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CPI Will Go Up This Week - Flippa Inte Ut

We spent the weekend in tiny Bishop Hill, IL, a former Swedish settlement about 2.5 hours west of Chicago. Wikipedia tells me the population is 128, up from the 2000 Census population of 128.

We are here for an annual family reunion – my wife is pure Swede. Of course, the US women’s soccer team would be playing Sweden while we are visiting. We were up early this morning watching the game and working on this newsletter, waiting for the rest of the Swedish clan to wake up.

I know very little about this team, but I know the name Megan Rapinoe. And I also knew it was weird she was substituting for Alex Morgan. This was exacerbated by multiple, terrible kicks, and I started worrying she would be asked to take a PK if it got there.

Not only did she kick, and miss, a PK…but she laughed. The whole way back to the team. Everyone reacts to stuff differently, but I’ve never seen an athlete miss so badly in a pivotal moment and then laugh.

Sluta skratta!

Rapinoe can’t be bothered to care about her PK and I’m playing cornhole with a family that will physically rumble over a bean bag, so I consoled myself with Swedish pancakes…svenska pannkakor.


Last Week This Morning - Förra Veckan i morse

  • 10 Year Treasury at 4.04%
    • German bund at 2.52%
  • 2 Year Treasury at 4.77%
  • SOFR at 5.30%
  • Term SOFR at 5.32%
  • Multiple manufacturing indices came in weak enough to confirm manufacturing, like real estate, is in a recession
  • JOLTs Job Openings came in at 9582K vs 9600K expected
  • Durable Goods Orders 4.6% vs 4.7% expected
  • Nonfarm Payroll came in at 187K vs 200K expected
  • Unemployment Rate came in at 3.5% vs 3.6% expected
  • Shipping conglomerate Maersk now expects global shipping to contract 4% this year, weaker than its previous projection of a 2.5% contraction
  • SLOOS, apparently the Swedish word for “Oh crap!”, is in rarified air. Covid, GFC, dotcom, and…today are the tightest lending standards on record. That has to be a drag on growth.


Bias for Higher Rates - Bias för Högre Priser

The 10 Year Treasury is hanging out north of 4% and the longer that continues, the more likely it becomes the floor and 4.25% becomes the next technical resistance level.

Is this because of the Fitch downgrade? Not directly, but the factors that led to the downgrade likely create a psychology of higher rates. Irresponsible spending, limitless borrowing, debt ceiling standoffs, etc. More specifically, I would cite the following as the primary culprit for higher rates.

  1. Bank of Japan Yield Curve Control (YCC) – BoJ raised the limit on 10yr sovereign yields from 0% to 0.50%. Simplistically, this gives the 10T about 50bps more rope than it had two weeks ago for traders that trade the spread between the two.
  2. The Treasury announced it would need to borrow $250B more than originally projected ($750B increased to $1T). That increases supply, which pushes up yields.
  3. Soft landing – last week’s GDP increased chatter of a soft landing (right after our newsletter was entitled “Fuck your soft landing”…can’t say I don’t have timing).

Bloomberg still expects the 10T to fall to 3.32% by year end, so this could be a short-term phenomenon. More importantly for cap buyers, Bloomberg has the 2T dropping a full 100bps from current levels by year end.

It feels like the bias is to higher rates right now. The market basically needs a reason for rates to drop right now.


Jobs Strong Like Bull - Jobb Stark Som Tjur

The economy added 187k jobs last month, the least since December 2020. The prior two months were revised lower by 49k.

Every single month this year, the prior month’s job gains have been revised lower.

Every. Single. Month.

Before we dig into that, the closely watched average hourly earnings came in at 4.4%, just like last month. Forecasts had expected a drop to 4.2%, so this was disappointing. AHE are considered an inflation gauge, so some observers are worried this translates into more hikes.

Turns out AHE held steady because number of hours worked in a week dropped to its lowest level in over three years, not because of inflation rebounding.

Since this is the strongest job market in the history of the universe, let me drop a few random thoughts here:

  • Full time jobs dropped by 585k, the biggest monthly drop since covid
  • Part time jobs surged 972k
  • Of the sectors reporting, only 50% are still actively hiring, the lowest in 10 years. Last month, this was 54%.
  • Multiple job holders increased by 118k

While the headline Unemployment Rate dropped to 3.5% (aka U-3), the broader U-6 measures underemployed. Simplistically, it does a better job of capturing part-time workers that wish they were full-time. Turns out we are at a similar level as year end 2019, right before covid hit.

Friday’s report: 6.7%

December 2019: 6.8%

That JOLTS tho!

At year end, there were 11.2m job openings. That number has fallen to 9.5mm.

Are we really that sure this is the strongest labor market in history?

Actually, I don’t care whether it is or isn’t. Instead, I would simply ask: why are we so obsessed with the labor market when the very thing we are trying to measure, inflation, has an actual metric we can track?

Covid disrupted everything else, is it impossible to believe we don’t need dramatically higher unemployment in order to see lower inflation?

The most important aspect of the job market might be this - there won’t be much pressure on the Fed to cut rates if we aren’t losing jobs.  

That probably means higher for longer. Even though they are done hiking, they aren’t cutting anytime soon.


Don’t Freak Out - Flippa Inte Ut

Don’t freak out if headline CPI increases this week.

Inflation is measured y/y. Inflation peaked 13 months ago, so we are starting to roll into the months that reflect a rapidly falling inflation from a year ago. Economists expect CPI to increase from 3.0% to 3.3%, but it’s the result of base effects. It’s a math thing, not a fundamentals thing.

If m/m increases, then it’s ok to freak out. Just keep in mind that it’s expected to come in at 0.2%, just like last month. It would take a gigantic miss to cause a genuine freak out.


Week Ahead - Vecka Framåt

Big releases at the end of this week with CPI and PPI inflation data releasing Thursday and Friday, respectively.