Matein Khalid
The April jobs number and now the April CPI has reinforced convictions that inflation will continue to come down and thus the capital markets price two Fed rate cuts by year end. The 10-year US Treasury note yield has dropped to 4.40% though the 2-year note is still at 4.82%, making this yield curve inversion protracted even as retail sales slip and consumer credit metrics deteriorate. All is definitely not hunky-dory in the kingdom of Joe and Jane Sixpack as the consumer saving cushion depletes.
Is the Wall Street consensus correct on inflation expectations? Despite the 0.3% rise in April CPI and the deceleration in core CPI, the hard truth is that CPI is still rising at a 3.4% annual rate while core CPI is rising at 3.6%, way above the Powell Fed’s 2% dual mandate target. The Biden White House has also plunged America into a deepening fiscal blackhole, with the national debt rising $1 trillion every 100 days. Owner-equivalent rent, one-third of the CPI index is rising at an alarming 5.8% rate. Core services are up 5.2%. Yikes! So I cannot fathom how any bond investor in his/her/its right mind can buy Jay Powell’s don’t worry, be happy inflation chorus that the CPI trickles down to his 2% dual mandate target and the central bank magically steer the economy to a soft landing on the eve of one of the most bitterly contested elections in the history of the American Republic since the Civil War. I am neither red nor blue in the political sense but definitely pro-green when I venture in the financial markets. So I just do not believe that the Volatility Index at 12.19 remotely captures the global macro risk that will hit Wall Street in the autumn.
Mr. Market has not remotely priced-in the possibility of an inflation or election shock this autumn as its favourite pendulum of greed and fear does not remotely capture any metric of fear now. Corporate credit spreads also leave no margin for any shock. The U-Mich consumer confidence index has plunged even while its survey of consumer inflation expectations has risen to 3.5%. This is a bad news stagflation omen.
Auric Goldfinger is obviously not complacent about inflation risk. Why is COMEX gold up 34% since October to $2430 an ounce? Rogue central banks fleeing King Dollar/US sanctions or Somali pirates hedging inflation risk in the futures markets? Even Brent/WTI crude is up about 10-$12 since last summer and Dr. Copper is white hot. Machiavelli warned us 5-centuries ago after a lifetime spent in the lethal politics of Renaissance Florence – “put not your trust in the promises of princes”. I warn my friends not to trust the promises of central bankers. Maestro Greenspan reassured us that derivatives were safe and a deregulated banking system was optimal a decade before Uncle Sam, the Old Lady and the ECB were forced to bailout the world’s largest banks. Bernanke promised with a straight face that subprime will be contained. Now, Powell promises that he has licked inflation. My bet? He is wrong.
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