Today's PPI report should have been expected to surprise to the upside as the leading indicators of inflation have been screaming to the upside for months!
Here is the ISM prices paid index, cumulated into a growth rate
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Industrial commodity prices have also seen a major acceleration for months.
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So today's PPI report was in line with the leads, suggesting that we have a cyclical upturn in inflation that is * primarily concentrated in the manufacturing sector *
This is a key point.
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Core PPI showed an increase in year over year terms to nearly 2.5%.
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To be very clear, this cyclical upturn in inflation will continue for the next several months and should not be expected to fall apart imminently
This does not mean the secular disinflationary trend is over. We have had 4-5 of these upturns since 2010. They happen. They fade
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Sticking with the trend of a general manufacturing-based upturn, what else surprised to the upside (shouldn't have been a surprise)...industrial production.
IP growth increased to -1.83% y/y
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Industrial production for manufacturing specifically is almost back to positive growth on a year over year basis.
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Should we expect the manufacturing-based growth and inflation upturn to continue?
Yes.
But remember to differentiate cyclical for secular.
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We're not changing this trend anytime soon.
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TLDR:
Play the cyclical trend. Don't lose sight of the long-term fundamentals.
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There is a battle between long-term (secular) disinflation and a short-term cyclical rise in industrial-based inflation
The market is desperately hoping the cyclical inflation wins, and it still has the edge for now, but not this month
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⚠️ Warning ⚠️
In the next few months, the base effect will boost inflation big time and it will be consistent with the cyclical upturn in inflation, but the CPI growth will fade after the easiest comp.
That aside...
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Headline CPI edged slightly higher in year over year growth rate terms but remains stubbornly low, and way too low based on breakeven rates.
While the DKW model is imperfect, it provides some context around which factors are driving Treasury rates higher.
The DKW model was recently updated for EoM January.
(Thread)
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To start, as I have commented many times in the past, the economy is in a clear cyclical upturn, so we should expect the vector or direction in both growth expectations and inflation expectations to move higher.
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However, embedded within a 10-year rate is 10-year assumptions, not easily moved like Y/Y CPI or growth. These are long-term, slow-moving averages.
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Headline inflation ticked up slightly and is mostly a balancing act between rising goods inflation and falling services inflation.
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Goods inflation continues to rise, jumping to nearly 4% on a year over year basis.
Goods inflation (and industrial commodities) are rising due to manufacturing backlogs caused by shutdowns and the overall shift to at-home goods consumption and away from services consumption.