The central point of both the US system and the equity market is the CPI. The three elements that interest the Fed to intervene are (according to Bernanke’s teachings at Princeton) currently managed by outdated “80s methods:
- The short-term money supply:
- M3, but it refers to Q2 and therefore is old data.
- The total average weekly earnings – BLS Employment Report. This data shows that as of September 2022, on an overall level, total weekly earnings are year-over-year slightly negative in real terms, but at the individual level, the loss of purchasing power is 3.4%.
- Consumption – BEA Personal Income. See the attached tables, which reveal that consumption in real terms as of August 2022 is negative year-over-year and year-to-date, both using the PCE and the CPI as deflators.
- The CPI, which is our focus today.
View the Economic Analysis: https://algotradingsystems.s3.amazonaws.com/docs/V+studies.xls
One of the elements alerting us to new pushes or brakes on the CPI is the analysis of the CPI 3 months annualized – elaboration of the BLS CPI report Tab 3 – sheet 3. It is evident that it is a much faster sensor than the year-over-year measure. Demonstration:
- 3 months indicated strong and increasing pressures on the CPI in February 2021, while year-over-year detected it in May – sheet 3 line 72 and line 123.
- Let’s see the situation in 2022 to date – 3 months – line 123 and following:
- The maximum inflationary push 2021-2022 occurs in June 2022 at +12.26 annualized and then collapses at the end of Q3 September 2022 to 0.67.
- This indicates that at the US system level, the price system, TODAY, has been frozen, with sectors still showing strong increases and others strong contractions.
September 2022 – Q3 2022 – column E shows the weight on the CPI of the various sectors:
- Overall situation of frozen prices:
- Sectors that create a strong boost to CPI growth:
- Food – weight 13.635% – +10.92 annualized. All sectors of food at home and away from home.
- Energy services – Electricity – due to the high prices of inventories of production fuel.
- All items less food & energy – weight 78.12% – still high at 5.11 annualized but trending down from June 7.43. This figure is strongly conditioned by the shelter – line 152 – weight 32.47% on the CPI – which remains high and growing. Rent and Equivalent Rent (Mortgages) due to the increase in Fed rates.
- Sectors that offset the increases – Energy weight 8.24% – the decline in the CL of the “bad” Saudi.
FOOD:
- The strong push is due to two factors:
- Domestic and international agricultural production below demand. It is bad economic planning that cannot be resolved in the short term and cannot be resolved with interest rates.
- A high-cost US production that has significant consequences on manufacturers’ inventories.
- The fortune of Import prices – BLS Release – Food Feeds and Beverage – 3 months prices annualized September 2022 -9.14, June 2022 -1.90, March 2022 +21.16 – year-over-year September 2022 +3.43%, June 2022 +8.70%, March 2022 +13.62%. It is evident that at the import level there is a strong slowdown in prices. The boost in food is created in particular by Vegetables +20% 3 months annualized +15.50% year-over-year – lack of production. Prices are expected to drop with Southern Hemisphere harvests – December 2022 to April 2023.
SHELTER:
- It is the Fed’s own policy that creates the inflationary push.
Conclusion:
- The three elements that should guide the Fed’s monetary policy suggest CAUTION:
- A consumer with a loss of real purchasing power.
- Negative consumption in real terms, either using the PCE or the CPI as a deflator.
- Inflationary pressure created by food due to a lack of domestic production. The increase in production in the agricultural sector is possible but it takes time and investments. The prices of the sector do not respond to interest rates. The growing inflationary pressure created by the shelter – 34% of the CPI – the same Fed policy creates it.
The Fed has already decided on a rate hike of 0.50 / 0.75 in November 2022. The risk is that they will make the same mistakes as Volcker in the 80s that brought the country and the market into recession.
Due to the forecast for November and the Christmas period, it is very likely the bottom will be set before March 2023, and we can expect some type of V bounce or large volatile frothy rallies to continue.
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