global demand vanishes.
But no worries:
“We’re going to have the best growth we’ve ever had this year, I think since maybe sometime after the Great Depression. (…)
The consumer balance sheet has never been in better shape. They’ve got $2 trillion in their checking accounts (…), they’ve paid down a lot of debt. … Home prices are up; stock prices are up; jobs are plentiful; wages are going up.”
— JPMorgan Chase CEO Jamie Dimon, speaking about the U.S. economy during the company’s annual healthcare conference [yesterday]. (Axios)
With Omicron, China’s Covid-19 Dilemma Deepens The Delta variant was quashed but at a high cost to the economy. There are reasons to think Omicron might hit China’s growth harder.
The hypercontagious Omicron Covid-19 variant has its first toehold in China: The country confirmed its first local transmissions over the weekend in the northern city of Tianjin. A public health official told state media that the virus appears to have spread for at least three viral generations in the city. (…)
Morgan Stanley economists think that if Omicron’s higher transmissibility leads to multiple citywide lockdowns across different regions, it would knock China’s first-quarter growth down by 0.6 to 0.7 percentage points to just over 4% year over year. Goldman Sachs puts the potential impact of a broader outbreak this winter at 0.9 percentage points for full year 2022, which, all else being equal, would drive its full-year forecast below 4%. More important, Morgan Stanley sees Omicron as a potential turning point at which the economic costs of China’s harsh Covid-19 control measures start to outweigh the benefits. (…)
Inflation in the OECD area continues to surge to 5.8% in November 2021, the highest rate in 25 years
EARNINGS WATCH
First of several warnings to come?
On Monday, Lululemon Athletica Inc. said that fourth-quarter sales and earnings would be toward the low end of its expectations — quite a surprise considering the company has been one of the industry’s stronger performers, and the holiday shopping season was expected to hold up despite the new variant. The shares fell as much as 9% in early trading.
The company best known for its yoga pants said that it started the holiday season strongly. But then it suffered from several effects of omicron, including staffing shortages and reduced operating hours in certain locations. Even before the latest variant, consumer-facing companies were grappling with supply-chain snarl ups and not having enough workers. If these pressures continue, Lululemon won’t be the last to highlight the consequences. (Bloomberg)
