Thursday, May 16, 2024

CPI’s split personality, is the BTC move macro-driven?, tariffs and the coming wave of inflation, and more…

“More interesting than thinking about what's possible in 10 years is thinking what's possible now but that no one has built.” – Clay Shirky ||

Hi all, I hope you’re well!

I forgot to mention on Tuesday that the episode I recorded with Tonya Evans for her excellent podcast Tech Intersect is out! You can listen to it wherever you get your podcasts, here’s a link for convenience.

If you find this newsletter useful, would you mind sharing it with your friends and colleagues? ❤

IN THIS NEWSLETTER:

• CPI’s split personality

• Is the BTC move macro-driven?

• Tariffs and the coming wave of inflation

• Oops, the BLS’s finger slipped

• A bitcoin bill

If you’re not a subscriber to the premium daily, I hope you’ll consider becoming one! You’ll get ~daily insight into the growing overlap between the crypto and macro landscapes, as well as some useful links. And there’s a free trial!

WHAT I’M WATCHING:

CPI’s split personality

To state the absurdly obvious, markets are weird. Yesterday’s ebullience was entirely down to the CPI data not being worse than expected, which is a circular incongruity that highlights the divergence between economist and trader perspectives.

The economist’s view

An economist will tell you that yesterday’s CPI read was a nothingburger that does not change the outlook of persistent inflation. Traders will tell you that a summer rate cut is back on the table, which means prices are heading up.

Wearing the economist hat (because I am mercifully not a trader), the numbers were more or less in line with consensus forecasts, with the exception of the month-on-month headline CPI index growth, which came in at 0.3% vs the expected 0.4%. April’s core inflation also grew by 0.3% month-on-month, which means both decelerated slightly vs March’s 0.4% increase. Year-on-year headline inflation slowed from 3.5% to 3.4% (as expected), and core CPI slowed from 3.8% to 3.6% (also as expected).

This is of course good news, a slowdown is much better than an acceleration, but the devil is in the details. Most of the CPI increase is still coming from services, which clocked in an annualized increase of 3.15%.

(chart via Bloomberg)

The thing about services inflation is that it is sensitive to wage increases, which in turn are sensitive to interest rates. If the Fed were to start to cut rates, presumably this would boost services inflation even more. And any resulting uptick in economic activity would also reactivate goods inflation, causing at the very least big perception and political problems.

A potential glimmer of hope comes from the observation that most of the services inflation is driven by housing costs. Should these come down, so will CPI growth, perhaps allowing for rate cuts. Only, lower rates could stimulate demand for housing, causing more price increases.

And anyway, strip out housing from the services measure, and you still have a problem: the “supercore” CPI index (ex-energy, food and housing) growth accelerated to 4.9% annualized, the highest rate in a year.

(chart via Bloomberg)

Trimming outliers doesn’t help, either. The Cleveland Fed’s trimmed mean measure (which strips out laggers and leaders and then takes a weighted month-on-month average) appears to have stalled.

(chart via the Cleveland Fed)

The trader’s view

The market, however, seems primed to look for signs of an economic slowdown since that means rate cuts are coming soon. And yesterday’s data delivered.

CPI growth slowed slightly, bucking the recent trend of uncomfortable strength and giving the first deceleration in six months. The market ebullience yesterday felt like a collective sigh of relief that rate hikes are now definitely off the table.

Also, a separate delivery of US retail sales data showed signs of a worried consumer. Consensus forecast had the month-on-month increase for April coming in at 0.4% (slower than March’s 0.6%). The actual read was 0.0%.

Overlooking that a weaker consumer is not good for the economy, or stock valuations for that matter, the S&P 500 was up almost 1.2% yesterday, and Nasdaq climbed 1.4%. Bond prices also climbed, pushing the 10-year yield down to the lowest level since early April.