CPI
There was plenty of Economic releases this week that are worthy of discussion, but we would like to begin with a focus on the CPI, which was released Wednesday, June 11th.
The treasury market had a collective sigh of relief.
A deeper dive suggests that Shelter pricing is finally starting to cool, which represents roughly 36% of the final 2.4% number. See the bottom of the screenshot below, at the far right.
Prevailing wisdom is that the BLS Shelter number has a serious lag to it.
Comparing CPI Owners Equivalent Rent to the Zillow Rent Index offers a glimpse of the lag.
Rent contribution to CPI from BLS vs the Zillow rent Index. The time it took for the Zillow Index to run from trough to peak was 16 months, 10/2020 to 2/2022. The CPI Owner equivalent took 26 months, 2/2021 to 4/2023. From a crude mathematical point of view, that is 1.625 X the amount of time. If we consider that from the other direction, peak to trough, it took 18 months, 2/2022 to 8/2023 for the Zillow Index. If we apply the same ratio to the CPI Owner Equivalent, which started moving lower on 5/2023 it should not bottom for 29 months, 18 x 1.625, or not until October of this year, 10/2025. In other words, this contribution to CPI, which is a 35.8% contribution to the overall CPI, should not be adding upward pressure to the overall index until October at the earliest.
Keeping with the focus on CPI, we wanted to also look at it compared to the PPI to see if there are costs being passed on to the consumer since the tariff episode began.
What we found was quite the opposite. CPI based costs seem to be absorbing PPI based ones.
For context here are the metrics we are using:
PPI
CPI
So, the CPI – the PPI gives us this chart.
For now, it appears that consumer facing businesses are the ones absorbing increased costs, at least according to this chart.
Fed Balance Sheet
The Federal Reserves’ Balance sheet has been reduced by 25% since March 31, 2022. A balance sheet reduction means they are selling securities, whether that be Treasuries, mortgage-backed securities, or foreign reserves. The former two will obviously place pressure on rates, or otherwise known as QT, Quantitative tightening. The 10yr TSY yield has moved 202bps on a yield basis since that March 31, 2022, date. So, why point this out? Well, at some point the Fed will stop and that should theoretically be good for interest rates, we hope!
Unfortunately, as Torsten Slok points out, Treasuries are flooding the fixed income market presently.
“Over the past 12 months, roughly half of all fixed income product coming to the market has been Treasuries. This is not healthy” and siphons capital from companies & households”: Apollo’s Torsten Slok The bottom line is that if the level of government debt were significantly lower, more dollars would be available for consumers to buy new cars and new houses, and for companies to build new factories.
https://www.apolloacademy.com/rapidly-growing-treasury-supply-crowding-out-other-types-of-credit-growth/
Coal & China
What can coal usage tell us about the Chinese economy?
Unlike copper and iron ore, of which China imports around 80% of its demand, coal is the opposite where China sources ~90% of its demand domestically. As a result, Chinese coal prices offer a much clearer reflection of the underlying fundamentals of the Chinese economy.
Both thermal and coking coal prices have fallen back to COVID-lockdown levels. The thermal coal is especially important as it accounts for majority of China’s power gen.
Does not exactly look like the demand is there for either, and that is reflected in the yield on the Chinese 10yr Bond.
Favorite Charts of the week
Is the big push by the likes of Blackrock and Ares to bring Private Equity exposure to the masses correctly timed?
Cannot say this chart is entirely counter intuitive, but sure did not expect it.
And finally, we noticed this chart earlier in the week, might be more noteworthy today with airlines all under pressure post the Israeli/Iranian conflict.
Have a great weekend!
Best,
Meraki trading team
