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The Daily Shot: U.S. Inflation Surprises To The Upside

Published 09/19/2016, 12:15 AM
Updated 07/09/2023, 06:31 AM

We begin with the United States where consumer inflation surprised to the upside.

1. The chart below shows US core CPI which came in a bit above consensus.

US Core CPI

2. Other inflation measures tracked closely by the Fed, the so-called "sticky CPI" and the 16% Trimmed-Mean CPI moved higher as well.

Sticky Price Consumer

Trimmed-Mean CPI

3. While it's easy to get excited about these increases - leading to the conclusion that the Fed must raise rates soon, some caution is required here. The bulk of the increase came from the medical care component of the CPI, and it's not at all clear how rate hikes would "cure" this problem.

Consumer Price Index: Medical Care

4. The other component of inflation that remains robust is "shelter CPI." The chart below shows how housing costs compare with the overall core CPI over the past ten years. Some suggest that a rate hike is required to cool housing costs. However, most of these increases come from rental expenses, and there is little evidence that higher rates reduce rents. In fact, higher financing costs could exacerbate the shortages of rental housing by lowering new construction activity.

CPI Components: Shelter vs Core CPI

5. The ex-shelter CPI is basically flat (chart below) and without the medical care price jump the US is in deflation.

CPI: All Items Less Shelter

6. Moreover, US real earnings growth is stalling. Once real wage increases move into negative territory, it will be difficult to sustain any inflation.

US Real Average Weekly Earnings YoY

7. Finally, the U. Michigan consumer inflation expectations are at the lowest level since 2010.

UMich Consumer Inflation Expectations

1. In other US economic developments, Goldman points out that "surprise" rate hikes are rare. The chart below shows the futures-implied probability before each rate hike since 1994. Many of the expectations were above 100% because the markets were pricing in some likelihood of a 50bp hike (vs. 25bp). It's difficult to imagine the Fed shocking the market when the implied probability is below 20% (currently, the CME calculation shows it at 12% - second chart below).

Rate Hikes

Meeting Date

2. The US ECRI leading indicator continues to rise and is starting to look a bit suspect. This measure is inconsistent with most other economic signals we've been getting.

US Weekly Leading Index

3. Business Insider points out that US small business sentiment is negatively impacted by the current political climate.

Small Business Sentiment

4. The US dollar rose sharply on Friday in response to the inflation report. Will the rally continue once analysts scale back their rate hike concerns?

DXY US Dollar Index

5. The dollar-denominated commercial paper market has been hit by the looming money market regulation.

Commercial Paper

6. China’s holdings of US Treasuries falls to the lowest level since 2013.

China Holdings of US Treasuries

1. Turning to the Eurozone, the bloc's labor markets continue to contribute to disinflationary pressures as labor cost growth slows.

Eurozone Nominal Labor Costs YoY

2. Deutsche Bank (NYSE:DB) is in the news again. Rumors persist that Angela Merkel wants the bank to merge or be acquired in order resolve the undercapitalization problem. The latest issue with the US Justice Department penalties is exacerbating the situation.

Deutsche Bank

Deutsche Bank shares gave up 8.5% on Friday.

Deutsche Bank AG

And the bank's CoCos (see definition here) took a hit on the news of the confrontation with the US authorities.

DB CoCos

3. Another troubled Eurozone bank, Banca Monte dei Paschi di Siena (OTC:BMDPY), saw its share price give up over 9% on Friday.

Banca Monte dei Paschi

Switching to the UK, the British pound sold off sharply. With the persistent currency weakness, UK's inflation expectations are rising (more on this later).

GBPUSD

Separately, here is the UK policy uncertainty index.

UK Policy Uncertainty Index

1. Now on to emerging markets where the Russian central bank cut interest rate further.

Russia Benchmark Rate

2. Russian bond yields rose sharply because, according to the central bank, this is the last cut of the year. This announcement surprised the markets.

Russian 2-yr Government Bond Yields

3. Speaking of rising yields, here is the Mexican 10-Year government bond yield.

Mexico 10Yr

4. The Mexican peso hit record lows - approaching 20 pesos to the dollar. Some have suggested that this sharp decline is in part the result of Donald Trump doing better in the polls. Ironically such low valuations in the peso will incentivise even more US firms to move a larger portion of their operations south of the border.

USD/MXN

5. The Philippine peso is now down 8 days in a row as the markets remain nervous about Rodrigo Duterte.

USD/PHP

6. Colombia's imports are collapsing.

Colombia Imports

7. Nigeria CPI continues to rise in response to some 40% devaluation of the currency over the past few months. The Central Bank of Nigeria rate hike is coming shortly.

Nigeria CPI YoY

8. China's property prices continue to move higher.

China Property Price Boom

1. We now turn to commodities where metallurgical Coal price blasts past $200/tonne (discussed last week).

Austalia Coking Coal

2. Gold and silver speculative positions remain elevated.

CFTC Gold

3. A pipeline problem sent US Northeast gasoline prices sharply higher in a stark divergence from crude oil.

Gasoline & Crude Oil

4. Speaking of divergence here is what happened to platinum and palladium on Friday. Is it once again driven by the VW diesel vs. gasoline auto production (catalytic converters)?

Palladium & Platinum

5. Sugar prices jumped 6% on Friday, nearing a 4-year high. The explanation is below.

Sugar 11

Why sugar prices jumped

1. In US equity and credit markets, corporate HY bonds continue to outperform stocks (year-to-date).

High Yield Bonds vs SPX

2. US homebuilders have underperformed sharply in the past few days.

S&P Homebuilders vs SPX

3. Wells Fargo (NYSE:WFC) is under pressure.

Wells Fargo vs S&P Bank ETF

4. Finally, US small caps continue to outperform (year-to-date).

Russell 2000

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