In simple terms, Core & Food are actually based on moving averages from the past 12 months of data...
4/ Gasoline however uses a combination of updated weekly Gas price data from an input feed plus a forecast estimation based on a regression between gasoline and daily oil prices
Basically, Gasoline, is the only input into the NowCast that is (somewhat) forward looking as opposed
5/ the other terms, which due to the use of moving averages can be lagged.
So thats why we see the NowCast typically underestimating CPI as inflation rises and an overestimation in periods like recently where inflation is falling.
So what about this month?
6/ Well Jan has two conflicting forces that make its reliability uncertain:
A. Gas prices rose over Jan, which is why the NowCast shows a MoM step up (to 0.65) from December's CPI release (0.1)
Gas also gets seasonally adj in the model whereas the observed price is not
7/
B. With CPI recently falling, moving avgs of Core & Food in the model could result in those terms overestimating the current rate that is computed by the BLS from more current spend data by category.
Counterbalancing this, Food prices themselves may have accelerated in Jan
8/
So in conclusion there is a notable upward bias to the Cleveland Fed CPI NowCast methodology in the current disinflation environment that needs to be recognized
I guess we'll find out the balance of all these factors very soon
2/x I'm not delving into statistical adjustments, this is about the real backdrop & whats driving overall trends. From that I'll draw some clarifying conclusions.
Here's the recent payrolls numbers charted. The trend shows payrolls normalizing down from elevated levels w/ chop
3/x Why were they elevated at the beginning of '22? Its all about the re-hiring of workers laid off during COVID. This is still on going.
The Chart shows US Total Employed. The US shed ~15% of its workforce as COVID hit and only recently surpassed 2019 levels, now +2% vs then.
An increasing % of #stocks are above their 200 MA as expected in a rally, but the % above their 20 MA is flat potentially presaging declining momentum of the rally...
3/5 When the % > 200MA is very high like now, but the % > 20 day MA starts to weaken, then we typically conclude the rally is in late stage and at risk
This may not be yet - as seen in orange the % > 20DMA can fluctuate at highs for a while. But given some weakening 2day...
We’ve had a bear mkt rally which has now failed and partially unwound. Brief Santa rally or not, the following chart pack tells a clear story of impending volatility:
This chart isn’t a mirror image - it’s the GS Fin Cond index against the #SPX. I’ve been tweeting updates on this for 6 mths because when conditions tighten, #stocks roll. Once again the Fed and now BoJ have triggered the tightening needed for inflation 🧯
Yields:
10 year yields are on the rise again with added fuel from the BoJ pivot yesterday. As the benchmark the risk free rate, this is negative for #SPX in the near term
will fall (particularly in Q1), potentially to even ~5% by March data, but wage gains will see medium term services & core inflation drivers inconsistent in the Fed's lens with a sustainable return to 2-3% target.
So Mr Mkt is saying based on history, the Fed never keeps...
rates at peak for long (ie the market assumes rate cuts soon after the peak).
But we need to consider that perhaps this time, with the labor pool down due to COVID and structural labor tightness, the #Fed may be FORCED to keep rates at the peak plateau for longer...