The central point of both the US system and the equity market is the CPI
The 3 elements that interest the Fed to intervene are – they should be (Bernanke’s teaching at Princeton) – currently there are dinosaurs with “80s methods –
1 – the short-term money supply
– M3 but refers to Q2 and therefore old data
– the total avg weekly earnings – BLS Employment Report – This data shows at sept 22 that on an overall level the total week-earnings is Y / Y slightly negative in real terms, but at the individual level the loss of purchasing power is of 3.4%
2 – Consumption – BEA Personal Income – see the attached tables and it emerges that consumption in real terms Aug 22 is negative Y / Y and YTD both using the PCE and the CPI as deflator – sheet 2
3 – the CPI and this is what we focus on today
View the Economic Analysis: https://algotradingsystems.s3.amazonaws.com/docs/V+studies.xls
One of the elements alerting on 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 Y / Y – demonstration –
– 3mths indicated strong and increasing pressures on the CPI on Feb 21, while Y / Y detects it in May – sheet 3 line 72 and line 123
Let’s see the situation 2022 to date – 3mths – line 123 and following
– the maximum inflationary push 21-22 occurs at June 22 +12.26 annualized and then collapses at the end of Q3 sept 22 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 other strong contractions
Sept 22 – Q3 22 – column E shows the weight on the CPI of the various sectors
– overall situation of frozen prices –
1 – Sectors that create a strong boost to CPI growth
a – Food – weight 13.635% – + 10.92annualized
all sectors of Food at home away from home
b – Energy services – Electricity – due to the high prices of inventories of production fuel
2 – 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
2 – Sector 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
1 – 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
2 – A high-cost US production that has significant consequences on manufacturers’ inventories
3 – The fortune of Import prices – BLS Release – Food Feeds and Beverage – 3mths prices annualized sept 22 -9.14 June 22 -1.90 march 22 +21.16 – Y / Y sept 22 + 3.43% June 22 + 8.70% march 22 + 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% 3mths annualized + 15.50% Y / Y – lack of production
Prices are expected to drop with Southern Hemisphere harvests – December 22 April 23
SHELTER
It is the Fed’s own policy that creates the inflationary push
Conclusion
The 3 elements that should guide the Fed’s monetary policy suggest – CAUTION
– a consumer with a loss of real purchasing power
– a negative consumption in real terms either using the PCE or the CPI as a deflator
– an inflationary pressure created by the 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 have already decided rate hike 0.50 / 0.75 Nov 22 – The risk is that they will make the same mistakes of Wolker in the 80s that brought the country and the market into recession.
Due to the forecast of November, and Xmas period 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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