I don’t expect Chair Powell will be donning a flight suit to announce “mission accomplished” at next week’s FOMC meeting. But his words will be carefully parsed for any hint of acknowledgement that we’re officially passed the worst of it.
“We never feel so alive as when we have nearly died.”
— Robert Macfarlane
Friday Accomplished Charts
Is it time to declare Mission Accomplished on inflation? Markets seem to think so.
By either skilful action or lucky timing (or some combination thereof), the Fed has successfully slowed the economy and is now turning inflation into disinflation.
Risk assets (including crypto!) have rallied on the prospect that June’s CPI print of 9.1% will prove to be the high-water mark — possibly for decades.
Whether this rally is the start of something bigger or just a bear-market bounce is TBD, of course. But either way, markets are feeling alive again after having survived a near-death experience with inflation.
I don’t expect Chair Powell will don a flight suit to announce “mission accomplished” at next week’s FOMC meeting. But his words will be carefully parsed for any hint that we’re officially past the worst of it.
How close are we to the Fed giving markets a green-light?
Let’s see if some charts can help us figure it out.
Futures markets have been telling us for some time now inflation would turn lower sooner rather than later. Businesses are now saying the same.
This morning’s PMI survey data showed the first contraction in business activity since the pandemic, with respondents asserting that disinflation is already here: “The weakening demand environment has helped to alleviate inflationary pressures … the rate of inflation [is] still running high by historical standards but [is] now down to a 16-month low.”
That may even be understating things:
The Fed’s Prices Paid index for the Philadelphia region (the most recent data), suggests prices are already falling (from admittedly high levels).
The Fed’s Future Prices Receivedindex shows businesses expect prices to fall further:
Prices received falling faster than prices paid does not bode well for corporate profitability — a reminder that in P/E terms, disinflation is good for the numerator (price), but bad for the denominator (earnings).
Companies are struggling to move the things they’ve already paid for:
Business inventories rose 17.7% in May (and presumably more in June and July). Retailers won’t worry much about 9% CPI when they are having to cut prices to get you to buy anything.
If you do buy their inventory, they won’t have trouble getting more:
The cost of shipping freight from China to the US (blue line) has fallen 65% from September highs. And that’s despite all the ongoing Covid-related port closures.
Here’s the most crucial falling price:
US gasoline prices have fallen for 39 straight days (39!) — from $5.10 on June 13 to $4.60 today. Inflation expectations — the Fed’s biggest worry — are sure to follow.
Our housing expectations have already followed:
The housing bubble is bursting, just like the Fed asked it to.
So, how long will we have to wait until the Fed changes its tune?
Maybe not much past August 10. The Cleveland Fed’s Inflation Now model sees the upcoming CPI print at just 0.33% month-on-month, down nearly a full point from June's 1.3%.
I won’t expect to see Powell don the flight suit on August 11, but he might at least start checking his closet for it. (Or ask George if he can borrow his).
VitalikButerin claims that #Ethereum will be able to to process "100,000 transactions per second", following the completion of 5 key phases (thread) — Miles Deutscher
Bond markets are moving again, and you should pay attention. (thread) — Alf
More people are accumulating ETH as the price drops. Largest number of addresses holding 1 ETH ever. — Dunleavy (graph)