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The Fed Is Wrong Again: Core Inflation Rapidly Rolling Over And Will Drop To 3% By Q1

The Fed Is Wrong Again: Core Inflation Rapidly Rolling Over And Will Drop To 3% By Q1

The Fed was dead wrong for the past decade in perpetuating…



The Fed Is Wrong Again: Core Inflation Rapidly Rolling Over And Will Drop To 3% By Q1

The Fed was dead wrong for the past decade in perpetuating QE long after the economic crisis had passed, but especially in 2020 and 2021 when it saw nothing but transitory inflation, and refused to step in an contain soaring prices which we are seeing today everywhere in action. And the Fed is also dead wrong now in its crusade to crush inflation - as it confirmed today when it hiked 75bps and telegraphed another 145bps of rate hikes - even if it means a grave recession.

Why is the Fed wrong again? Because besides sliding commodity prices (which will very likely soar in the very near future, especially once winter arrives in Europe and once Biden's drain of the SPR is over), the bulk of core CPI components - and certainly some of the biggest drivers such as shelter, cars and airfares are rolling over fast.

That's according to a new report by JPM's Phoebe White (full note available to pro subs here), who writes that she forecasts a material softening in inflation across all of the components that have been the largest contributors of core inflation over the past year—not only vehicle prices, but rents, medical care services, and airfares as well—and last week’s hot CPI report does not change this view.

At a high level, we have seen a continued rotation in the composition of core inflation over recent months, with core services inflation accelerating from 3.7% Y/Y as of December 2021 to 6.1% as of August 2022, while core goods inflation has decelerated from 10.7% to 7.1%. Notably, even while core goods inflation continues to run hotter than core services inflation, services receive nearly triple the weight in the calculation of the core index, with the rent components alone comprising more than 40% of the basket (Exhibit 1).  Thus, it is clear to see why rent inflation, which has accelerated above 6% Y/Y in recent months, is the largest contributor to core CPI inflation as of the August report: Exhibit 2 shows that the two rent measures, owners’ equivalent rent and rent of primary residence, account for 1.9%-pts and 0.7%-pts, respectively.

Let's drill down into the data, starting start with rent inflation - which is the largest contributor to Core Inflation - and which the JPM analyst expects to peak in the next few months and roll over.  Why? Take the Zillow Observed Rent Index which like the Apartment list price index (which we have discussed countless times especially when it was soaring higher), tends to lead the CPI rent measures, and this index has been softening recently.

And while JPM expects shelter inflation to break above 7% Y/Y by early next year - due to its several month delay from real-world prices - the bank also expects the pace of monthly gains to peak within the next few months. The rate of increases in the Zillow Observed Rent Index, which measures asking rents on new leases, peaked above 17% in February, but has softened to 12%
oya as of August—a notable softening, albeit still elevated versus the ~4% average pace observed prior to the pandemic. Unlike the Zillow data, the rent components in CPI track average rents across both new and existing leases. Thus fluctuations in the Zillow index slowly pass-through to official measures as the stock of leases begins to resemble the recent flow of new leases, with each percentage-point increase in the Zillow rent index preceding a 0.6%-pt cumulative increase in shelter CPI .

To be sure, one complicating dynamic that we have been highlighting is the fact that tighter monetary policy could temporarily exacerbate rental inflationary pressure, as high mortgage rates discourage home-buying. Indeed, now that no new home buyer reliant on a mortgage can possibly afford a house, they will likely have no choice but to find a rental. On the other hand, there is a limit to how high rents can go simply as a function of disposable income: outside of the top income cohort, JPM finds that rent affordability is already stretched, implying it will be difficult for rent inflation to sustain rates much above the pace of wage growth. And once neither housing nor rent is affordable, well then it becomes a political issue and Democrats will scream bloody murder - as Liz Warren already did today - and will demand Powell to start cutting rates.

Away from rents, new and used vehicles have had the next largest contributions to core CPI. And with demand softening, supply constraints easing, and raw material costs falling, JPM thinks declines in used vehicle prices are on the near-term horizon. Declines in new vehicle prices are likely to follow in 2023. In fact, the Manheim Used Vehicle Value Index, which measures the prices dealerships pay for used cars at auctions, has declined since its peak in January, with the index falling 4% in August alone, and another 2.3% over the first half of September.

When will this slowdown appear in official data: as chart 5 illustrates, the pass-through from the Mannheim index to the BLS data exhibits a 1-3 month lag, making it somewhat difficult to forecast the precise timing of inflections in the used vehicle CPI. Looking ahead, JPM expects the trend of falling used vehicle prices to continue over coming months: Chart 6 shows that the J.P Morgan Automotive Commodities Index is now down 35%, reflecting the cost-weighted average price of the commodities used to manufacture a vehicle. Used vehicle prices tend to be more sensitive to raw commodity costs compared with new vehicles, given that scrap value reflects a greater share of the overall price of a used vehicle.

The component with the next largest contributions to core CPI inflation is airline fares which is one of the more highly volatile categories of inflation. The still-high rate of airfare inflation on a year-ago basis reflects the surge observed through the spring alongside rising jet fuel prices, but this component has fallen by more than 14% since its peak in May, with prices likely to be somewhat more stable going forward.

Finally, the recent surge in health insurance inflation likely reflects, at least in part, the drop in insurance claims over a year ago, given the “retained earnings” methodology that BLS uses to calculate this component. Some utilization metrics are now tracking in line with pre-pandemic levels

Overall, when taking a deeper look at the largest contributors to core CPI inflation over the past year, JPMorgan sees clear evidence that core inflation is peaking and is likely to moderate fairly quickly on a sequential basis over the near term, falling from 6.5% in the three months through August, to about a 3.5% SAAR pace in 1Q 23 and just 3.1% in 2Q23, or essentially in line with the Fed' target.

To be sure, the longer it takes for these dynamics to play out, the greater the risks that high inflation could become more ingrained. However, what is even more relevant is that the latest hawkish rate hike by the Fed - which guarantees that the Fed overshoots, driving a more material weakening in demand and triggering a recession — will certainly lead to even softer inflation. In other words, if the Fed halts its tightening campaign here, not only will core prices drop to where the Fed wants them, but a recession may even be averted. However, if Powell continues blindingly to hike, a crushing recession is virtually guaranteed. And since the Fed is always wrong about everything, the worst case scenario is now in play.

Much more in the full report available to pro subs in the usual place.

Tyler Durden Wed, 09/21/2022 - 20:00

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NYC biotech LB Pharmaceuticals eyes $75M for new take on decades-old schizophrenia drug

As Karuna Therapeutics wraps up its FDA approval request for what could be the first new type of schizophrenia drug in decades, another East Coast biotech…



As Karuna Therapeutics wraps up its FDA approval request for what could be the first new type of schizophrenia drug in decades, another East Coast biotech is raising $75 million to test an adjusted version of a decades-old medicine for the disorder next year.

LB Pharmaceuticals has secured about $35 million so far and expects another $40 million in the round, according to an SEC filing on Thursday. Per the financial document, its board includes directors associated with Vida Ventures, Pontifax, Deep Track Capital and TCGX, a crossover firm that has invested in multiple nine-figure biotech financings in recent months, including Carmot Therapeutics, Alkeus and Upstream Bio.

LB declined to comment.

The New York City biotech plans to run a Phase II trial of a chemically differentiated form of amisulpride, a D2 and D3 antagonist that has been available in Europe and more than 50 countries for decades, according to an investor deck from June. Sanofi marketed it as Solian, which generated €135 million in sales in 2002 for the French Big Pharma. It’s since become available as a generic.

LB’s board includes Piero Poli, CEO of Swiss drugmaker Rivopharm, which produces generic amisulpride. In February 2020, Acacia Pharma secured FDA approval for an IV formulation of amisulpride in certain postoperative patients with nausea, marketing it as Barhemsys.

With its methylated version of amisulpride, LB says its oral asset LB-102 has the potential to be more effective at lower doses by improving blood-brain barrier permeability, per the investor deck. Its new chemical structure gives LB-102 IP protection until “at least 2037.” LB has positioned the drug as a blockbuster treatment that could generate $1 billion or more in annual sales, pointing to antipsychotic prescriptions in the EU with an average price of $2,000 per month.

The drug is set to go into Phase II testing in adults with acute schizophrenia in the first quarter of next year, per the June document.

The company expects to enroll about 350 people at 25 sites, testing whether three doses of the drug are better than placebo based on the commonly used schizophrenia clinical trial measure known as PANSS, or Positive and Negative Syndrome Scale. Karuna’s M1/M4-preferring muscarinic agonist KarXT has passed two Phase III trials that use that measure, leading to massive financing hauls for the biotech and Cerevel Therapeutics. Boston-based Karuna plans to submit its approval request to the FDA this quarter. Meanwhile, Sumitomo and Otsuka’s ulotaront failed a Phase III on the PANSS test two months ago.

LB expects the study to focus on in-patients for four weeks. Pending the mid-stage results, the company would likely then take LB-102 into multiple Phase III trials in 2025, with plans to submit an NDA in 2028, per the June presentation. The company sees schizophrenia as the first step, with potential for studies in depression, bipolar depression and other indications.

Zachary Prensky

The drug developer is led by a former family office manager, CEO Zachary Prensky. LB’s medical chief is Anna Eramo, who previously ran clinical and medical affairs at Lundbeck’s US operations and worked on the development of Rexulti, approved for schizophrenia and other indications. Science chief Andrew Vaino and chief financial officer Marc Panoff were previous executives at Retrophin.

Prensky co-founded LB with Vincent Grattan, a pharmacist who came across amisulpride in the 2000s while working on medication managements in multiple prisons. “As many are aware, correctional facilities are de facto mental health hospitals, and I wanted to make sure we were stocking the most reliable medications,” he told Psychiatric News in 2021.

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Dana-Farber, Brigham breakup could lead to a ripple effect for CGT clinical trials for cancer

Dana-Farber Cancer Institute announced on Sept. 14 that it is securing a new joint venture with Beth Israel Deaconess Medical Center, marking a breakup…



Dana-Farber Cancer Institute announced on Sept. 14 that it is securing a new joint venture with Beth Israel Deaconess Medical Center, marking a breakup of its decadeslong adult cancer care partnership with Brigham and Women’s Hospital.

The news shocked Brigham, which had been negotiating a partnership extension with Dana-Farber for the past 15 months, according to the Boston Globe.

There are around 20 ongoing cell therapy clinical trials under the Dana-Farber Brigham Cancer Center, which comprises 12 treatment centers with experts from Dana-Farber and Brigham working together. Brigham also has its own gene and cell therapy institute and a lab dedicated to next-generation, genetically-modified CAR-T cell therapies for cancer.

With the Dana-Farber contract set to end in 2028, concerns have been raised about the impact on current cell and gene therapy (CGT) studies and ones that are scheduled to start, due to the complex nature of the treatments involved.

Jason Foster

Manufacturing CGTs is a skill- and labor-intensive process. Ori Biotech CEO Jason Foster told Endpoints News that hospitals and research centers often work together to make them on-site for clinical trials, with highly skilled experts from the specialty centers playing a key role. UK-based Ori develops technologies that automates CGT manufacturing.

At Dana-Farber Brigham Cancer Center’s cellular therapies program, cells are processed at an outside commercial facility or at the Connell and O’Reilly Families Cell Manipulation Core Facility.

When such partnerships come to an end, “that kind of [specialist] knowledge loss is something that will impact both the trajectory of [CGT] trials, but also the time it takes to get these products to patients,” Foster added.

These potential negative impacts on trials would only compound preexisting barriers to access to CGTs, including high costs and lengthy manufacturing processes. Estimates suggest that 25% of patients die while waiting for CAR-T treatments, according to ASCO Post.

Lee Buckler

Lee Buckler, senior vice president of advanced therapies at Blood Centers of America, told Endpoints in an email that collaboration between research institutes and healthcare providers was of significant — if not critical — value to the testing of CGTs.

A Brigham spokesperson said that the hospital is one of the largest recipients of NIH funding and does not expect any changes to trials already under agreement, adding it would continue to be a leader in the CGT space. “We are also planning for a new, state of the art Brigham facility which will include the medical oncology specialty,” the spokesperson said.

Dana-Farber did not respond to Endpoints before deadline.

Problems with CGT trials could be both the cause and the effect of partnership breakdowns. Buckler said that general hospitals are often reluctant to facilitate the kinds of clinical trial protocols associated with innovative CGTs, which may drive research centers to align with partners more willing to prioritize them.

Under the new partnership with Beth Israel, Dana-Farber plans to create a free-standing state-of-the-art cancer hospital, which it said would have the flexibility to “incorporate the innovations and technology in cancer care that Dana-Farber’s and BIDMC’s researchers and clinicians are developing every day.”

Vered Caplan

But a dedicated cancer hospital is not necessarily better at carrying out CGT trials than a general hospital with a tightly-integrated cancer specialty.

“I’ve seen general hospitals with tremendous capabilities and specific hospitals with tremendous capabilities — it really depends on the particular hospital,” Orgenesis CEO Vered Caplan told Endpoints in an interview. Germantown, MD-headquartered Orgenesis rolls out CGT mobile processing units and labs for cancer treatment to hospitals.

Regardless, the breakup means Dana-Farber must convince patients that its program with Beth Israel will provide at least the same quality care as the Brigham partnership, while Brigham must rebuild its specialist capabilities without Dana-Farber expertise.

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Zelensky Departs Washington Mostly Empty-Handed Amid Mood Shift In West

Zelensky Departs Washington Mostly Empty-Handed Amid Mood Shift In West

By all accounts, Zelensky came away from his Washington visit with…



Zelensky Departs Washington Mostly Empty-Handed Amid Mood Shift In West

By all accounts, Zelensky came away from his Washington visit with nothing new. Biden did announce a fresh $325 million aid package for Ukraine from already committed funds, but the hoped-for long range missile approval never came (however, more cluster bombs are being sent). And as we detailed Thursday, House Republican leadership once again failed to move forward on a mere procedural vote for the Pentagon funding bill, due in large part to GOP members rejecting Biden's proposed $24 billion more in Ukraine aid.

Thursday's package announced by Biden, as Zelensky visited the White House and Capitol Hill, was run-of-the-mill and entirely to be expected. "Today I approved the next tranche of U.S. security assistance to Ukraine including more artillery, more ammunition, more anti-tank weapons and next week, the first U.S. Abrams tanks will be delivered to Ukraine," Biden said.

As for the earlier in the day (Thurs.) meeting with Congressional leaders, House Speaker Kevin McCarthy explained when asked why the Ukrainian leader's request to address Congress was denied, "Zelensky asked for a joint session, we just didn't have time. He's already given a joint session."


Instead in a closed-door meeting, Zelensky later acknowledged he discussed with lawmakers "the battlefield situation and priority defense needs."

But if there is any level of consolation for Kiev, it's seen in the Pentagon announcement which came late in the day Thursday. Facing potential US government shutdown on Oct.1st, given at this point Congress is not expected to pass the 12 appropriations bills needed to fund government operations before next fiscal year, the Pentagon has said it will exempt its operations supporting Ukraine from a shutdown. 

The military typically suspends any activities not deemed vital to national security during government shutdowns, thus the DoD is in effect saying Ukraine aid remains "vital to national security". 

"Operation Atlantic Resolve is an excepted activity under a government lapse in appropriations," Pentagon spokesman Chris Sherwood told Politico, in reference to the operational name still used for actions supporting Kiev.

But Politico points out a potential shutdown would still negatively impact US support to Ukraine:

Sherwood noted that while DOD’s activities related to Ukraine will continue, furloughs and other activities halted under the shutdown could still have a negative impact.

"Training would happen, but depending on whether or not there were certain personnel that were not able to report for duty, for example, that could have an impact," said Pentagon spokesperson Brig. Gen. Patrick Ryder on Thursday.

This Pentagon exemption to keep Ukraine-related support active during a government shutdown seems to be the only significant thing Zelensky came away with. 

It appears to have been the main object of discussion when Zelensky met with Secretary of Defense Lloyd Austin in Washington during the trip. The Pentagon said this was "to reaffirm the steadfast US support for Ukraine."

Meanwhile, Bloomberg takes note of Zelensky "showing the strain" amid increasing divisions among allies:

The Ukrainian president allowed a dispute with one of his biggest allies to spin out of control at the United Nations General Assembly this week, and that’s just a hint of the tensions building behind the scenes.

Zelenskiy has been leading his country through Russia’s brutal assault for 19 months, all the time fighting on another front to wring the weapons and finance he needs from his US and European supporters. Now he suspects that President Joe Biden’s commitment is wavering and other leaders may be taking their cue from the US, according to a person who met with him recently.

He grew very emotional at times during that discussion, the person said, and was scathing in his criticism of nations that he said weren’t delivering weapons quickly enough.

Washington's lackluster greeting of Zelensky this week (compared to how he was received in December 2022) came simultaneous to Poland declaring it will no longer arm Ukraine, amid a fierce diplomatic spat over blockage of Ukraine grain imports by Warsaw, to protect Polish farmers.

The Economist is also taking note of the significant mood shift among Western allies...

A "long war" indeed... given a G7 leader from a European country has told reporters this week that the West is prepared for a years-long war, something likely to last some six or seven years, according to the quote.

"A senior official from one European G-7 country said the war may last as much as six or seven more years and that allies need to plan financially to continue support for Kyiv for such a long conflict," Bloomberg wrote.

Tyler Durden Fri, 09/22/2023 - 10:15

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