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Inflation Has Peaked! So What? 11/11/22


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Core CPI has now followed PPI final core finished consumer goods downward. This comes seven months after the Fed started QT. This lag is par for the course. Inflation seems to follow the size of the Fed's balance sheet with a lag of 6-12 months.

That lag is due largely to the BLS's methodology of smoothing and lagging the phony input it uses to measure housing inflation. That measure, called Owner's Equivalent Rent, which I have explained here for years, is a completely phony, suppressed, lagged, BS measure of housing prices. The BLS number for OER now shows a rise of 6.9% y/y, the highest level yet. It includes a 2.8% increase since June. 

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As a result the monthly change in the Core CPI looks like this. 

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In contrast, the NAR's median home price in September, a real time measure derived from MLS most current sales data, dropped by 7% from September to June. 

In reality, housing prices are falling and they are the largest component of CPI. But the CPI doesn't measure actual house prices. It measures a made up joke that massively understated and lagged actual housing inflation on the way up, and now will lag, and overstate housing inflation on the way down.  Total inflation including housing prices is  now lower than the CPI now shows. But reality doesn't matter. The Fed bases policy on government statistics. 

The problem is also that other measures of CPI, best represented by the PPI core finished goods, have so far, and are likely to continue to, come down only slowly, based on the correlation with the Fed's balance sheet. If the current trends continue, core CPI will drop to around 5% over the next year where it should merge with the Fed's favorite measure, core PCE. 

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Meanwhile, market interest rates, as reflected in the 13 week T-bill rate will trend toward 5% and reach it in early 2023. The Fed will follow, ratcheting its fake funds rate up by another 1-1.5% over that time. At that point, we'll have a neutral interest rate. But the Fed's balance sheet reductions will still be on autopilot unless the markets break. They're showing no sign of that at the moment, obviously. So the Fed will keep the real tightening, which is QT, going. 

And remember, the Fed's goal is 2%, not 5%. 

So, party on Wayne. Party on Garth. Enjoy your delusional highs.

Meanwhile, on the ES 24 hour S&P futures, the 5 day cycle projection is 4000. We're close enough as of 5:30 AM ET. To break this absurd meltup, the market would need to be below 3960 by the end of the day. 

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Just updating my Primary Dealers data. In the last 6 weeks, they have finally gone heavily short Treasury futures across the maturity spectrum. 

And naturally, now they're getting killed. 

I don't know how these guys stay in business. How they consistently report profits. Their fixed income positioning is constantly wrong. 

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50 minutes ago, MisFit Kid said:

Today is Bank Holiday for Veteran's Day.......(No Bond MKT in US)

Pivot-Bot and Flo-Bot seem to be at work....

Armistice Day in Europe. Major national holiday in the EU. 

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28 minutes ago, PullMyFinger said:

UNH getting Old Yellered behind the barn today. 

and yet the Dow Fraudex is about to go green

#4 in the SOW is AMGN (-8)

#1 UNH (-28)

It is hard to believe the "math" anymore.....much less "the science"........

>: Ah......GS +7 (that is all P-Bot and F-Bot need to know, I guess)

>:: Then again, it is the 30 stock "price weighted index"

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