Research.LeutholdGroup

When measured by the gains in stocks, gold, and house prices, there has been just one other occasion in which asset inflation was as “broad” as today—late 1980. But the differences in underlying fundamentals between then and now couldn’t be more stark. 

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Consumer Price Inflation of 1.2% for the twelve months through October remains way below the Fed’s long-time 2% objective, which is nothing new. But a first step in getting inflation to eventually run a little bit “hot” (the Fed’s new objective) is to break the long-term disinflationary psychology among consumers and investors, and that is clearly happening. In fact, based on the excellent “Inflation Surprise” Indexes published monthly by Citi, the U.S. is now the world’s inflationary hotspot!

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News that the Bureau of Labor Statistics may have undercounted the May unemployment rate by six percentage points should remind investors of the danger of taking government economic reports too seriously. Regardless of the figure, though, unemployment is no doubt near its peak for the downturn.

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Investors have just suffered a negative wealth effect that will likely work to tamp down inflation over the next year.

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The latest CPI numbers missed market expectations. The problem is not with the actual CPI numbers, but merely the fact that market expectations are still a tad too high. More disconcerting is the cool trend in housing inflation.

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While our Group Selection (GS) framework hasn’t yet warmed up to commodity-oriented industries, our macro work suggests perhaps it should.

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The latest Core CPI number disappointed again. The divergence between inflation break-evens and the yield curve is puzzling. Given the lack of inflationary pressure and the Fed’s projected rate path, it would not surprise us to see a flatter curve without the help of fiscal stimulus in the next few months.

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The latest CPI numbers are in-line with expectations. The divergence between inflation break-evens and the yield curve is worth close monitoring. Given that the global recovery is still intact, we don’t think the current inflation picture justifies the flatness of the yield curve.

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The latest CPI numbers missed expectations but we consider it a passable reading.

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Bond investors residing in the Lower For Longer© camp no doubt feel vindicated by the summer rally that’s taken yields on 10-year Treasury bonds to as low as 2.06% in early September.

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The CPI numbers have disappointed five months in a row. The real bad news for inflation hawks is that the weakness in core CPI is broad-based. There is hope for inflation to stem its recent weakening trend soon as the Chinese CPI has already stabilized and started to turn up.

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Temporary and transitory? The CPI numbers have come in below estimates four months in a row.

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The CPI numbers have disappointed three months in a row. Weak commodity prices do not inspire higher inflation expectations. The global scope of inflation deceleration adds more weight to the recent soft readings. However, lower bond yields relative to nominal growth rate is inflationary and buffers the impact of weak inflation and rate hikes.

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The latest CPI numbers are slightly weaker than expected. We think expectations for higher inflation are still on the high side. The global scope of inflation deceleration adds more weight to the recent soft readings. Patience is the right approach for the reflation trade at this point.

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The latest CPI is weaker and the softness was sooner than we expected.  More alarming is the recent broad-based deterioration in economic data.  Lower inflation expectations have flattened the yield curve recently, which hurt Financial stocks. We believe inflation has likely peaked for the time being and patience is the right approach for the reflation trade at this point.

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The dovish rate hike is a positive for inflation and credit. A hawkish message right now would have been quite detrimental and self-defeating in terms of realizing two more hikes later this year. We believe achieving sustained 2-3% inflation could be harder than most people expect going forward. Overall, we are encouraged by the dovish hike but we think the real test for inflation is when the base effect starts to wane.

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For managers who must remain fully invested in equities (or “paid to play,” as we’ve often called it), the level of inflation might prove a less important consideration than its character.

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CPI numbers were strong and better than expected. A big part of the recent upturn in inflation has to do with the much lower base from a year ago. We are seeing upside inflation surprises on a global basis but wage inflation is still disappointing. We are encouraged by the general uptrend in inflation data but we think the real test comes after the positive base effect subsides.

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CPI figures for December matched consensus estimates.  The Federal Reserve should be pleased to see the modest uptrend in prices.  Sustained price inflation still faces a number headwinds including: resource slack, a strong Dollar and a weakening Yuan. Energy prices saw the largest gains in 2016 after a brutal 2015. Within the Core CPI, medical care experienced notable gains.

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CPI numbers were largely in line. There are encouraging signs that inflation is turning on a global basis. The path to sustained higher inflation is not going to be a smooth one and too much enthusiasm can prematurely end this reflation theme. We are encouraged by the general uptrend in inflation and inflation expectations but certainly do not want to take higher inflation as a given.

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· Headline CPI was in line but Core CPI missed.

The powerful prospect of a huge fiscal stimulus, a substantial tax cut and meaningful deregulation stoked hopes for higher growth and inflation. The Trump-induced reflation trade is still considered risk positive.  The market is putting a lot of faith in Trump’s new policy package but its actual impact on the economy remains to be seen.

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Headline CPI was in line but Core CPI missed.  The current reading still fits the overall “Goldilocks” inflation backdrop and should be considered favorable for the risk rally. The reason behind the recent rise in inflation expectations was the market’s perception of a policy shift away from monetary easing towards fiscal easing.

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Inflation is slightly stronger than expected but has no impact on policy decisions. Right now, both the market and the data are telling the Fed to put the rate hike on hold. If the Fed decides to pass in September, there is a very good chance that the Fed might not be able to hike at all this year.

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Inflation is weak in July but the rebound in oil prices, the renewed weakness in the dollar and the strength in Chinese Yuan are all positive for inflation expectations in the near term. The disinflationary headwinds from outside of the U.S. are only getting stronger, not weaker. It’s hard to disagree with the market’s low rate hike expectations.

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The latest CPI reading is positive for the overall risk rally. We continue to recommend a more patient approach towards inflation. The key market-based drivers of inflation have turned negative. But the recent key economic numbers have mostly exceeded expectations.

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The latest jobs report disappointed but we think it’s a short term aberration as other data still point to a healthy job market. Some of the key market-based inflation drivers, however, have reversed course a bit in the last couple weeks. Patience is still the right strategy.

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Inflation exceeded expectations in April. The more durable inflation measures such as wage inflation are also improving. We characterize the recent improvement in inflation as a relief from the threat of deflation but still quite far from being a catalyst for run-away inflation.

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Inflation missed expectations in March.  The three key inflation drivers this year - oil, the Dollar and the Chinese yuan, are all going in the right direction.  The risk of being too early on the inflation call far outweighs the risk of being too late.  Patience is still recommended.

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Inflation met or modestly exceeded expectations. The three key drivers for inflation (oil, the Dollar and the Chinese yuan) continued to improve. But we are not rushing to declare victory on disinflation. “Organic” inflation, such as sustained wage inflation, has been very elusive so far.

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Both CPI and PPI surprised to the upside.The three key drivers for inflation (oil, the Dollar and the Chinese yuan) all saw some improvements.  Despite the recent improvements, we are still in no hurry to call the bottom in inflation.  The downturn in the energy and manufacturing industries has wide-reaching effects. Patience and caution are still warranted.

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Inflation was lower than expected in December.  The three key drivers for inflation this year are oil, the Dollar and the Chinese yuan. None of these are helping so far.  We have been avoiding inflation sensitive assets and do not see any reasons to catch the falling knife at this point.

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Inflation was largely in line with expectations in November.  The impact of lower energy prices seems to have lessened as the year-over-year comparison gets better.  We are far from ready to call a return of inflation. The ISM price indexes supported our still cautious view towards inflation.

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Inflation met expectations in October.  Overall inflation not under-shooting expectations is likely to give the Fed some comfort when it decides on the rate hike in December. Various wage inflation measures show some promise but we will be patient and wait for confirmation.

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Inflation met or slightly beat expectations in September.  We are watching the oil prices and the dollar closely for signs that the disinflationary headwind might be dying down.

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Longer term drivers of inflation, such as velocity of money, capacity utilization, wage inflation, all suggest disinflation is here to stay.  It’s still too early to call the bottom in oil prices so we continue to expect weaker producers’ inflation ahead.

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The current inflation numbers are not yet reflective of the recent sell off in oil prices so we expect even weaker inflation going forward.

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With the recent weakness in oil prices and the renewed strength of the U.S. dollar, we would not be surprised to see weaker headline numbers in the next few months. The expectations of a rate hike might actually end up pushing the rate hike further out. We are now less sanguine about a pick-up in PPI in the rest of the year.

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While there’s understandable obsession over the likely level of inflation (especially with the year-over-year CPI dipping below zero in the past two months), equity managers with no interest or skill in inflation forecasting might be better served by monitoring the character of inflation—i.e., whether it was led by changes in consumer or producer prices.

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The short end of the yield curve sold-off to price in an earlier-than-expected rate hike, while the long end rallied as the prospect of tightening reduced longer-term inflation expectations.

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We looked at the periods around the end of the three previous easing programs (QE1, QE2 and Operation Twist) and compared those patterns with the current ones for various measures.  The current patterns from both an economic and a market front bear enough resemblance to the previous ones to make us a bit uncomfortable.  February’s market action was encouraging, but it is still too early to rule out a post-QE fizzle.

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