A Fork In The Road

Markets are approaching a fork in the road. Dead ahead … according to the US BLS, “February 2024 CPI data are scheduled to be released on March 12, 2024, at 8:30 A.M. Eastern Time.”

Yes, we know that the Fed holds the PCE in higher esteem. But it’s not normally released until well after CPI and PPI. This allows markets plenty of time to adjust PCE expectations based on the earlier reported data. So PCE tends to have much less market moving potential. CPI is king of government consumer price based inflation data.

I’m not predicting what will be reported or the markets’ reaction. The second part is the diciest of all because financial media play the same kind of expectations game with economic statistics as they do with corporate financial announcements. Corporate earnings “beat expectations” 75%-80% of the time. The obvious flaw in this rhetorical formulation is that the earnings are what they are … it is the expectations that are wrong. In other words, published expectations miss actual reported earnings 75%-80% of the time.

This is by design. It fosters the impression corporate performance is more impressive than it is. It would be naive not to suspect Wall Street plays the same game with economic data releases. In any case, “expectations” are routinely reported with no disclosure of how those whose expectations are being reported were selected. Whatever CPI is, it can be made to look and feel better if “expectations” were worse.

The first part is no picnic either. It is certain that where asset price inflation leads, consumer price inflation will follow. This has been a perennial Financology theme since inception. But the time lags between follower and leader are multiple and variable. Not to mention that CPI itself is a complex and unreliable melange of statistical machinations.

There are however some clues. Just as assets store purchasing power for later use, the lag tends to vary according to how full the storage tanks are. Higher asset valuations and more rapidly advancing asset valuations shorten the lags. Since the beginning of 2020, pronounced moves in consumer prices have lagged similar moves in asset prices within months. See our earlier post on this matter: CPI – A Lagging Indicator Of Inflation.

We’ve also already seen tentative evidence of 2024 CPI following 2023 API (Asset Price Index;-) in January’s report: The CPI Shocker We Expected.

The possibility that February’s release expands on this development looms. While we don’t know whether or to what extent that possibility may be realized, the potential for a market trend change is something we will be closely watching.

6 thoughts on “A Fork In The Road

  1. Mega says:

    Assuming the FED wants to KILL the Euro/EEC then they keep rates “High”. I have to laugh at 5% seen as high (I can recall +12%). The FED will move the the goal posts anytime they need to.

    Only thing they seem to losing grip on is GOLD price

    1. Finster says:

      That makes two of us laughing. Powell is telling Congress he thinks it will be appropriate to move policy out of “restrictive” territory some time this year. This is a slick way of bypassing the question of whether policy is even restrictive in the first place. Why bother with analysis when insinuation will do?

      He cites no evidence that policy is restrictive. I sure as heck don’t see any. The labor market is booming, employment at record high. Wage inflation is growing entrenched. Consumer disinflation has stalled, being stalked by consumer reflation. Stock prices are flying, crude is bubbling up again, gold and bitcoin are breaking records.

      This is tight money? With remarks like that, Fed Comedian Powell is only trashing his own credibility. At this rate the only way official inflation series like CPI & PCE get into 2% territory would be with a yet more aggressive statistical massage.

      Over the past four months, thanks largely to the Fed’s reckless public speculation about rate cuts, broad asset price inflation is running at around a 40% annual rate. On no planet does that sustainably coexist with 2% consumer price inflation.

    2. Finster says:

      BTW presumed similarity with the 2018-2020 rally yields a target for this gold move around ~$2400 in the third quarter of this year.

  2. Finster says:

    The Fed’s BTFP facility is also scheduled to expire March 12. But that can be extended at any time, and it’s not the only funding source available to banks.

    Another potential market trigger comes around the end of the month when the Fed’s RRP facility is expected to run dry. Michael Lebowitz explains:

    Liquidity Problems Are Closer Than You Think

    I disagree however with Lebowitz’s claim that high debt levels require the Fed to ride to the rescue. Those high debt levels exist largely because of too much liquidity for too long and the reintroduction of risk would restore some balance to manic markets and help contain inflation. Mollycoddling the financial industry at the expense of average Americans isn’t the solution, it’s the problem.

  3. Finster says:

    The February CPI and PPI have now been released and have shot a hole through the whole inflation glide path and rate cut narrative that has dominated market media since December. The cool and calculating bond market has reacted with a sharp selloff, raising rates across the yield curve. Rate hikes just since the first of the month are 10 bp for one and ten year maturities. Corresponding hikes since the beginning of the year are 24bp and 34 bp. This stands in sharp contrast to the falling rates story. The more emotional stock market has taken a bullet, but is still on its feet. Stay tuned…

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