Friday, May 27, 2022

Morning Note: Inflation's Cooling (ever so slightly), But It'll Remain a Thing...

So, personal income for April, released this morning, rose at a slower pace vs March, and slower than economists' expected. Personal spending's rate of change slowed month-on-month a bit as well, however, it came in .2% higher than expectations. But of course the price index is what everyone's keying on this morning!

Headline PCE (personal consumption expenditures) inflation rose 0.2% on the month, 6.3% year-on-year, expectations were for 0.3% and 6.3% respectively. Core (ex food and energy) rose 0.3% on the month (same as March, and as expected), 4.9% year-on-year (down .3% vs March and as expected).

As we've expressed ad nauseum we see higher inflation as structural phenomena going forward, but a cooling in terms of rate of change was/remains likely in the offing.

Inflation swap rates (market-based expectations) have certainly been sending that signal.

2, 5 and 10-year inflation swaps:

Economist Peter Boockvar puts this morning's inflation data into context, and seems to agree with our structural view:
"PCE is most weighted to healthcare and Medicare and Medicaid reimbursement rates, artificially depressed, make up most of that. That is why I believe the CPI is a much better measure of inflation, more properly weighted to housing and measures healthcare via out of pocket costs but since the PCE is always lower, it is a convenient stat for the Federal Reserve to pick instead. Anyway, the rate of change is slowing as speculated here for months but the real question is to what rate does it eventually settle out at. I expect it to be 4-5% by year end, nowhere near the pre covid pace of 1.5-2%."

There's more to cover, but will leave that for our economic update, which will likely hit your inbox later today. 

Asian equities rallied overnight, with 14 of the 16 markets we track closing higher.

Europe's green this morning as well, with 16 of the 19 bourses we follow trading up as I type.

US stocks are higher to start the day: Dow up 98 points (0.30%), SP500 up 0.84%, SP500 Equal Weight up 0.84%, Nasdaq 100 up 1.37%, Nasdaq Comp up 1.35%, Russell 2000 up 0.80%.

The VIX sits at 26.74, down 2.76%.

Oil futures are down 0.03%, gold's up 0.32%, silver's up 1.43%, copper futures are up 0.89% and the ag complex (DBA) is up 0.40%.

The 10-year treasury is up (yield down) and the dollar is down 0.15%.

Among our 38 core positions (excluding cash and short-term bond ETF), 31 -- led by Dutch Bros, Albemarle, AMD, SOXX (semiconductor ETF) and MP Materials -- are in the green so far this morning. The losers are being led lower by solar stocks, carbon credits, energy stocks, utility and healthcare stocks.

Goodhart and Pradhan's enlightening book The Great Demographic Reversal makes the structural inflation case from a demographic angle:
"...our highest conviction view is that the world will increasingly shift from a deflationary bias to one in which there is a major inflationary bias. Why? Put simply, improvements in the dependency ratio are deflationary, since workers produce more than they consume (otherwise it would not be profitable to employ them in the first place), while dependents consume but do not produce. The sharp worsening in the dependency ratios around the world means that dependents who consume but do not produce will outweigh the deflationary workers. The inevitable result will be inflation."

Have a great day!

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