by While the world fixated on the US CPI, it was other “inflation” data from across the Pacific that is telling the real economic story. Having conflated the former with a red-hot economy, the fact American consumer prices aren’t tied to the actual economic situation has been lost in the shuffle of the FOMC’s hawkishness, with markets obliged to price wrong-way Jay. The short end of the yield curve (USTs and elsewhere) is plotting like FOMC dots, whenever oil and crude factors raising the ceiling maybe short-term duration of the Fed’s rate hikes. Since these are pure theater, the curve’s far end is looking elsewhere for what the economy is really about. . . . . Inversion is simply these two competing sets: Fed playing inflation-fighter for the cameras pushing
Topics:
Jeffrey P. Snider considers the following as important: 5.) Alhambra Investments, bonds, China, Consumer Prices, CPI, currencies, economy, exports, Featured, Federal Reserve/Monetary Policy, global trade, imports, inflation, Janet Yellen, Markets, newsletter, PPI, producer prices, Recession
This could be interesting, too:
Eamonn Sheridan writes CHF traders note – Two Swiss National Bank speakers due Thursday, November 21
Charles Hugh Smith writes How Do We Fix the Collapse of Quality?
Marc Chandler writes Sterling and Gilts Pressed Lower by Firmer CPI
Michael Lebowitz writes Trump Tariffs Are Inflationary Claim The Experts
| While the world fixated on the US CPI, it was other “inflation” data from across the Pacific that is telling the real economic story. Having conflated the former with a red-hot economy, the fact American consumer prices aren’t tied to the actual economic situation has been lost in the shuffle of the FOMC’s hawkishness, with markets obliged to price wrong-way Jay.
The short end of the yield curve (USTs and elsewhere) is plotting like FOMC dots, whenever oil and crude factors raising the ceiling maybe short-term duration of the Fed’s rate hikes. Since these are pure theater, the curve’s far end is looking elsewhere for what the economy is really about. |
 . |
 . |
|
 . |
|
 . |
|
| Inversion is simply these two competing sets: Fed playing inflation-fighter for the cameras pushing up short-term bonds as the market attempts to gauge just how much onrushing weakness the FOMC will be able to ignore (by focus on the CPI) from the very real recession risks rising globally.What’s most compelling as to those recessions risks when it comes to the most recent May 2022 data from China is that it covers Shanghai (and other places) on its reopening. Yet, consumer prices over there fell last month when compared to April. According to the NBS last week, the Chinese CPI dropped 0.2% month-over-month.
Compared to May 2021, the index has increased just 2.1%, the same year-over-year rate as April. |
 . |
| Unlike what it looks from the perspective of US or European CPIs, there’s no mistaking the downturn across China all throughout last year. |
 . |
 . |
|
 . |
|
 . |
|
| And that had spilled over into China’s producer prices quite some time ago. The Chinese PPI, a very good proxy for the rest of the world, gained just 0.1% May over April, and was up just 6.4% year-over-year. That compares to a peak rate of 13.5% set last October – just like the yield curve – and is the slowest for producer prices dating back to March 2021 before this whole supply shock really got going.
In terms of leading indicators, China’s PPI is way out in front of any other CPI. There has been a very solid relationship between Chinese producer prices (including factory gate prices), industrial profits (that are harmed when rising input and commodity costs aren’t passed to consumers, in China and elsewhere, restricting profit growth), nominal Chinese GDP therefore what the rest of the world can get from China that the rest of the world badly needs. And that means imports into China from everywhere else, which brings up shortfalls in external money (eurodollar) as well as domestic demand. |
 . |
| According to the country’s General Administration of Customs also last week, while exports rebounded to 16.9% growth year-over-year in May (compared to 3.9% in April), imports didn’t improve really at all (4.1% compared to 0.01%). |
 . |
 . |
|
 . |
|
 . |
|
| Since these trade estimates are issued in nominal terms include price changes, export growth isn’t nearly as impressive at it seems (like Japan) while actual volumes from China have to be less that they had been a year ago. Goods coming in from Europe aren’t even increasing in nominal terms, thus weakness all across trade-oriented sectors in Germany and elsewhere.
Since this is the third month in a row of basically zero nominal growth for Chinese imports, it’s more than reasonable to conclude the must-conserve-dollars policy is still being employed which conveys and spreads eurodollar financial shortfalls into rest-of-world real economy shortfalls. China’s merchandise surplus in May was nearly another record high, yet CNY is still close to 6.70 to the dollar and SAFE’s reported balance for total “reserves” only increased from by the smallest amount (from the worst three-month decline in years). |
 . |
Put everything together, it’s the opposite of what the US and European CPIs seem to propose. The global economy is rapidly slowing down (commodities, freight rates, etc.)
Decelerating producer prices in China coupled with especially falling (volume) imports are far more correlated with macro factors across the rest of the world, especially given these numbers in May when Shanghai and other cities/regions were allowed back to business. China is suffering from the global dollar shortage (Euro$ #5) and transmitting that weakness everywhere else around the world.
“There’s nothing to suggest a recession is in the works,” Ms. Yellen said.
Sure, to a former Fed-blind person, the ENTIRE bond market pricing for recession equals “nothing.”https://t.co/D9ts2sgLCR
— Jeffrey P. Snider (@JeffSnider_AIP) June 13, 2022
Therefore, global recession risks and the looming end to “inflation” are now being hedged harder into the UST curve’s (and Germany’s) back end. Because the front end is obliged to price instead the politics of Fed rate hikes based on the non-economic factors in gasoline and Russian oil, the US CPI, inversion is the inevitable result creating confusion as to what appears to be a puzzling conflict (at least in the US) between inflation vs. recession.
It’s only a conflict of interest rates, not actual economics (small “e”). The latter are increasingly clear, which is why even mainstream use of the R-word (and official denials) is (are) becoming more and more frequent.
You Might Also Like
It’s Not Nothing, It’s Everything (including crypto)
2022-06-15
Markets got aggressive long before the FOMC did. Everything, and I mean everything, has been trending the other way. Jay Powell says inflation risks are most pressing when markets have consistently priced the opposite for a whole lot longer.
Prices As Curative Punishment
2022-06-14
It wasn’t exactly a secret, though the raw data doesn’t ever tell you why something might’ve changed in it. According to the Bureau of Economic Analysis, confirmed by industry sources, US new car sales absolutely tanked in May 2022.
Synchronizing Chinese Prices (and consequences)
2022-05-14
It isn’t just the vast difference between Chinese consumer prices and those in the US or Europe, China’s CPI has been categorically distinct from China’s PPI, too. That distance hints at the real problem which the whole is just now beginning to confront, having been lulled into an inflationary illusion made up from all these things.
Not Good Goods
2022-04-24
The goods economy in the United States is – maybe was – the lone economic bright spot. That in and of itself should’ve provoked more caution, instead there was the red-hot recovery to sell under the cover of supply shock pricing changes. The sheer spending on goods, and how they arrived, each unabashedly artificial from the get-go.
China More and More Beyond ‘Inflation’
2022-04-17
If only the rest of the world could have such problems. Chinese consumer prices were flat from February 2022 to March, even though gasoline and energy costs predictably skyrocketed. According to China’s NBS, gas was up 7.2% month-over-month while diesel costs on average gained 7.8%.
You Know What They Say About The Light At The End Of The Tunnel
2022-04-14
In any year when gasoline prices rise 18%, that’s not going to be good for anyone except maybe oil companies who extract its key ingredient from out of the ground (or don’t, as the case can be). Yet, annual rates of increase that size do happen.
US CPI Reaches Seven On US Goods Prices, With Disinflation Setting In Everywhere Else (incl. US Services)
2022-01-16
How is that US Treasury rates out in the independent longer end of the yield curve have now “suffered” a seven percent CPI to go along with double taper and triple maybe quadruple (if the whispers are to be believed) rate hikes this year, yet have weathered all of that allegedly bond-busting brutality with barely a market fluctuation?
Testing The Supply Chain Inflation Hypothesis The Real Money Way
2021-12-18
Basic intuition says this is a no-brainer. Producer prices rise, businesses then pass along these higher input costs to their customers in the form of consumer price “inflation” so as to preserve profits. This is the supply chain hypothesis. Statistically, we’d therefore expect the PPI to lead the CPI.And this was expected for much of Economics’ history, taken for granted as one of those self-evident truths (kind of like the Inflation Fairy). After the dreadful experience of the Great Inflation, and the dreadful performance of Economics during it, a few scholars went back to take a second look.One of the most cited contrary studies was published in 1995 by Todd Clark of the Federal Reserve’s branch in Kansas City (Economic Review; vol. 80, issue Q III, 25-39). Using econometric evidence,
Tags: Bonds,China,Consumer Prices,CPI,currencies,economy,exports,Featured,Federal Reserve/Monetary Policy,global trade,imports,inflation,Janet Yellen,Markets,newsletter,PPI,producer prices,recession