Inflation
Inflation: Not “If,” But “Where”
In the aftermath of the Great Financial Crisis, we reminded investors that it would be historically unusual for the thematic leaders of a bull market to repeat as the winners of the subsequent bull.
The Decade Of U.S. Exceptionalism & The Year Ahead
Two words sum up the past decade pretty nicely: U.S. Exceptionalism. The superiority of U.S. assets really comes down to the unique combination of growth (U.S. stocks), yield (U.S. bonds), and relative safety (both U.S. stocks and bonds).
Playing With Fire & Ice—An Inflation Scorecard
We put together an Inflation Scorecard that monitors two critical sets of inflation drivers: demand pull and cost push. The qualitatively-adjusted score is much closer to a neutral reading than the mechanical composite (which suggested quite a bit more disinflationary headwind).
Did The Doves Swoop In And Save The Day?
Just a few months ago, Fed Chairman Jerome Powell boasted a reputation as a straight-talking, sound-money banker.
The Fed Was Not The Only One To Tighten Last Month
Wage inflation should accelerate in the months ahead, oil could bounce from its oversold low, and college textbooks might double in price before the fall semester. No problem…
Inflation—Another Small Miss
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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.
Inflation—Largely In Line
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The year-over-year headline number was in line with market expectations but the month-over-month increase missed market consensus (0.1% vs. 0.2% expected). All else being equal, there is a good chance CPI might have peaked for 2018. A stronger dollar is disinflationary while the short term impact of tariffs is higher import prices.
Inflation Warning Flags?
After yet another benign figure on wages for June, the idea that inflationary pressures might be a problem for the stock market seems far-fetched.
Inflation—No Surprises Here
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Headline and Core CPI figures hit estimates right on the nose in May, continuing the trend of modest but not outrageous price increases. Energy prices have boosted headline CPI while core CPI continues to be driven by services. With both of the Fed’s mandates pretty much accomplished, appreciate this rare window of time.
Staples Still Stomped Upon
Consumer Staples has historically been the sector most resistant to intermediate stock market corrections, exhibiting an average “downside capture” of less than 40% during all such declines dating back to 1989.
A New Hurdle For An Old Bull?
The first quarter S&P 500 earnings “beat” rate stands to be the highest in history, as any CEO with a pulse has learned to lower the hurdle.
What’s Ailing Consumer Staples?
For the first time in this bull market, defensive stocks failed to provide any semblance of defense during a market correction.
What’s Ailing The Staples?
The setback that began in late January qualifies as the sixth intermediate correction of the current bull market, where “intermediate” is defined as an S&P 500 loss ranging between 7%-12%...
Inflation—Suddenly Relevant
The headline and Core CPI numbers for January both came in hotter than expected. Despite the resurrected interest and concerns about inflation we still haven’t caught inflation fever. Because of the narrative (correct or not) look for increased volatility surrounding inflation announcements.
Most Likely Just A Correction
So, what happened to the January Barometer—the old analyst’s maxim that a market gain in January portends a gain for the full year?
Inflation—A Small Upside Surprise
The latest Core CPI number beat expectations but the yield curve flattened. The market shows more conviction about the Fed’s rate hikes than longer term inflation. We recommend patience and we don’t believe missing out on the first few months of higher inflation will cost us dearly.
Keep An Eye On “Relative” Inflation
While our Group Selection (GS) framework hasn’t yet warmed up to commodity-oriented industries, our macro work suggests perhaps it should.
Inflation-As Flat As The Yield Curve
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.
Stocks Versus Your “Personal” Inflation Rate
While the bull possesses a seemingly endless supply of energy, the Leuthold database still houses a supply of measures by which the bull market has fallen short.
Goldilocks—Alive And Well
If we look beyond the daily noise from North Korea, the global macro picture still fits our “Goldilocks” view pretty well.
Where The Bear Lingers
While the next recession could be caused by a variety of factors, we suspect the recovery will eventually end like most post-war expansions, only after a significant rise in interest rates.
Inflation Disappoints Again
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.
Inflation Complacency?
Leading inflation indicators have leveled off so far in 2017 after last year’s huge rebound from the deeply oversold readings produced by the 2014-2015 collapse in commodities.
Goldilocks—Enjoy It While It Lasts
The best interpretation of the current cross-asset message is the scenario of goldilocks, and there are reasons to believe this is a possible scenario for the near term.
Inflation-Weaker Sooner Than Expected
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.
A Dovish Hike--Positive For Inflation
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.
Lo And Behold, Another RATIO!!
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.
Inflation: Just A Cyclical Uptick
We should emphasize that any inflation pickup is likely to be a traditional, late-cycle phenomenon stemming from rising wage growth and rebounding commodity prices. We do not expect a secular move toward significantly higher inflation rates (say, north of 3.0%-3.5%).
Could Inflation Threaten The Stock Market?
Over the last 70 years, stocks have made no cumulative progress when Producer Price Inflation runs above 4%. Returns have been average when PPI inflation runs between 2% and 4%—where it is today.
Inflation-All About That Base
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.
Reflation And Election Year Patterns—Not Much To Lean On
· One bright spot in last month’s lackluster market action was that inflation sensitive assets saw impressive relative returns.
Inflation Remains Largely In Line With Expectations
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.
Inflation Hindered; Contributing To A Flattening Yield Curve
A stronger dollar and a weaker Chinese yuan dented the prospects for higher inflation in May.
Time For Materials?
The Leuthold Materials sector jumped five spots to #3 in the June Group Selection (GS) rankings, its highest ranking in eight years and the first reading outside of the bottom four in almost four years.
Inflation Exceeded Expectations In April
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.
Reflation Trade Back In Vogue? We’d Rather Be Late Than Early
Despite recent improvement in some inflation measures, we are not convinced the war against disinflation has been won. The risk of being too early on the inflation call far outweighs the risk of being too late.
Inflation-Patience Recommended
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.
Implications Of Low Growth, Low Inflation, Low Rates
The current environment will likely persist longer than most expect which will put further downward pressure on profit margins. As margins come under pressure, companies increase leverage to prop up ROE. However, the market wants higher duration, not higher leverage.
Inflation Modestly Exceeds Expectations
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.
Inflation Surprised To The Upside
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.