Thread by @tdarling1

🐻♉️↗️↘️↔️⚠️🚩🔺🔻🧮 💰

#CPI Preview
1/10

One 🤡 calls it #macrotourism, but #CPI and #FOMC policy response are the single most important issues to macro investors today.

Let’s dig into the 🧮!

2/10

At his Brookings Institute speech at the end of November, Powell broke core #inflation into 3 components:

a) goods inflation
b) housing services inflation
c) services, ex-housing = wages

2a/10

Goods inflation is clearly coming down along with inputs into that equation.

$COOPER +10.65% in November is nonetheless -13% YTD

2b/10

$LUMBER is -64% YTD

2c/10

$COTTON -28% YTD

2d/10

The cost of transporting those goods from places far away have also fallen dramatically, with the #FBX -73.4% YTD

Chart: Freightos Baltic Index (FBX)

2e/10

Used car 🚗 prices, an early driver of inflation, are now little changed on a y/y and m/m basis per #MainheimIndex

3a/10

Food and energy prices have also fallen significantly since the June/July peak

Chart: 🌾$DBA -1.0% YTD

3b/10

Can this be true? The cost of fueling your vehicle is down significantly

Chart: ⛽️ $GASO -7.4% YTD and crashing 📉

4/10

Rents, a proxy for shelter costs which comprise 42% of the #CPI and a lagging indicator among lagging indicators, are +7.8% y/y and -0.97% in November.

Chart: Rent Report for November from Rent.com

5/10

But here’s the problem - #wages

To quote Powell, "nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time."

5a/10

The market wobbled on December 2 with the release of the November payroll report

Chart: Wages accelerated to +5.1% y/y in the November #NFP report

5b/10

The market wobbled again on Friday with the release of #PPI +7.4%.

The area of specific concern: the index for services for intermediate demand increased 6.7%, the largest 12- month advance since rising 7.9 percent in May.

Service = #wages

6/10

In advance of #PPI, $TNX had declined -81 bps from the October peak, abruptly reversed course on Friday, rising 17 bps

Chart: $TNX holding trend support

6a/10

$TLT, effectively, the inverse of $TNX, had rising 17% off the October bottom, but gave back 3% on Thursday and Friday

Chart: $TLT stopped in its tracks upon the release of #PPI

7/10

Equity indices, which rose in concert with $TLT (0.2 correlation), gave back some of the October - November gains.

Chart: $SPX -3.37% and a SELL signal on the weekly chart.

8/10

Positive vanna and charm flows from $1 T in notional options expiration this coming Friday were no match for the macro forces (rising wages and persistent inflation) at play.

Chart: $VIX +377 bps on the week a signaling BUY

9/10

With wages continuing ↗️, there is more work to do, per Powell:

"Policies to support labor supply are not the domain of the Fed: Our tools work principally on demand. Job growth remains far in excess of the pace needed to accommodate population growth over time (100K/m)."

9a/10

Notably, both the market and the Treasury have been fighting the Fed.

In particular, Yellen had projected a TGA build to 700B by 12/31. Instead, she has released over -79B from the account last week and no where near 700B.

Chart: TGA to 432B

10/10

#CPI headline consensus = +7.3% y/y down from +7.3% in October

#CPI core consensus = +6.1% y/y down from +6.3% in October

The 🔑 number to watch is core #CPI, which will remain 🛗 and perhaps higher than consensus.

10a/10

With the market and the Treasury fighting 🥊 the Fed, expect a hawkish 🦅 50 BPS hike on Wednesday.

Likely, that is NOT priced in

You know what to do

Have a super profitable 💰 week!

Correction:

#CPI headline consensus = +7.3% y/y down from +7.7% in October

Here's an awesome, much more comprehensive 🧵 on #wages