Scan Widely, Watch Closely. For years I've tracked around 500 data-sets from the world's leading economies every month to produce the most data-rich suite of shocks & surprises indexes. When something catches my eye, this daily podcasts talks about it . . . briefly.
US CPI Surprise - What it Means for US and Global Inflation
The US July CPI result was better than expected, with headline inflation moderating to 8.5% yoy (from 9.1% in June), mainly thanks to a 4.6% mom fall in energy costs. This was on the back of a 10.4% mom fall in Brent oil prices and a 8.5% mom fall in Nymex natural gas prices. It is not obvious this is being repeated in August: so far, on average oil prices have fallen a further 7.5% mom, but gas prices have rebounded 12.6% mom, and overall the CRB index, which fell 9.5% in July, is almost unchanged.
Still, July's result is strong enough to allow us to scale back the likely inflationary trajectory in the US, with it now expected to peak at 9.1% in September, before drifting down to below 8% by end-2Q23.
But two caveats. First, I'm fashioning these trajectories from the 6m deviation in 5yr seasonalized trends - but volatilities in CPI indexes during the last six months have been consistently dramatic (both above and below trend), and in some cases (UK) positively freakish. So even a 6m trend assumption isn't looking particularly stable month-on-month.
Second, whilst inflationary pressures may be moderating in the US, they are only now beginning to show up in force in NE Asia. Overall, this means that my measure of global aggregate inflation continued to rise in July. . . .
28 Jul 2022
US 2Q GDP - Profits and Stockmarket Valuations
I'm less concerned with the recession/no-recession arguments (hey, don't US politics just absolutely fascinate you? Me neither), than with the implications for profits and stockmarket valuations. Three observations:
1. Regardless of headline GDP, once you strip out extremely volatile inventory-flows, there's been essentially no growth in final sales of domestic product now for five quarter. There's just no momentum at all.
2. The massive fiscal stimulus has not yet completely been washed out of the Kalecki profits reckoning. I calculate profits were down 7.4% qoq and 19.4% yoy, mainly thanks to the fiscal deficit moderating. But there's worse - the profits/GDP ratio has fallen to its lowest level since 1Q16 - so there's cyclical as well as one-off structural pressure at work.
3. All of which means the S&P500 remains overvalued on my slow-model basis, which has been essentially on the money for the last 30 years. July's rally will extend that overvaluation. So the vulnerability continues, and rises.
22 Jul 2022
The US Camel's All Tapped Out
The speed and severity with which data from the US has collapsed over the last month is extremely unusual. Why is the outbreak of inflation doing such damage so quickly.
One reason is the way in which the US profits model has changed over the years, until since 2000 to the present day, 77.6% of Kalecki profits are attributable to household and government dissavings, whilst only 22.4% come from net investment and net exports. Compare that to 1960-1980, when net investment and exports accounted for 65.7% of profits, with h'hold and govt dissavings generating only 34.3%.
Let's state the obvious: if your profit model depends disproportionately on h'holds and governments spending more than the earn, sooner or later, even the strongest financial balance sheet will become impaired, fragile. And it's that financial fragility which is kicking in, and kicking down, right now.
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