The European inflation rate is “calculated using the weighted average of the Harmonised Index of Consumer Price [HICP] aggregates” according to TradingEconomics.com. That is a fancy way of saying the things people pay for, including the things they need on a daily basis.
Here is the dreaded deflation (of consumer prices) that Europe is fighting. Like the US before it, Europe is operating on a plan that would boost prices (i.e. the effects of inflation) higher so that people participating in the financialized economy can benefit from rising equities (as we first projected in Q4 2014) and the regular people can, well… get screwed (USA style).
Welcome to the European ‘me too’ QE play!
Yesterday the Euro boinked our target of 105 [1.04935] and all seems to be going according to plan.
But the play (dollar bull, euro bear) is getting extreme now. Extremes can persist but they are what they are, defined as “reaching a high or the highest degree; very great”.
Let’s just assume the extremes have not yet reached the highest degree. That does not mean the risk vs. reward to a stance in line with current trends is not extreme. It is. Time is the thing. Trend followers who momo mature trends and go on autopilot always get burned sooner or later.
By Michael Ashton
Below you can find a recap and extension of my post-CPI tweets. You can follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments.
- CPI -0.7%, core +0.2%. Ignore headline. Annual revisions as well.
- Core +0.18% to two decimals. Strong report compared to expectations.
- Core rise also off upwardly-revised prior mo. Changing seasonal adj doesn’t affect y/y but makes the near-term contour less negative.
- y/y core 1.64%, barely staying at 1.6% on a rounded basis.
- Core for last 4 months now 0.18, 0.08, 0.10, 0.18. The core flirting with zero never made a lot of sense.
- Primary rents 3.40% from 3.38% y/y, Owners’ Equiv to 2.64% from 2.61%. Small moves, right direction.
- Overall Housing CPI fell to 2.27% from 2.52%, as a result of huge drop in Household Energy from 2.53% to -0.06%. Focus on the core part!
- RT @boes_: As always you have to be following @inflation_guy on CPI day >>Thanks!
- A bit surprising is that Apparel y/y rose to -1.41% from -1.99%. I thought dollar strength would keep crushing Apparel.
- Also New & Used Motor Vehicles -0.78% from -0.89%. Also expected weakness there from US$ strength. Interesting.
- Airline fares, recently a big source of weakness, now -2.98% y/y from -4.71% y/y.
- 10y BEI up 4bps at the moment. And big extension tomorrow. Ouch, would hate to have bet wrong this morning.
- Medical Care 2.64% y/y from 2.96%.
- College tuition and fees 3.64% from 3.43%. Child care and nursery school 3.05% from 2.24%. They get you both ends.
- Core CPI ex-[shelter] rose to 0.72% from 0.69%. Still near an 11-year low.
- Overall, core services +2.5% (was +2.4%), core goods -0.8% (was -0.8%). The downward pressure on core is all from goods side.
- …and goods inflation tends to be mean-reverting. It hasn’t reverted yet, and with a strong dollar it will take longer, but it will.
- That’s why you can make book on core inflation rising.
- At 2.64% y/y, OER is still tracking well below our model. It will continue to be a source of upward pressure this year.
- Thank you for all the follows and re-tweets!
- Summary: CPI & the assoc. revisions eases the appearance that core was getting wobbly. Median has been strong. Core will get there.
- Our “inflation angst” index rose above 1.5% for the 1st time since 2011. The index measures how much higher inflation FEELS than it IS.
- That’s surprising, and it’s partly driven by increasing volatility in the inflation subcomponents. Volatility feels like inflation.
- RT @czwalsh: @inflation_guy @boes_ using surveys? >>no. Surveys do a poor job on inflation. See why here: http://www.palgrave-journals.com/be/journal/v47/n1/abs/be201135a.html …
- 10y BEI now up 5.25bps. 1y infl swaps +28bps. Hated days like this when I made these markets. Not as bad from this side.
- Incidentally, none of this changes the Fed outlook. Median was already at target, so the Fed’s focus on core is just a way to ignore it.
- Once core rises enough, they will find some other reason to not worry about inflation. Fed isn’t moving rates far any time soon.
- Median CPI +0.2%. Actually slightly less, keeping the y/y at 2.2%.
Continue reading Post-CPI Thoughts
Guest Post by Michael Ashton
This is an interesting chart I think. It shows the spot CPI swap curve (that is, expected 1y inflation, expected 2y compounded inflation, expected 3y compounded inflation), which is very, very steep at the moment because of the plunge in oil. It also shows the CPI swap curve one year forward (that is, expected inflation for 1y, starting in 1y; expected inflation for 2y, starting in 1y; expected inflation for 3y, starting in 1y – in other words, what the spot curve is expected to look like one year from today). The x-axis is the number of years from now.
Continue reading Crazy Spot Curves – Orderly Forwards
Guest Post by Michael Ashton
Money: How Much Deflation is Enough?
Once again, we see that the cure for all of the world’s ills is quantitative easing. Since there is apparently no downside to QE, it is a shame that we didn’t figure this out earlier. The S&P could have been at 200,000, rather than just 2,000, if only governments and central banks had figured out a century ago that running large deficits, combined with having a central bank purchase large amounts of that debt in the open market, was the key to rallying assets without limit.
That paragraph is obviously tongue-in-cheek, but on a narrow time-scale it really looks like it is true. The Fed pursued quantitative easing with no yet-obvious downside, and stocks blasted off to heights rarely seen before; the Bank of Japan’s QE has added 94% to the Nikkei in the slightly more than two years since Abe was elected; and today’s announcement by the ECB of a full-scale QE program boosted share values by 1-2% from Europe to the United States.
Continue reading Money, Commodities, Balls and How Much Deflation is Enough?
Well actually, one Hommie is getting hammered and the index is getting dinged. We have been following this chart of the Homebuilders Index for probably a year or so now. It has been moving along in a large, bullish Cup & Handle.
Today KB Home grossed out the market (thanks for the heads up, Hammer) with talk about stuff that you would not expect to see in a low energy and (some) materials and low interest rate environment.
“We are projecting our first quarter 2015 gross margin will drop significantly from the first quarter of 2014 hitting the low point for the year before improving sequentially for the remaining three quarters of 2014,” Chief Executive Jeffrey Mezger said on a conference call after the company released quarterly financial results. He said there was a “softening in demand” in some markets during the fourth quarter, more sales incentives, and pressures from construction, labor and material costs.
Unbelievable. It reminds me of what I posted a few weeks ago about my trash man boosting prices due to increased costs – of nearly everything other than powering his trucks. There have been other surprising instances of late as well that I don’t quite recall at the moment.
Could the payback for the balls out inflationary operation in play 24/7 and 365 over the last 6 years be brewing?
Guest Post by David Stockman & Stealthflation
The Deflation Calamity Howlers Are Dead Wrong—-In Europe And Everywhere Else
The calamity howlers of deflation are out in force this morning owing to an absolute economic non sequitur. Namely, that year-on-year consumer prices in the EU came in at negative 0.2% in December, implying that ECB printing presses need to go into immediate overdrive.
Well, of course the CPI has momentarily weakened. Crude oil has experienced a monumental plunge of more than 50% since mid-2014. That has temporarily dragged down the euro zone’s reported CPI and the math isn’t all that complex. During the last 12 months, euro zone energy prices have fallen by 6.3%, and everything else is still 0.6% higher than a year ago.
So what’s the emergency? This is the very same CPI blip that occurred when oil collapsed in the second half of 2008. As is evident below, that episode did not generate some cascading plunge into economic darkness. In fact, the Eurozone CPI was back running above 2.5% in no time.
The truth of the matter is that the EU-19 is in clover because it’s consumers get a big break; and, on the other side of the economic equation, it produces almost no oil. Europe’s production is mainly in the UK and Norway and they have their own currencies. Accordingly, the ECB should be putting its printing presses on an extended sabbatical and declaring victory on the achievement of its “price stability” objective.
Continue reading Deflation Calamity Howlers Are Dead Wrong
Guest Post by Michael Ashton
Today’s column is a brief one, as I need to post a correction. Not a correction to my stuff, mind you, but to others.
Pictures like the below have been circulating now for a couple of weeks. This is a chart of the 2-year inflation “breakeven” on Bloomberg, illustrating how a “deflation warning” is sounding as they go negative.
Continue reading Call Off the Deflation Warning
- Fill’er Up –Market Anthropology [biiwii comment: a few days late but interesting viewpoint on the post-2011 disinflationary phase]
- 5 Themes for 2015 –SeekingAlpha [biiwii comment: this SA post disputes MA’s view; what makes a market and all…]
 December ISM just out, details here –NFTRH.com
and… What Happens After a Big Down Day Between Christmas & New Years –QuantEdges