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.
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.
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
Here are the major factors in play as we head into the new year:
- Fed and Bond market at odds
- Bear steepener in play with 10Y3M de-inverting
- US inflation sticky with strong, above trend NGDP
- Employment weakening around the edges
- CBs around the world cutting (US likely on pause)
- Yen carry trade unwind round 2
- China stimulating
- Global conflicts increasing
- Trump presidency (tariffs, taxes, budget deficit, and debt ceiling)
- $USD Strength, elevated yields
$SPX and $BTC near ATHs (sentiment near giddy)
Let’s break these down
2/15
The Fed and the Bond market have been at odds all year
Coming into 2024, Fed Funds Futures markets were pricing 6 to 7 rate cuts. The bond market responded by driving yields from 3.87% on 12/31/23 to 4.7% in four months while the Fed stood pat at 5.25-5.5% FFs
Then came the summer growth scare
The 10Y dropped to a low of 3.603 coming into the 9/18 Fed meeting. Spooked by the SAHM rule trigger, the Fed cut 50.
What did the bond market do?
Turned tail and rose to 4.5% in 2 months, fell back briefly to 4.125% in early December before rising to 4.64% last week, following the Fed’s hawkish cut and likely pause.
I see this back and forth dynamic continuing with another growth scare coming in Q125. More Fed cuts to come after a January pause.
3/15
The consequence of Fed/Bond market interplay is the bear steepening of the yield curve
After more than a 2-year inversion, the 10Y3M curve de-inverted on 12/14/24
Previously recognized as the most accurate signal of a coming recession in the next 3-6 months, the 10Y3M curve has been written off as dead
I don’t think it’s dead, and we are likely to experience a contraction in 2025.