Thursday, Sept 12, 2024

CPI, and signs both small businesses and institutional investors are getting nervous

“It is not paradox to say that in our most theoretical moods we may be nearest to our most practical applications.” –  Alfred North Whitehead ||

Hello everyone, I hope you’re doing well!

A macro- and markets-focused newsletter today, with a smattering of charts – I do have some cool institutional crypto stuff to dive into, but for length management I’ll have to leave that for tomorrow. Below, I look at the CPI (good but not yet good enough), what small businesses are thinking (always significant), and some relevant results from the latest S&P institutional investor survey.

I’ve been doing some talking: On Monday, I recorded an episode of Bits and Bips with James Seyffart and Joe McCann, so much fun – it was published yesterday, you can see that here.

I also had a great chat with Nate Whitehill and Akiba of CryptoSlate for their latest SlateCast episode – you can see that here.

IN THIS NEWSLETTER:

• CPI, yawn

• Small businesses are nervous

• Investment managers are also nervous

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WHAT I’M WATCHING:

CPI, yawn

Yesterday’s US August inflation drop was, as expected, a non-event. I’ve written before about how the narrative is now laser-focused on employment data, with disinflation finally a widely accepted “given” and therefore no longer the main area of concern for the US Fed.

So, I won’t go into much detail here other than to say both headline and core CPI came largely in as expected, with year-on-year increases of 2.5% (vs 2.9% in July) and 3.2% (vs 3.2%) respectively.

The only surprise was the month-on-month core CPI bump: stripping out the more volatile energy and food components, it increased by 0.3% (0.28% if you like decimals) vs the consensus forecast of 0.2% (and 0.2% in July), largely due to a pickup in housing costs.

This is likely to cool in coming months, but there are other reminders that inflation is not yet “licked”. The Fed’s preferred “supercore” CPI index, which strips out food, energy and housing (leaving a more wage-sensitive index), picked up for the second consecutive month.

(chart via Bloomberg)

And core inflation, unlike headline CPI growth (finally!), is still well above its 20-year moving average.

(chart via Bloomberg)

Bringing inflation down further going forward will be slow, even with the help of housing and the oil price – and this is without the potential inflationary impact of tariffs, tax cuts, fiscal spending and labour market contraction via deportation.

Inflation uncertainty is now reflected in the market pricing of rate cut odds, with overwhelming consensus that next will deliver only one cut.

Phew. I’ve said it before, there is no reason for the Fed to implement two cuts next week – the data doesn’t warrant it yet, and doing so would signal panic, never a good message from the global economy’s most significant central bank.

Employment is “normalizing” but not collapsing. And economic growth is so far chugging along – the Atlanta Fed GDPNow model (generally more accurate than economist consensus) last week nudged up its prediction for Q3 annualized growth of 2.5%, which is not bad.

(chart via the Atlanta Fed)

What’s more, real rates may feel restrictive, but that’s not yet showing through in severe credit tightening and collapsing consumption. And the 10-year real rate measure calculated by the Federal Reserve Bank of Cleveland may be high relative to the post-GFC era, but zooming further out, it’s kinda in a normal range now. We’re not going back to near-zero real rates, barring a severe crisis which we should fervently hope doesn’t happen.

(chart via the St. Louis Fed)

See also:

• It’s the jobs, stupid

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Small businesses are nervous