Friday, January 13, 2023

Morning Note: It (fighting inflation) is a "Marathon"

I sympathize with economist Diane Swonk's take on the current inflation setup.

Emphasis mine...

"Goods prices cooled - even new vehicle prices ticked down. But service sector inflation remains way too hot, which is where labor acute shortages play a larger role in price setting. Important to remember some of the cooling in core inflation is simple math.
Prices accelerated rapidly in the second half of 2021, which lowers year over year comparisons of inflation. The fact that core inflation is still 5.7% above a year ago and outpace wage gains with the exception of parts of the service sector is worrisome.

We generated 4.5 million new paychecks last year, a large chunk of which was to multiple job holders - that is more a sign of economic weakness than strength - workers struggled to make ends meet. Those gains buoyed aggregate demand even as individual lost ground to inflation.

The blow to earnings will be blunted in January with an 8.7% cost of living adjustment to Social Security payments. But purchasing power will erode as employment gains slow. Where are all the workers? Baby boomers retired and are not coming back.

The goal of the Fed is to cool inflation faster than wages and earnings power so that wages can out pace inflation. They are more willing to overshoot than undershoot given the persistence of core inflation. If they stop short of their goal to derail inflation we risk a more prolonged and corrosive bout of inflation or worse. Add risks of another supply shock from China’s abrupt end to its zero COVID policies and Russia’s threats to retaliate for sanctions, with cyber & physical attacks, including energy infrastructure and Fed has to double down.

Todays data is welcome news. Lower energy prices ease a lot of pressures for workers. But it is not enough. The burn of inflation persists. Fighting it is a marathon not a sprint.

CPI ex food, energy and shelter (something Powell has been focusing on) fell by 0.1% for third month in row in December... annual inflation rate on this measure down to 4.4% in Dec (from ‘peak’ of 6.7% in Sep).

Asian stocks rallied overnight, with 12 of the 16 markets we track closing higher.

Europe's in the green so far this morning as well, with 13 of the 19 bourses we follow trading up as I type.

US stocks are struggling to start the session: Dow down 77 points (0.22%), SP500 down 0.49%, SP500 Equal Weight down 0.54%, Nasdaq 100 down 0.59%, Nasdaq Comp down 0.51%, Russell 2000 down 0.32%.

The VIX sits at 18.70, down 0.69%.

Oil futures are up 0.60%, gold's up 0.70%, silver's up 0.64%, copper futures are down 0.35% and the ag complex (DBA) is down 0.26%.

The 10-year treasury is up (yield down) and the dollar is up 0.07%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 10 -- led by silver, base metals futures, gold, Dutch Bros and Amazon -- are in the green so far this morning. The losers are being led lower by Albemarle, Disney, oil services stocks, defense stocks and financial stocks.

That's been one of my mantras - focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it's worth it in the end because once you get there, you can move mountains.

--Steve Jobs

Have a great day!

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