Peter Boockvar

Along with the slowdown in the rise in inflation we know we’ve seen a pretty sharp drop in US inflation breakevens. For perspective, entering 2020 the 10 yr implied inflation rate was at about 1.80%, peaked at 3.04% in April 2022 and as of Wednesday stood at 2.12%. I don’t usually focus on TIPS auctions but yesterday’s 10 yr was solid. The yield of 1.22% was a large 4 bps below the when issued. The bid to cover of 2.79 was the best since May 2019 and the 2nd best since 2014. Finally, direct and indirect bidders took 92% of the auction, the most on record dating back to 2003. In response, the 10 yr inflation breakeven yesterday jumped 11 bps to 2.23% and just maybe we’ve seen the bottom in this inflation breakeven downtrend. I believe TIPS are now cheap, particularly out 5 yrs where the inflation breakeven has fallen to just 2.26%. As I expect reality to show 3-4%, they are thus attractive if I’m right. 

As seen with a variety of consumer products/food companies, particularly Conagra just a few weeks ago, there is still notable inflation flowing thru the pipeline, albeit less and that is helping to lift sales but also hurting volumes. Proctor & Gamble said this yesterday in their earnings call, “Raw impact material costs inclusive of commodities and supplier inflation are still a significant headwind versus last year, though we have seen some modest sequential improvement…We are setting a portion of these cost headwinds with price increases and productivity savings.” 

And those who just assume inflation is quickly and magically going back to pre Covid levels and trends, listen to what P&G said, “In terms of peak pricing, you’re right, many of the large price increases get left this fiscal year. But that doesn’t mean that we’re not putting more pricing in the market. So for example, we have a number of price increases that go into effect in February. So there’s two components here. One where lapping price increases were executed last year, but we’re also still passing through some of the cost pressures via incremental pricing around the world.” Companies are not going to give up lost profit margins so easily. 

And P&G said this about Europe, “The European markets will continue to have to work through very high inflation numbers. I think we’ve seen a little bit of help via a warmer winter season that has helped energy prices. But Europe is not through, I think, with inflationary pressures and consumers are still to see many of the consequences in terms of their heating bills as we are entering February and March.” 

European bonds are down across the region with yields up. Christine Lagarde today in Davos said with regards to their inflation fight, “We have to also stay that course of resilience that we observed in 2022.” Her and some others are putting to bed the story that came out a few days ago that after a 50 bps rate increase at the next meeting that they will immediately downshift to 25 bps.

Japan said its CPI in December rose 4% headline and also ex food as expected. The core/core rate that also takes out energy was higher by 3%, one tenth less than the forecast but up from 2.8% in November. That’s also a 41 yr high if we take out the influence of VAT changes. Speaking in Davos, Kuroda said “Our hope is that wages start to rise and that could make the 2% inflation target to be met in a stable and sustainable manner. But we have to wait for some time.” Kuroda unfortunately has it backwards. His policy impacts inflation, not wages and by keeping the former tame, inflation adjusted wages automatically rise. JGB yields are down for a 2nd day on his resolve, however misplaced, and the yen is weakening too. The 5 yr inflation breakeven is down 2 bps off a 3 week high. 

Core/Core CPI

The UK finished the holiday season with softer than expected retail sales in December. Ex auto fuel they fell 1% m/o/m instead of rising by .5% as forecasted. The 6.1% y/o/y drop is the most on record dating back to 1989 according to the ONS. The UK consumer is seeing a big time REAL wage squeeze but the fall in energy prices is giving some relief while constant public sector strikes are disrupting life. The ONS said simply, “consumers cut back on spending because of increased prices and affordability concerns. This was due to increased food prices and the rising cost of living.” Remember that Liz Truss was thrown out because she wanted to cut personal income taxes which would have given some relief to consumers. Instead Rishi Sunak raised them, making the cost of living squeeze worse and he’s still PM.