Ecochartscpi_
Everybody seems to be all abuzz about today’s CPI number. Its no big whoop.

Why? At this point, I think we can all agree that a 1/4 point increase at the June FOMC meeting is a foregone conclusion. So that makes today’s data more or less irrelevant to that meeting. Even if the inflation data comes in extremely benign, its but one point in a data series. Its doubtful it will impact the Fed’s thinking about the next tightening in any meaningful way.

And the August FOMC meeting is so far away, and there will be so much additonal data between now and then, including 2 NFP reports, that today’s CPI will have long been forgotten.

By August, the Fed will most likely be forced to acknowledge that either a) the economy has slowed enough that the tightening cycle is over;  or 2) Inflation has gotten away from us and we need to keep tightening. By August, even Greenspan would have to admit that Goldilocks is dead . . .

Either way, today’s data point, at least as far as the Fed is concerned, won’t change very much.

On the other hand, a benign number — or even one that hits consensus — could light up the markets. The sentiment readings have all hit extremes, with the Put Call ratio, the Bull/Bear  ratio, and the percentage of stocks above their 200 day moving average at levels typically associated with intermediate bottoms.

UPDATE June 14, 2006

Mike Darda adds:

The
headline CPI rose 0.4% m/m in May while the core CPI
rose 0.3% for the third consecutive month.
The headline CPI is up
4.2% on a year-to-year basis while the core CPI is up 2.4% y/y. Three-month growth in the core CPI
(annualized, not compounded) has risen to 3.7%, the fastest pace in a decade.
Owners’ equivalent rents, which make up nearly one-thir
d of the
core CPI, advanced 0.6% m/m during May and 5.5% A.R. during the last three months, the
fastest since 1990. On a year-to-year basis, rents are up 3.3%.

Nothing to see here folks, move along.

Core_inflation_june

As Art Laffer said last night, there’s no inflation here . . .

Category: Economy, Federal Reserve, Inflation, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “Much Ado About Nothing”

  1. Rich DeSio says:

    Good appearance on Kudlow last night…you made that cheerleader Laffer look silly on the inflation question…his citing the lofw cost of PCs and low interest rates as evidence of no inflation against the rising costs of housing, health care, energy, taxes, insurance, education, etc. was laughable.

  2. Ryan says:

    Is there anywhere to get an average put/call ratio and the bullish/bearish ratios? The site I used to use (vtoreport) appears to have closed down.

  3. Carl Pellegrini says:

    Give credit when credit is due – this is Alan Greenspan’s inflation
    The FED IS NOT TIGHTENING !!!!

    If it were, do you REALLY believe that commerial paper outstanding growth would be 18.4% for the last 52 weeks and Bank loans & Commmerical paper outstanding would NOT BE UP at a SAAR of 24.6% for the last 7 weeks, 15.7% for the last 13 weeks and 13.5% for the last 52 weeks

  4. yc32 says:

    It is interesting that in 04′ and 05′, we saw double digit increases in insurance premiums, tuitions, housing prices, and utility bills daily in headline news. Now if you look at the stock price of xom, aet, dhi, and duk, it is clear that the price increases has moderated. So, is inflation getting worse, or has inflation come down from high levels?

  5. vf says:

    funny how economists are looking to ignore the rise in owner’s rent.. typical bs

  6. Ned says:

    Yes. Now that everyone can agree with Barry perhaps the worst is over and it is time for a relief rally. Or not. The Fed is trying to talk down inflation expectations, not actually lower inflation. Just ask that Lonesome Dove Bennie B.

  7. scorpio says:

    all the angst. the markets finally turned negative (barely) for the year, before turning up this morning. gold is no longer up 40% for the year, just 10%. what a hoot. let’s see how people respond to real losses when they come.

  8. Robert Cote says:

    What I don’t understand is the items in the core CPI. They’ve been subject to two years or more of dramatically increased production costs yet they haven’t passed those on while profits remain. It’s almost as if the core components don’t need insurance, energy, transportation, health services, etc.

  9. edhopper says:

    I’m a bit of a broken record here, but as we look to Q3 and Q4 it will all turn on housing. And the more BB tightens to fight infaltion, the harder housing lands (or crashes)

  10. Franco says:

    4.2% YOY for the CPI?

    I still think a 6% Fed Funds rate is in the cards.

  11. me2200 says:

    “I still think a 6% Fed Funds rate is in the cards.”

    Me too. And a 50 basis point hike somewhere along the way to really show the market who is in control.

    With inflation running at 4.2%, I think Bernanke has every right to get on top of this, pronto. And I think the media is WRONGFULLY giving him a bad rap for doing so.

    I don’t think the Fed can count on a slowing economy to handle inflation.

    Everyone blames the Fed for “over tightening” in the past, but you have to look at the circumstances. Usually the markets were red hot when the Fed was tightening and in total denial that things were out of control. It isn’t until the Fed brings things to their attention that they realize they are out of control and then panic ensues.

  12. alex says:

    interesting twists – gold and oil are down…CPI up -seesm that a lot of speculative capital is leaving the resource sector. CPI, of course, is a picture from the past. May be the FED is now in better control of the inflation and the tough talk by Ben impacted inflation expectations. What do you think, Barry?

  13. I believe that the fed will continue to tighten as long as core inflation is above their comfort zone. Many central banks have raised rates, except for the bank of England which has an exploding money supply, no doubt because they fear a downturn in housing if they raise rates.

  14. drey says:

    anyone willing to venture a guess on how long the yield curve stays inverted?

  15. jab says:

    Flat/Inverted until the fall when the dollar cracks and the long end goes up.

  16. ken says:

    I think it is important to remember that the original stated fed goal to raise rates was to return the FED Funds target rate to nuetral, it was not to put a lid on inflation. Hence all the discussion about a possible pause in the rate hikes.

    In other words many believe, both within the Fed and without, that around a 5.00- 5.50 targeted rate would be neither an expansive nor a constrictive policy.

    Now however with inflation definitely a problem it seems to me reasonable that we anticipate another 200 – 300 bp rate hike in the making. And if I am right these hikes should come in 50 -100 bp increments instead of 25bp.

    Anything less would be an abandonment of the fight to contain inflation.

    Fighting inflation is like fighting a fire. You cannot smother it enough, nor leave any embers alive.

    You heard it here first.

  17. tjofpa says:

    And speakin of that inverted curve Banky stocks really feelin the whackage today. I bet their none to happy with Bennie.

  18. Blissex says:

    All this discussion about 6% discount rate and CPI ”inflation” makes me want to ask again the famous question:

    * What do you think the ”real” (after ”inflation”, whatever that means) discount rate now is like? More like negative, more close to zero, more like positive?

    Put another and stronger way: if a financial company borrows at a wholesale rate linked to the discount rate, how easy is it to invest that money in assets that appreciate faster/return more than the nominal discount rate?

  19. Josh says:

    Does anyone pay attention to the “Moore Inflation Predictor”? They are now forecasting the average annual rate of inflation (based off of CPI) to be 7% in December.

  20. Blissex says:

    «I think it is important to remember that the original stated fed goal to raise rates was to return the FED Funds target rate to nuetral, it was not to put a lid on inflation.»

    But what is a neutral rate? In recent years this seems to have become code for ”as close to zero in real terms as possible”…

    Also note the slightly amusing translation of «goal to raise rates was to return the FED Funds target rate to nuetral» into plain english:

    ”Our current real rate is wildly expansionistic, so we shall undershoot the neutral rate for as long as we can while telling people we shall eventually reach it”.

  21. me2200 says:

    Its not the Fed Funds rate that has to be neutral. It is the inflation rate that has to be neutral and I think it needs to get down to 1.5-2%.

    I think the market has a bad, bad case of denial. everyone is talking about one and done. I don’t see it happening. I think oil has to get back south of $40 and commodities have to cool before the Fed is done.

    The market has been saying one and done for a long time now. And they’ve been wrong. What is different now ? Nothing. If anything the situation is worse.

    Like I said before… a few well placed 50 basis point hikes a year ago would have prevented a lot of pain.

  22. Alaskan Pete says:

    “The market has been saying one and done for a long time now. And they’ve been wrong. What is different now ? Nothing.”

    Au contraire. What is different now is that the housing sector is finally rolling over.

  23. me2200 says:

    “Au contraire. What is different now is that the housing sector is finally rolling over.”

    It isn’t rolling over fast enough to affect demand or spending, not yet so far. Commodities are still high, consumer spending is still strong, house owners are still in denial, etc.

    I agree it is rolling over, but it hasn’t made it into anyone’s macro numbers yet. Take the beige book, for example.

  24. B says:

    Don’t be so sure it isn’t rolling over fast enough to affect spending. You see any retail stocks making new highs? More like new lows. Some down 30-40%. ALL DOWN substantially. x-gasoline retail sales were negative.

    Contrary to popular opinion, price stability also includes things like……………………..housing……………..and as Pete mentioned………….

    I see NARI and others blather about how we want our market to have a soft landing like Britain. I guess they know something I don’t. I read last week that first time home buyers were at a 25 year low in Britain. I think Britain just as easily be characterized by teetering on the edge of the black abyss. That is why they aren’t raising rates. Our Fed will soon follow. Bernanke doesn’t need to pop any housing bubbles and if anyone has read his research they would know he firmly is against any attempts at popping perceived bubbles. Using the analogy of a sledge hammer, ie, rate increases, to make a cake or something as unattractive.

  25. me2200 says:

    “Federal Reserve Board Governor Susan Schmidt Bies said consumers so far appear to be handling the gradual re-setting of adjustable rate mortgages, which raise their payments. She said some industry evidence indicates that delinquencies for these types of loans ‘may be on the uptick,’ adding that delinquency rates for loans issued in 2005 in most cases are higher than those for comparable loans issued in prior years.”
    “‘Some industry observers believe that the increase in delinquencies for loans issued in 2005 is directly related to the continued easing of underwriting standards and the increased use of risk layering practices,’ such as accepting less documentation for loan applications and failing to assess a borrower’s ability to cope with a higher interest rate, she said.”
    “Bies reiterated her concerns that real estate loan concentrations are high relative to capital, especially for smaller banks with assets of $100 million to $1 billion. The concentration level for these banks is about 400 percent of total capital, or twice the level of the late 1980s and early 1990s, a period of considerable loan loss problems in the banking industry.”

  26. me2200 says:

    Apparently the news today took the bond traders a bit by surprise. Yields on the 5 year Fed note are up by more than 10 basis points. We aren’t as inverted as we used to be.

    http://www.bloomberg.com/markets/rates/

  27. jjw says:

    the curve actually got flatter … 30-year +8bp , 10-year +9bp , 5-year +10bp , 2-year +11bp …. but whole curve above FF now…. interesting part is Aug. FF futures now price 46% to 5.50 , was 21% yesterday

  28. me2200 says:

    The hedge funds are eerily quiet through this whole sell off. Anyone know of a hfund that is in trouble ? I can’t imagine that with all the selling in emerging and commodities that someone somewhere didn’t make a wrong bet.

  29. jsj says:

    couple stat-arb desks getting hit hard…. negative skew setting in

  30. me2200 says:

    Tell us more…

  31. 3c0nj0hn says:

    can it really be as obvious this? do we now get a two week rally into the fed meeting, followed by massive sell-off on some sort of hawkish interpretation of the statement or maybe a 50bp hike. can it?

  32. Si says:

    Interesting comments B about Britain. I can tell you from first hand experience that inflation is raging over there. Prices increasing rapidly for stuff you actually use but you wont see it in any of the “official” figures. If anything the people who set policy on these things are in deeper denial than the Fed, relying heavily on the British peoples historic ability to just put up and shut up. Its interesting as just as in the states, maybe more so, real estate has been bid up to crazy levels. People over there are in kind of a silent agreement with policy makers to not raise rates. Can’t think its gonna be good over the long term.
    None of these policy makers really have any balls anymore they just mess around with numbers until they get the kind of reaction they are looking for, sad but true.

  33. whipsaw says:

    per 3c0nj0hn:

    “can it really be as obvious this? do we now get a two week rally into the fed meeting, followed by massive sell-off on some sort of hawkish interpretation of the statement or maybe a 50bp hike. can it?”

    kinda scarey, isn’t it? But that’s pretty much the scenario that I foresee too, give or take a week. I’m just going to sit back until $SPX fails to break 1280 twice, then I’m buying back the puts that I cashed out this morning and going after the bulls again.

  34. me2200 says:

    “can it really be as obvious this? do we now get a two week rally into the fed meeting, followed by massive sell-off on some sort of hawkish interpretation of the statement or maybe a 50bp hike. can it?”

    BOJ didn’t hike rates. Nikkei is rallying. First day since ? that they had net buyers. $20 says NY rallies tomorrow. What is there to derail it before the next Fed meeting, other than a huge sell off after the meeting or maybe in anticipation of what will be said at the meeting.

    I keep reading 50 basis points. I’ve had that in my mind since before the last Fed meeting. What are the chances ? Nil ? Small but finite ?

    I hate rallies based on nothing or last ditch bounces. We know there is a slowdown coming and I’m guessing the housing market is going to tank a lot stronger than anyone realizes thus far. I’ve got this feeling that if copper goes back up to $4, Bernanke would hit the market with 50 bps. The word “measured” wasn’t in the last statement, was it ? Does that mean 50 bps is fair game ?

    When does Bernanke speak again ?

  35. kennycan says:

    YoY CPI was 4.2%. May 31, 2005 Fed Funds stood @ 3.00%. May 31, 2006 FF are 5.00%. So the avg FF rate the past 12 mos has been 4.00%. So rates have been 0% to slightly negative for another 12 mos. Given the lag between low real rates and their feeding through the pipeline, it is disconcerting to think that we have an economy that is rolling over already. If 0% real rates can’t keep the party going, that is disturbing.

    It is said that the Fed’s job is take away the punch bowl just as the party gets good. It’s looking like the Fed has to be running a meth lab just to keep the patient alive.

  36. I suspect that by the August or September meeting, the Fed will acknowledge the slowing economy and say they are pausing as they await more data.

    It is more likely to not be a pause, but the end of the cycle.

    6 months later, they are cutting rates.

  37. me2200 says:

    “If 0% real rates can’t keep the party going, that is disturbing.
    It is said that the Fed’s job is take away the punch bowl just as the party gets good. It’s looking like the Fed has to be running a meth lab just to keep the patient alive.”

    Thats because we have a paper economy. Half our friggin economy was a one way bet on HOUSING. That is where everyone got their spending money from. And now it is going to crash.

    Barry, I agree with your call as long as the slowdown actually does something for CPI and as long as the dollar holds. I’ve got this sneaking suspicion that Bernanke sees trouble ahead.

    Wage inflation in the US ISN’T the source of inflation right now. Commodity demand and energy costs are. I think Bernanke is trying to get consumption down so that we don’t see continued inflation in these components.

    So… what if we get to September and the economy is slowing nicely and we get a big fat hurricane that boosts gas prices to $4 and there is feed through into CPI ?

    Or… what if we get to September and when we tell the world we aren’t going to tighten anymore, our dollar index falls to 80 cents and suddenly we get inflation in our imports.

    Or… what if foreigners stop buying our bonds because they fear a dollar correction ?

    How is Bernanke going to handle these situations ? My guess is that he has to TIGHTEN further, even though the economy is slowing.

    Basically, the only way I can see this situation getting back under control is to tighten at the expense of the economy until all signs of commodity inflation are gone and then get the economy going with some real industry instead of another friggin bubble.