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    Not enough good inflation news

    What’s New in US Inflation

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    Welcome home. If inflation is lower than expected and stock prices can’t keep up, something is happening. I don’t know what it is. you? If so please email me: robert.armstrong@ft.com

    Cheap used cars cool the market

    We know august Inflation report The news was more or less good as the Treasury rebounded. Mr Market seems to have seen nothing in the CPI to make him think that the Fed will advance the tapering / tightening schedule.

    Core inflation (excluding food and energy) rose only 0.1% from last month and 4% from a year ago. This is the slowest rate in 6 months. Used car prices are one-third higher than they were a year ago, but a little cheaper than last month, demonstrating that one of the worst and most noticeable reopening bottlenecks has been eased.

    So yeah. But lowercase yay: The good news wasn’t enough to fill the slow leak in the stock market. The S & P 500 fell again yesterday, down 2% from its highs earlier this month.

    While the resumption of inflation is giving way (witnessing used car prices), some observers are seeing the root cause of peripheral price pressure. Paul Ashworth of Capital Economics is in a note to the client.

    Both rents and equivalent rents for owners have risen 0.3% month-on-month, indicating that cyclical pressure from extremely difficult labor market conditions is pervading consumer prices. The unprecedented surge in other rent measurements suggests that there is much more to come down that pipeline. .. ..[We]Expect further decline [in reopening inflation] Over the next few months. .. .. However, looking inside, we can see that cyclical inflationary pressures continue to rise.

    I talked to Ashworth yesterday. “The pandemic caused a very dramatic labor shortage,” he told me, health concerns, lack of childcare, enhanced government interests, early retirement and perhaps a balance between work and life. Even the social reassessment was all united. His concern is that wage pressure jumps to other “sticky” prices (paradigm homes), which leads to a wage price spiral (for kids like me in the 70’s, wage prices). Spiral was a monster our parents scared us (we were naughty).

    Such concerns are supported by this chart.

    Wages are rising, but far from expected, given the unprecedented explosive growth in the number of unfilled jobs. 3 meters above the pre-pandemic level. How long can this gap be tolerated? (Average hourly wage data probably underestimates wage inflation due to the return of many low-skilled hospitality workers to work in recent months, which also explains the downturn spike this spring due to the arrival of vaccines. doing.)

    And if the CPI data doesn’t convince you that there is no cyclical rise in “sticky” prices, then this city rent map is probably Apartment list, Rental search sites convince you:

    yesterday’s letter I called people who think the market is not pricing enough inflation risk “inflationary neurology”. I look at the map and think I was too strict.

    Ashworth believes it will take some time for the penny to fall for inflation skeptics like Federal Reserve Chairman Jay Powell.

    “In the next 12 months, things will be mixed. It’s hard to tell if the Fed has to move. We expect inflation and core inflation to fall next year. But the problem is inflation. Is it going down completely? [the Fed’s] the goal? There will be a period of 6 to 12 months when the Federal Reserve Board can say “go there, it’s down”. .. .. However, after that, the resumption effect is lost and inflation of the cyclical factor becomes dominant. That’s when it becomes clear to the Fed that inflation is not temporary. ”

    The fund manager owns a lot of stocks and is sad

    One chart neatly summarizes the September edition of Bank of America’s hottest fund manager survey.

    Of the 232 fund managers surveyed by BofA, the percentage of those who believe the US economy is expected to improve has recently plummeted from more than half to the minority. Still, despite pessimism, three-quarters of managers are still overweight stocks. As the graph shows, this is a rare combination.

    The theme of pessimism is carried out throughout the investigation. Management’s expectations of profit growth, rates of return and inflation are all declining. The percentage of people who take “higher risk than usual” is rolling over. Currently, few managers believe that small caps and low quality stocks will outperform. Cash allocation is small, but it is starting to increase.

    But at the same time, managers don’t want anything to do with bonds. A whopping 69% is bond underweight (light blue line):

    Finally, the percentage of managers who say they have hedged their stocks against a sharp drop in the market is the lowest in three and a half years.

    I saw all of this and thought of “pessimistic complacency.” Pessimism is mixed with the belief that stocks will always exist. I told the phrase to one of the BofA strategists behind the investigation, David Jones, and he said he preferred a “bearish bull”:

    “People are certainly long stocks, perhaps not as long as they were, but at these yield levels we can’t justify putting marginal dollars into bonds. So they What else are you going to do?

    “So you see this discrepancy between the darkening macro outlook and continued investment in equities … Equity flow is very strong. Since the beginning of 2021, the last 10 I think it’s a year or 15 years … We’re heading for a trillion dollar year. ”

    Jones’ team believes that tensions between emotions and allocations are most likely resolved by reducing enthusiasm for equities. They think the end of the year may be tough on stocks. What’s the big reason? They believe that the 40-year bull market for bonds has ended with the political, financial and financial changes brought about by Covid and the pandemic. Ultra-low interest rates, which keep stock prices high, are expected to rise. Change is coming slowly or rapidly. This year’s big rush is a chaotic rush, with the possibility of returning to cash and bonds, or coming out all at once.

    I’m not sure if I’ll buy Jones’ macro treatise. However, BofA’s research is confident that there will be significant changes in market sentiment. The ground is shifting.

    One good reading

    FT’s economics editor, Chris Giles, excels at how both sides of Brexit have transitioned. Damage control mode.

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