October 13, 2021 (Investorideas.com Newswire) With inflation getting worse, has the Fed woken up? And with the USD wanting shiny, gold, silver, and mining shares proceed to really feel the pinch.
With U.S. nonfarm payrolls coming in weaker than anticipated on Oct. 8, the Fed’s taper timeline was as soon as once more within the highlight. Nonetheless, with the U.S. unemployment rate falling to 4.8% (versus 5.1% anticipated) and the weak point primarily pushed by a decline in authorities payrolls (personal payrolls elevated by 317,000), the lukewarm print ought to nonetheless meet Chairman Jerome Powell’s taper threshold.
To elucidate, July’s information was revised upward by 38,000 (elevated for the second time), whereas August’s information was revised upward by 131,000. In consequence, 169,000 extra jobs had been added than beforehand reported.
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What’s extra, with inflation surging and the “transitory” narrative struggling a gradual and painful demise, the Fed is having its ‘come-to-Jesus’ second. For context, I have been warning for months that the central financial institution stays materially behind the inflation curve.
I wrote on Apr. 30:
With Powell altering his tune from not seeing any “unwelcome” inflation on Jan. 14 to “we’re more likely to see upward stress on costs, however [it] will likely be short-term” on Apr. 28, are you able to guess the place this story is headed subsequent?
To that time, Atlanta Fed President Raphael Bostic mentioned on Oct. 12:
“I consider proof is mounting that worth pressures have broadened past the handful of things most immediately linked to produce chain points or the reopening of the providers sector…. To date, indicators don’t recommend that long-run inflation expectations are dangerously untethered. However the episodic pressures might grind on lengthy sufficient to unanchor expectations.”
Extra importantly, although, he admitted:
“Transitory is a unclean phrase…. It’s changing into more and more clear that the function of this episode that has animated worth pressures – primarily the extraordinary and widespread provide chain disruptions – won’t be temporary. By this definition, then, the forces should not transitory.”
And the way does this affect his taper timeline?
Additionally making the rounds, Fed Vice Chairman Richard Clarida supported the hawkish rhetoric on Oct. 12. Talking on the Institute of Worldwide Finance’s digital annual assembly, he mentioned that “the dangers to inflation are to the upside.” And after conceding that “the large unknown proper now’s how lengthy it should take for these bottleneck results to work their manner by means of,” he admitted:
For context, if the Fed concludes the taper by the “center of subsequent yr,” the timeline is extraordinarily hawkish. To elucidate why, I wrote on Sep. 23:
With ~$120 billion price of bond purchases poised to hit zero in roughly 9 months, the accelerated liquidity drain is extraordinarily bullish for the USD Index.
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To elucidate, the darkish blue line above tracks the tempo of the Fed’s taper following its announcement in December 2013, whereas the orange line above tracks the consensus estimate this time round. Nonetheless, if you happen to focus your consideration on the sunshine blue line, you may see that Powell’s taper timeline pushes QE to zero prematurely of each the precedent set in 2014 and the present consensus estimate.
On prime of that, whereas the Fed has lastly opened its eyes to persistent inflation, the central financial institution continues to be working within the rearview. To elucidate, whereas Fed officers appear to agree that tapering is important to calm inflation (which we additionally agree on), on the present charge, the hawkish shift is not almost hawkish sufficient.
For instance, whereas I have been sounding the alarm on the cost-push inflationary spiral for months, Brent and WTI prices at the moment are trading north of $80 per barrel and Citigroup mentioned that winter climate might uplift the previous to $90 per barrel within the fourth quarter. For context, Citigroup, Goldman Sachs and Financial institution of America are all forecasting $90+ per barrel Brent this yr. And whereas The White Home known as on OPEC (for the second time) to “do extra” (enhance provide to cut back oil costs), the cartel has ignored the pleas. In consequence, if oil’s upward momentum persists, the Fed is materially underestimating the inflationary affect.
Second, whereas commodity costs stay crucial driver of inflation, even “transitory” components have leaped to new highs. For context, I wrote on Apr. 16:
The Manheim Used Car Index – compiled from a database of greater than 5 million annual used car transactions – elevated by 5.87% month-over-month to a file excessive 179.2 in March. What’s extra, the tempo of the surge is in contrast to something that we have ever witnessed earlier than.
And after a short pause – which even we conceded on condition that abnormally excessive used automobile costs must be “transitory” – Manheim revealed that wholesale used car costs “elevated 5.3% month-over-month in September” and “introduced the Manheim Used Car Index to [a record high] 204.8.”
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As well as, Oshkosh Company – an American producer of specialty vans, army automobiles, truck our bodies, airport fireplace equipment and entry tools – decreased its full-year income and earnings steerage on Oct. 8. The corporate cited “vital provide chain and logistics disruptions in addition to materials and freight price inflation much like different corporations which are past the corporate’s prior expectations.”
CEO John C. Pfeifer added:
“We carried out a number of worth will increase in our non-defense segments over the previous six to 9 months to fight unprecedented uncooked materials inflation and freight price escalation. Based mostly on present situations, we count on that our pricing actions will cowl our larger enter prices. Nonetheless, on account of our backlogs, we don’t consider this worth catch-up will happen till the top of the second quarter of Calendar 2022. If price escalation persists, we’ll take extra pricing actions.”
On the opposite facet of the inflationary coin, the NFIB launched its Small Enterprise Optimism Index on Oct. 12. And whereas the headline index declined from 100.1 in August to 99.1 in September, wage inflation rose to ranges unseen because the Seventies.
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Moreover, whereas “the web % of homeowners elevating common promoting costs decreased 3 factors to a web 46 %,” output inflation nonetheless stays at a greater than 30-year excessive.
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Lastly, I’ve talked about on a number of events that the commodity Producer Price Index (PPI) will doubtless decide when/if the inflationary momentum subsides. For context, its relationship with the headline Shopper Worth Index (CPI) stays proper on pattern (comply with the black arrow under):
And with the headline CPI crucial elementary information level launched right now, I wrote on Sep. 15 that “one other headline CPI print of roughly 5.25% to five.75% ought to hit the wire when the info is launched on Oct. 13.
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To elucidate, the inexperienced line above tracks the YoY share change within the commodity PPI, whereas the pink line above tracks the YoY share change within the headline CPI. For those who analyze the connection, you may see that the pair have an in depth connection.
The underside line? Whereas the headline CPI stays pinned within the 5%+ vary (anticipated) for now, the metric continues to be properly above the Fed’s 2% annual goal. What’s extra, with the S&P Goldman Sachs Commodity Index (S&P GSCI) making new highs alongside Brent and WTI, the longer term affect on the commodity PPI must be materials. And if the Fed would not speed up the liquidity drain and calm commodities’ fervor, we might even see a 6% headline CPI print earlier than we see 4%. Conversely, if corporations cannot go by means of the upper enter inflation, the affect on company revenue margins might upend the overall inventory market and go away the Fed handcuffed.
In consequence, whether or not the Fed accelerates its taper timeline or margin pressures result in a inventory market correction, each outcomes are profoundly bullish for the U.S. greenback. And with the PMs exhibiting sturdy damaging correlations with the buck, they may endure materially because the occasions unfold.
In conclusion, the PMs had been blended on Oct. 12. Nonetheless, with the EUR/USD hitting a brand new 2021 low and the USD Index hitting a brand new 2021 excessive, the greenback’s medium-term outlook stays fairly shiny. Furthermore, with the Fed upping the hawkish ante and an accelerated liquidity drain poised to chip away on the PMs, new lows ought to materialize over the following few months.
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Przemyslaw Radomski, CFA
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