Inflation is always and everywhere ...
But what creates and drives it is what matters for the markets.
… a monetary phenomenon. Just don’t tell neo-Keynesian Fed Vice Chair Clarida and Fed Chair Powell. Under their tutelage, M2—a broad measure of money supply—has soared 30% the past 16 months. The Fed’s balance sheet has ballooned 90% the same period to almost $8 trillion. Meanwhile, President Biden’s agenda would spend 24-25% of GDP even after the stimulus wears off. Never has fiscal and monetary policy been so aligned, nor known no bounds without subsequent inflation, SIS Research says. MMT’s not a theory anymore. It was far different four decades ago when market participants viewed the every-Thursday money supply report as the most important data on the week. Fed Chair Paul Volcker, appointed in 1979 amid stagflation (a sluggish economy and skyrocketing inflation), made taming money supply growth his top priority. This aligned with the monetarist’s school of thought that stable growth in the money supply should bring about stable levels of inflation. It worked. Inflation was crushed at a cost of back-to-back recessions. And now? The Fed’s done away with the weekly M2 reports. They’re now monthly with data that's nearly 2-months old. Hmm.
We braced for this, didn’t we? May CPI (more below) surprised to the upside against already elevated expectations. We might take comfort that roughly half the run-up was driven by airfares, new and used cars and that those pressures could ease. Neither the stock nor bond markets seemed concerned. The S&P 500 hit a new high the same day as the report, the 10-year Treasury yield closed well below 1.5% and Michigan inflation sentiment eased, all signs underlying inflation may be peaking and many are taking the Fed at its word that true tightening is unlikely until nearly 8 million pre-pandemic workers are back on payrolls. Some wonder if the Fed may hint at taper at next week’s FOMC meeting. But MNI-Market News interviews with central bankers suggest even Jackson Hole (the Kansas City Fed’s gathering of central bankers at the end of August) may be too early for that discussion. Under its new inclusive definition of “maximum employment,” the Fed wants to see improvement in all segments of the labor market before backing off. Forget inflation, Strategas Research says. The dollar is its biggest long-term worry. Thank you!!
Soaring capex, a record rebound in profits, rising capacity utilization, avid demand for big-ticket items from homes to cars and buoyant CEO confidence continue to support growth and the bullish case (more below). 2021 is expected to see the fastest GDP growth in nearly four decades. Revenue forecasts can't keep up. Analysts project revenues to grow 12% this year while economic forecasts imply 18% growth. The S&P forward operating margin has surpassed 2018’s highs and 2021 earnings-per-share (EPS) growth estimates that began the year at 23% keep rising and now stand at 36%. We're near challenging seasonality and a highly anticipated pullback is due—it’s rare in any year not to have a 10% correction. But there’s so very much money on the sidelines, waiting for that pullback. Fundstrat puts it near $3.2 trillion. Breadth is supportive. The S&P cumulative advance/decline line hit a new all-time high this week, more than 90% of the S&P companies are trading above their 200-day moving averages and globally, 75% of MSCI All Country World component stocks are above 200-day moving averages. Incidentally, correlation within the S&P is at pandemic lows—an opportunity for active management. While we debate Fed policy reversal, history shows returns remain robust leading up to and following the first hike. Over the past four rate-hike cycles (’94, ’99, ’04 and ’15), Credit Suisse shares the S&P gained 9.5% in the 12 months prior to the first hike and 26% over the subsequent 3 years. The real damage from higher rates tends to occur later in the cycle when tighter policy flattens/inverts the yield curve. This week, I traveled (Yay!) to speak before 350 bankers in wonderful, if not so socially distant San Antonio. During Q&A, their concerns were of two phenomena—MMT and bitcoin. Same question for each: “How will this story end?” My first thought, which I didn’t share, was Jack Nicholson’s comment to Tom Cruise in “A Few Good Men” ….
- This is so bullish! CFO capital expenditure (capex) plans for this year were the strongest since Evercore ISI began its survey in 2002, a sign productivity’s boom—it rose at its fastest pace in a decade in Q1—will be sustained. Jefferies own capex indicators, for the U.S. and globally, also have gone ballistic.
- It’s an employee’s market Job openings jumped to a record high again in April even as the quit rate (the percentage walking away from current jobs) hit a record high. And still with 8 million unemployed. By fall, arguably this mismatch should improve with enhanced jobless benefits going away, children returning to school and Covid fears easing.
- A synchronous global V Worldwide air cargo volumes continued their V-shaped recovery in April, May’s global PMI displayed strong showings on both sides of the Atlantic and Manpower’s quarterly survey of worldwide hiring intentions was notably upbeat.
- How long is ‘transitory?’ May’s 74 basis-point jump in core CPI was the second biggest in 40 years, trailing only April’s 92 basis-point blowout. Led by used cars, airfares, new cars and household furnishings, the core components accounted for two-thirds of the CPI’s 5% year-over-year headline rise, a sign price pressures may last through summer. But stickier rents and rental-equivalent housing rose strongly, too. Businesses are starting to hike prices (more below).
- Hard to be upbeat when you can’t find workers The NFIB optimism gauge slipped for the first time in four months in May on uncertainty about near-term growth. A record-matching 57% of respondents reported difficulty finding qualified applicants, prompting them to enhance pay and worker benefits, and a record 43% are planning price hikes in coming months on top of 40% who already have.
- Is it different this time? The gap between 10-year Treasury yields and the CPI is -350 basis points, the highest since 1980. In fact, it has only been more negative for 10 months in the last 70 years, all of which were in ’74, ’75 or ’80. Such a deeply negative (albeit crude) proxy for real yields is great for financial conditions today, but Deutsche Bank wonders if we are building up to a big accident with such a mismatch between inflation and bond yields?
Minimal disruption Goldman Sachs estimates a 15% global minimum tax rate as G-7 leaders agreed to in theory this week would represent a 1-2% downside to consensus 2022 EPS estimates. Information Technology and Health Care names with low current effective tax rates and high foreign income exposure face the greatest risk. But for them, the hit to EPS is only around 5%.
‘Jetson Jobs’ That’s the name for work categories created by new technologies. In 1980, the U.S. Bureau of Labor Statistics added Word Processing. Subsequent decades saw Robotic Machine Operator, Chief Information Officer, and Wind Turbines Technician and Intelligence Analyst. Some think Machine Learning Engineer or Robotic Systems Integration Lead (ironically George Jetson’s actual job involved pressing a single button on a computer all day) may make 2020’s list.
Now they’re Walmart greeters Bank of America shares that since the U.S. Census of 1950, only a single job out of 270 occupations has disappeared explicitly due to automation—elevator operators. In the U.K., manual car washers have increasingly displaced automated car wash machines because of an influx in cheap migrant labor.