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This Is Not The Inflation You Are Looking For, Move Along

This Is Not The Inflation You Are Looking For, Move Along

"This is not the inflation you are looking for. Move along."

In recent weeks a veritable cottage industry of financial experts has cropped up, seeking to defuse ever louder fears…

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This Is Not The Inflation You Are Looking For, Move Along

"This is not the inflation you are looking for. Move along."

In recent weeks a veritable cottage industry of financial experts has cropped up, seeking to defuse ever louder fears that the burst in inflation observed in the past month is "transitory" and won't impact the Fed's medium-term thinking or its timeline for tapering/liftoff (not least of all due to the growing political blowback against soaring inflation as captured in "Biden Aides See Political, Not Economic, Peril in Inflation Data" and "Inflation fears grow for White House"). The latest to hammer the "transitory" point is Goldman economist David Mericle who has doubled down on the bank's sanguine view on inflation, writing in a Sunday note that the data surprises of the past two weeks "have left our Q1 2022 forecast for the start of QE tapering unchanged" adding that "if our taper timeline is right, then liftoff will probably not be on the table for about two years." This is because the bank's economists believe that that the inflation risks that matter most for the Fed’s rate hike decisions are not those that have emerged in the past few weeks, but rather those "that will remain relevant at a multiyear horizon."

So what are those multiyear horizon inflationary risks? Let's dig in.

First, we start with Goldman concession that inflation is indeed running amok:

The last ten days produced a flurry of startling data surprises that added fuel to inflation fears: a 0.7% increase in average hourly earnings in April and even larger gains in low-wage industries, the largest increase in core CPI in 40 years, and a 0.4pp jump in the University of Michigan’s measure of long-term household inflation expectations to the highest level in a decade

That said, when looking at last week's show-stopping CPI print, which Goldman admits was "a huge upside surprise" it is one of little lasting significance according to the Goldman and here's why. As shown in the next chart which decomposes the largest increase in the core since 1981 by category, the main contributors fall into two groups:

  1. travel and related services categories where prices are experiencing quick reopening rebounds from deeply depressed levels, and
  2. goods categories like used cars where a pandemic-induced demand surge has run headfirst into temporary shortages, production bottlenecks, and supply chain disruptions. In contrast, other large core service categories remained soft in April.

While these forces might also generate high inflation prints in coming months - as the full normalization of prices in pandemic-depressed categories like airfares as reopening progresses would add another 30bps to core CPI and 15bps to core PCE, while supply chain disruptions including the semiconductor shortage also remain severe, as shown in the next chart and their impact on goods prices has probably not yet run its course...

... Goldman again trots the familiar party line that "these disruptions and shortages look unlikely to boost inflation on net beyond this year".

Many arose because producers initially made the natural assumption last year that demand would fall in a recession, as it usually does. Instead, fiscal support boosted household incomes and the unavailability of services led to a surge in demand for goods, resulting in the supply-demand imbalances that have pushed up prices. But this problem should be resolved from both directions over the rest of the year: producers are ramping up to meet demand and consumers are increasingly free to shift their consumption basket back toward services. And encouragingly, the most prominent example of the current supply chain disruptions—the shortage of microchips for autos—is set to fade later in Q2.

It remains to be seen if the chip shortage somehow resolves itself in the next month, but until we wait here is another chart from Goldman, this time showing the impact of reopening effects and temporary shortages on the year-on-year rate of core inflation, which Goldman believes is likely to peak in April and May, and should gradually fade later this year and will turn negative next year as prices in categories such as used cars normalize from their current elevated levels.

Here Goldman is quick to counter that its observations do not mean that there are no inflation fears. After all, just hours earlier we discussed another Goldman note according to which the bank saw "substantial home price appreciation for at least a couple more years", in which the bank projected that we projected "that shelter inflation will exceed 4% in 2023, a higher rate than at any point in the prior economic cycle", even surpassing the housing bubble of 2006-2007.

How does one reconcile the two? As Goldman's econ team explains, it's not that there are no inflation fears "but rather that investors should focus on the right risks, those that could have more lasting significance."

Going down the list, Goldman starts off with the broadest upside inflation risk which is the possibility that fiscal support, pent-up savings, and easy financial conditions could persistently push demand well above potential GDP, leading to a serious inflationary overheating: "our forecast instead implies that GDP will rise about 1% above our estimate of potential, which we would view as consistent with inflation rising moderately but not dramatically above 2%."

Here, Goldman notes that "so far the consumer spending data appear roughly consistent with our expectations" and the next chart shows that Goldman's consumer spending tracker jumped after both rounds of stimulus checks, but that spending is now running about 3% above the pre-pandemic level, meaning it is only about 1% above the pre-pandemic trend (Friday's disappointing retail sales only confirmed this hypothesis). In other words, while further reopening is likely to raise spending, the boost from the stimulus checks is likely to continue to fade.

Next, Goldman lists three specific upside risks that could have more meaningful and lasting consequences for inflation and monetary policy than the current post-pandemic price spikes.

Risk #1: A sharper rise in wage growth

The first risk is that wage growth could rise to a much faster pace than reached last cycle if current signs of worker shortages and labor market tightness prove more persistent than many expect. The starting point for wage growth is unusually high for an economy emerging from a recession. The next chart shows that Goldman's composition-adjusted wage growth tracker barely slowed from its pre-pandemic pace and remains at about 3% year-on-year.

Adding fuel tot he fire, a number of recent labor market indicators hint at an acceleration. Average hourly earnings rose 0.7% in April, wage growth is up sharply over the last year in low-wage industries and industries with particularly tight labor markets, and lower-wage workers report much higher pay expectations for potential jobs.

Moreover, a range of other indicators discussed here, such as a very high job openings rate, a high quits rate, worker surveys reporting that it is easy to find a job, and employer surveys reporting that it is hard to find workers, all point to a very tight labor market where workers have the upper hand.

Incidentally, even Goldman has no problems identifying the reason for this record labor market imbalance: as the bank admits, "the underlying reason seems to be that effective labor supply is much more constrained than the 6.1% unemployment rate suggests, owing to unusually generous unemployment insurance benefits and lingering virus-related impediments to working" but "we expect both of these temporary factors to fade by the fall, which should relax these supply constraints and cool the current wage pressures."

Risk #2: A multi-year boom in home prices boosts rent inflation

The second risk is one we discussed earlier, namely that a multiyear boom in US home prices could drive shelter inflation much higher. The chart below shows that shelter inflation has fallen during the pandemic, and Goldman's shelter inflation tracker suggests that rent growth should remain modest for the time being.

But the shelter category is highly cyclical and is very likely to accelerate as the economy improves and the effects of temporary pandemic drags like eviction moratoriums fade. On top of this, Goldman expects that a national housing shortage will fuel substantial house price appreciation for at least a couple more years. Bottom line: "the tightest national housing market since the 1970s nevertheless poses some additional upside risk."

Risk #3: Temporary price spikes raise inflation expectations substantially

The third risk noted by Goldman is that the current price spikes caused by temporary pandemic effects could have a more lasting impact if they raise long-term inflation expectations substantially (i.e. transitory proves to be non-transitory). Last week brought hints in this direction, including a 0.4% jump in the University of Michigan’s measure of long-term household inflation expectations, a modest increase in long-term inflation expectations in the Survey of Professional Forecasters, and further increases in market-implied inflation compensation.

Goldman's own monthly version of the Fed’s index of Common Inflation Expectations (CIE) has risen further to 2.08% in a preliminary May reading. The Fed’s index is smoothed, and if the underlying measures held steady at their current levels, the bank estimates that the CIE would eventually rise to 2.1%.

Another point to note is that at least half of the rebound over the last year appears to reflect mundane co-movement with gasoline and other energy prices, which correlate strongly even with longer-term expectations. The remainder of the increase likely reflects other factors, such as the latest price spikes and the Fed’s new average inflation targeting framework. So far, Goldman concludes, that "the increases are healthy, indeed, as Chair Powell said at his last press conference, the Fed’s new framework will only succeed in centering inflation on the 2% target if it succeeds in boosting inflation expectations." But if the CIE moved well above its historical range as news of sharp prices increases makes headlines this year, Goldman warns of upside risk to its own inflation forecast.

Finally, what does all this mean for Goldman's inflation outlook and what the Fed will do next?

As Goldman's economists conclude, all three of these sources of upward pressure on inflation are expected to materialize to some degree in the years ahead. Indeed, each of them is an essential contributor to our forecast that core PCE inflation will reach 2.1% by end-2022, 2.15% by end-2023, and 2.2% by end-2024, higher numbers than reached last cycle and enough to generate liftoff in early 2024.

But, as a surprisingly cautious Goldman concedes in its final paragraph, "each of the three factors discussed above also carries some additional upside risk that we take seriously and watch closely in our Monthly Inflation Monitor. While another month of rapidly rising airfares or used car prices would probably not change our medium-run inflation views much, substantial surprises on these three key risks likely."

In closing, it's worth reminding readers that earlier today Morgan Stanley's economists also warned that there is just one substantial threat to the "red hot global recovery", and that would of course be inflation, i.e., "the biggest threat to this cycle is an overshoot in US core PCE inflation beyond the Fed’s implicit 2.5%Y threshold – a serious concern, in my view, which could emerge from mid-2022 onwards" but like Goldman, MS economists don't see much risk of runaway (or hyperinflation) just yet and is why Morgan Stanley's chief US economist Ellen Zentner still expects the Fed to signal its intention to taper asset purchases at the September FOMC meeting, to announce it in March 2022 and to start tapering from April 2022.

Tyler Durden Sun, 05/16/2021 - 19:09

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International

Copper Soars, Iron Ore Tumbles As Goldman Says “Copper’s Time Is Now”

Copper Soars, Iron Ore Tumbles As Goldman Says "Copper’s Time Is Now"

After languishing for the past two years in a tight range despite recurring…

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March 15, 2024

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Copper Soars, Iron Ore Tumbles As Goldman Says "Copper's Time Is Now"

After languishing for the past two years in a tight range despite recurring speculation about declining global supply, copper has finally broken out, surging to the highest price in the past year, just shy of $9,000 a ton as supply cuts hit the market; At the same time the price of the world's "other" most important mined commodity has diverged, as iron ore has tumbled amid growing demand headwinds out of China's comatose housing sector where not even ghost cities are being built any more.

Copper surged almost 5% this week, ending a months-long spell of inertia, as investors focused on risks to supply at various global mines and smelters. As Bloomberg adds, traders also warmed to the idea that the worst of a global downturn is in the past, particularly for metals like copper that are increasingly used in electric vehicles and renewables.

Yet the commodity crash of recent years is hardly over, as signs of the headwinds in traditional industrial sectors are still all too obvious in the iron ore market, where futures fell below $100 a ton for the first time in seven months on Friday as investors bet that China’s years-long property crisis will run through 2024, keeping a lid on demand.

Indeed, while the mood surrounding copper has turned almost euphoric, sentiment on iron ore has soured since the conclusion of the latest National People’s Congress in Beijing, where the CCP set a 5% goal for economic growth, but offered few new measures that would boost infrastructure or other construction-intensive sectors.

As a result, the main steelmaking ingredient has shed more than 30% since early January as hopes of a meaningful revival in construction activity faded. Loss-making steel mills are buying less ore, and stockpiles are piling up at Chinese ports. The latest drop will embolden those who believe that the effects of President Xi Jinping’s property crackdown still have significant room to run, and that last year’s rally in iron ore may have been a false dawn.

Meanwhile, as Bloomberg notes, on Friday there were fresh signs that weakness in China’s industrial economy is hitting the copper market too, with stockpiles tracked by the Shanghai Futures Exchange surging to the highest level since the early days of the pandemic. The hope is that headwinds in traditional industrial areas will be offset by an ongoing surge in usage in electric vehicles and renewables.

And while industrial conditions in Europe and the US also look soft, there’s growing optimism about copper usage in India, where rising investment has helped fuel blowout growth rates of more than 8% — making it the fastest-growing major economy.

In any case, with the demand side of the equation still questionable, the main catalyst behind copper’s powerful rally is an unexpected tightening in global mine supplies, driven mainly by last year’s closure of a giant mine in Panama (discussed here), but there are also growing worries about output in Zambia, which is facing an El Niño-induced power crisis.

On Wednesday, copper prices jumped on huge volumes after smelters in China held a crisis meeting on how to cope with a sharp drop in processing fees following disruptions to supplies of mined ore. The group stopped short of coordinated production cuts, but pledged to re-arrange maintenance work, reduce runs and delay the startup of new projects. In the coming weeks investors will be watching Shanghai exchange inventories closely to gauge both the strength of demand and the extent of any capacity curtailments.

“The increase in SHFE stockpiles has been bigger than we’d anticipated, but we expect to see them coming down over the next few weeks,” Colin Hamilton, managing director for commodities research at BMO Capital Markets, said by phone. “If the pace of the inventory builds doesn’t start to slow, investors will start to question whether smelters are actually cutting and whether the impact of weak construction activity is starting to weigh more heavily on the market.”

* * *

Few have been as happy with the recent surge in copper prices as Goldman's commodity team, where copper has long been a preferred trade (even if it may have cost the former team head Jeff Currie his job due to his unbridled enthusiasm for copper in the past two years which saw many hedge fund clients suffer major losses).

As Goldman's Nicholas Snowdon writes in a note titled "Copper's time is now" (available to pro subscribers in the usual place)...

... there has been a "turn in the industrial cycle." Specifically according to the Goldman analyst, after a prolonged downturn, "incremental evidence now points to a bottoming out in the industrial cycle, with the global manufacturing PMI in expansion for the first time since September 2022." As a result, Goldman now expects copper to rise to $10,000/t by year-end and then $12,000/t by end of Q1-25.’

Here are the details:

Previous inflexions in global manufacturing cycles have been associated with subsequent sustained industrial metals upside, with copper and aluminium rising on average 25% and 9% over the next 12 months. Whilst seasonal surpluses have so far limited a tightening alignment at a micro level, we expect deficit inflexions to play out from quarter end, particularly for metals with severe supply binds. Supplemented by the influence of anticipated Fed easing ahead in a non-recessionary growth setting, another historically positive performance factor for metals, this should support further upside ahead with copper the headline act in this regard.

Goldman then turns to what it calls China's "green policy put":

Much of the recent focus on the “Two Sessions” event centred on the lack of significant broad stimulus, and in particular the limited property support. In our view it would be wrong – just as in 2022 and 2023 – to assume that this will result in weak onshore metals demand. Beijing’s emphasis on rapid growth in the metals intensive green economy, as an offset to property declines, continues to act as a policy put for green metals demand. After last year’s strong trends, evidence year-to-date is again supportive with aluminium and copper apparent demand rising 17% and 12% y/y respectively. Moreover, the potential for a ‘cash for clunkers’ initiative could provide meaningful right tail risk to that healthy demand base case. Yet there are also clear metal losers in this divergent policy setting, with ongoing pressure on property related steel demand generating recent sharp iron ore downside.

Meanwhile, Snowdon believes that the driver behind Goldman's long-running bullish view on copper - a global supply shock - continues:

Copper’s supply shock progresses. The metal with most significant upside potential is copper, in our view. The supply shock which began with aggressive concentrate destocking and then sharp mine supply downgrades last year, has now advanced to an increasing bind on metal production, as reflected in this week's China smelter supply rationing signal. With continued positive momentum in China's copper demand, a healthy refined import trend should generate a substantial ex-China refined deficit this year. With LME stocks having halved from Q4 peak, China’s imminent seasonal demand inflection should accelerate a path into extreme tightness by H2. Structural supply underinvestment, best reflected in peak mine supply we expect next year, implies that demand destruction will need to be the persistent solver on scarcity, an effect requiring substantially higher pricing than current, in our view. In this context, we maintain our view that the copper price will surge into next year (GSe 2025 $15,000/t average), expecting copper to rise to $10,000/t by year-end and then $12,000/t by end of Q1-25’

Another reason why Goldman is doubling down on its bullish copper outlook: gold.

The sharp rally in gold price since the beginning of March has ended the period of consolidation that had been present since late December. Whilst the initial catalyst for the break higher came from a (gold) supportive turn in US data and real rates, the move has been significantly amplified by short term systematic buying, which suggests less sticky upside. In this context, we expect gold to consolidate for now, with our economists near term view on rates and the dollar suggesting limited near-term catalysts for further upside momentum. Yet, a substantive retracement lower will also likely be limited by resilience in physical buying channels. Nonetheless, in the midterm we continue to hold a constructive view on gold underpinned by persistent strength in EM demand as well as eventual Fed easing, which should crucially reactivate the largely for now dormant ETF buying channel. In this context, we increase our average gold price forecast for 2024 from $2,090/toz to $2,180/toz, targeting a move to $2,300/toz by year-end.

Much more in the full Goldman note available to pro subs.

Tyler Durden Fri, 03/15/2024 - 14:25

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Government

Moderna turns the spotlight on long Covid with new initiatives

Moderna’s latest Covid effort addresses the often-overlooked chronic condition of long Covid — and encourages vaccination to reduce risks. A digital…

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March 15, 2024

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Moderna’s latest Covid effort addresses the often-overlooked chronic condition of long Covid — and encourages vaccination to reduce risks. A digital campaign debuted Friday along with a co-sponsored event in Detroit offering free CT scans, which will also be used in ongoing long Covid research.

In a new video, a young woman describes her three-year battle with long Covid, which includes losing her job, coping with multiple debilitating symptoms and dealing with the negative effects on her family. She ends by saying, “The only way to prevent long Covid is to not get Covid” along with an on-screen message about where to find Covid-19 vaccines through the vaccines.gov website.

Kate Cronin

“Last season we saw people would get a flu shot, but they didn’t always get a Covid shot,” said Moderna’s Chief Brand Officer Kate Cronin. “People should get their flu shot, but they should also get their Covid shot. There’s no risk of long flu, but there is the risk of long-term effects of Covid.”

It’s Moderna’s “first effort to really sound the alarm,” she said, and the debut coincides with the second annual Long Covid Awareness Day.

An estimated 17.6 million Americans are living with long Covid, according to the latest CDC data. About four million of them are out of work because of the condition, resulting in an estimated $170 billion in lost wages.

While HHS anted up $45 million in grants last year to expand long Covid support initiatives along with public health campaigns, the condition is still often ignored and underfunded.

“It’s not just about the initial infection of Covid, but also if you get it multiple times, your risks goes up significantly,” Cronin said. “It’s important that people understand that.”

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Government

Consequences Minus Truth

Consequences Minus Truth

Authored by James Howard Kunstler via Kunstler.com,

“People crave trust in others, because God is found there.”

-…

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March 15, 2024

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Consequences Minus Truth

Authored by James Howard Kunstler via Kunstler.com,

“People crave trust in others, because God is found there.”

- Dom de Bailleul

The rewards of civilization have come to seem rather trashy in these bleak days of late empire; so, why even bother pretending to be civilized? This appears to be the ethos driving our politics and culture now. But driving us where? Why, to a spectacular sort of crack-up, and at warp speed, compared to the more leisurely breakdown of past societies that arrived at a similar inflection point where Murphy’s Law replaced the rule of law.

The US Military Academy at West point decided to “upgrade” its mission statement this week by deleting the phrase Duty, Honor, Country that summarized its essential moral orientation. They replaced it with an oblique reference to “Army Values,” without spelling out what these values are, exactly, which could range from “embrace the suck” to “charlie foxtrot” to “FUBAR” — all neatly applicable to our country’s current state of perplexity and dread.

Are you feeling more confident that the US military can competently defend our country? Probably more like the opposite, because the manipulation of language is being used deliberately to turn our country inside-out and upside-down. At this point we probably could not successfully pacify a Caribbean island if we had to, and you’ve got to wonder what might happen if we have to contend with countless hostile subversive cadres who have slipped across the border with the estimated nine-million others ushered in by the government’s welcome wagon.

Momentous events await. This Monday, the Supreme Court will entertain oral arguments on the case Missouri, et al. v. Joseph R. Biden, Jr., et al. The integrity of the First Amendment hinges on the decision. Do we have freedom of speech as set forth in the Constitution? Or is it conditional on how government officials feel about some set of circumstances? At issue specifically is the government’s conduct in coercing social media companies to censor opinion in order to suppress so-called “vaccine hesitancy” and to manipulate public debate in the 2020 election. Government lawyers have argued that they were merely “communicating” with Twitter, Facebook, Google, and others about “public health disinformation and election conspiracies.”

You can reasonably suppose that this was our government’s effort to disable the truth, especially as it conflicted with its own policy and activities — from supporting BLM riots to enabling election fraud to mandating dubious vaccines. Former employees of the FBI and the CIA were directly implanted in social media companies to oversee the carrying-out of censorship orders from their old headquarters. The former general counsel (top lawyer) for the FBI, James Baker, slid unnoticed into the general counsel seat at Twitter until Elon Musk bought the company late in 2022 and flushed him out. The so-called Twitter Files uncovered by indy reporters Matt Taibbi, Michael Shellenberger, and others, produced reams of emails from FBI officials nagging Twitter execs to de-platform people and bury their dissent. You can be sure these were threats, not mere suggestions.

One of the plaintiffs joined to Missouri v. Biden is Dr. Martin Kulldorff, a biostatistician and professor at the Harvard Medical School, who opposed Covid-19 lockdowns and vaccine mandates. He was one of the authors of the open letter called The Great Barrington Declaration (October, 2020) that articulated informed medical dissent for a bamboozled public. He was fired from his job at Harvard just this past week for continuing his refusal to take the vaccine. Harvard remains among a handful of institutions that still require it, despite massive evidence that it is ineffective and hazardous. Like West Point, maybe Harvard should ditch its motto, Veritas, Latin for “truth.”

A society hostile to truth can’t possibly remain civilized, because it will also be hostile to reality. That appears to be the disposition of the people running things in the USA these days. The problem, of course, is that this is not a reality-optional world, despite the wishes of many Americans (and other peoples of Western Civ) who wish it would be.

Next up for us will be “Joe Biden’s” attempt to complete the bankruptcy of our country with $7.3-trillion proposed budget, 20 percent over the previous years spending, based on a $5-billion tax increase. Good luck making that work. New York City alone is faced with paying $387 a day for food and shelter for each of an estimated 64,800 illegal immigrants, which amounts to $9.15-billion a year. The money doesn’t exist, of course. New York can thank “Joe Biden’s” executive agencies for sticking them with this unbearable burden. It will be the end of New York City. There will be no money left for public services or cultural institutions. That’s the reality and that’s the truth.

A financial crack-up is probably the only thing short of all-out war that will get the public’s attention at this point. I wouldn’t be at all surprised if it happened next week. Historians of the future, stir-frying crickets and fiddleheads over their campfires will marvel at America’s terminal act of gluttony: managing to eat itself alive.

*  *  *

Support his blog by visiting Jim’s Patreon Page or Substack

Tyler Durden Fri, 03/15/2024 - 14:05

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