"The whole world is simply nothing more than a flow chart for capital." - Paul Tudor Jones
Capital flows determine prices and prices guide central bank policy. As such, price analysis and possible outcomes thereof are key to the macro framework.
On Tuesday, MoM CPI for August came in at 0.4% (5.3% YoY) with Core CPI MoM at 0.3% (4.2% YoY). As we've said before, it will be about transitory vs. more sticky components and where inflation will ultimately settle in. Housing prices and rent are expected to contribute to those sticky forces and challenge the FOMC's current narrative.
New car inflation has accelerated as global chip shortages have driven domestic auto inventories to record lows. Covid Zeroism in most Asian countries has led to continued hiccups in the supply chain and stirred up port movement at one shipping hub after the next.
As lead times from semiconductor firms increase, so do orders from auto makers as they plan their own inventory cycle -- a self fulfilling prophecy
Some say, Chinese policies around Covid could last as long as 2022, which is when Beijing hosts its Winter Olympics. During Xi Jinping's third term as president of China - which also marks the term in which he wouldn't be if it wasn't for President for Life, - the CCP wants to avoid losing face at all cost; it is therefore hard to see how policies can change drastically.
How transitory can used car prices be if new vehicle inventory remains at record lows or falls further?
While the Fed doesn't have a solid framework around what exactly causes inflation, people's perception certainly plays a role in the process. If we combine perception of higher prices with demand-push inflation via fiscal initiatives, transitory could become "not so transitory".
Stripping out top and bottom elements
Weighted average of one-month inflation rates of components whose expenditure weights fall below the 92nd percentile and above the 8th percentile of price changes -- another way to get rid of the extremes
It is very noticeable that after extremes are taken care of, inflation appears to be trending more than the Fed would like it to.
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Inflation concerns lead us into Wednesday's FOMC decision at 1:00 pm CT.
We view the coin from two sides:
When will taper begin
At what pace will the Fed taper
It is not a secret that $40bn/month of MBS purchases are a stretch at this point, given housing prices are at record highs and increasing every time we get new data. The Fed is equally concerned about pulling liquidity at this point and creating a taper tantrum in the face of a future debt ceiling resolution, which in turn will lead to treasury supply hitting the market.
While another strong jobs report would likely have led the Fed to lay out a specific timeline for tapering, a weak recovery in low to mid-skilled jobs leaves the services sector far behind the rest of the labor pack.
"The way you create deflation is you create an asset bubble." - Stanley Druckenmiller
The Fed certainly has a job that's multi-variable and it is not easy to balance this complex equation. However, as long as easy money allows fiscal policy makers to spend, they will spend; ultimately leading to an ever more complex situation.
On Wednesday we will watch any indication on tapering as well as the pace thereof.
Food for Thought
Jobless Claims will be released at 7:30 am CT on Thursday
JOLTs Job Opening at 10.9 million for July
Treasury markets will ultimately be the signal for when and how fast the Fed has to taper. Continuously, the FOMC has signaled a "behind the curve" approach where markets will move first.
The Dollar has seen a bid this week with the EUR/USD trading near 1.17.
Consensus: EPS est. $4.96; Revenue est. $21.89bn
The Amazon vs. E-Commerce effect in the aggregate
Smaller businesses getting set up on Shopify are increasingly selling online
Amazon has seen a relative deceleration in sales last quarter
Implications for work-from-home and consumer behavior as a whole
Consensuses: est. $1.12 EPS; Revenue est. $12.46bn
Competition against Adidas and potential stimulus effects
Consensuses: est. $3.55 EPS; Revenue est. $61.23bn
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