On Friday after the Amazon-Whole Foods news we heard a lot of opinions on what this should mean for the Federal Reserve in terms of technology and disruption bringing us another round of price deflation in the important category of food. I just want to remind people though that the secular downward pressure on consumer goods prices really started in 1962 when Walmart was founded and brought us Every Day Low Prices. I do hope though that the Amazon deal and the entire price impact of the internet brings some deeper discussion broadly and within the halls of the Fed on consumer inflation and what drives it because I still counter that the 2% central bank inflation goal should be challenged as to why it makes any sense. On the goods side, technological breakthroughs and efficiency will always be a natural suppressant on prices. The Compaq Portable II, http://oldcomputers.net/pics/compaqii-2.jpg, cost $3,499 in 1986. If it rose by 2% per year since it would today be about $6,300. Instead something similar is about $1,000. I’ll throw out hedonic adjustments that pollute the CPI/PCE readings for now. Honestly speaking, it is where government and the Fed have been most influential that has seen the most amount of inflation. Examples being housing, whether to buy or rent, tuition, and medical care. I won’t now get into asset price inflation.
Bottom line, from a secular trend standpoint we will always have price pressures on goods with commodity prices of course being a cyclical variable and typically sticky services inflation mostly because of the influence of misguided government policy. Thus, the Fed needs to dig deeper into why and how they want to achieve this made up 2% figure. Lastly, and back to food prices, as everyone is talking about food deflation, this is the chart on the CRB food stuff index which is up by 14% in the past two months. I reiterate my positive stance on the washed out agricultural stocks, particularly the fertilizers.
CRB FOOD STUFF INDEX
This index includes butter, cocoa, corn, hogs, lard, soybean oil, steers, sugar and wheat.
Short rates are rising to the highs of the morning, with the 2 yr yield at 1.33-.34% up 2 bps, after NY Fed President Bill Dudley said that “the Fed hasn’t tightened financial conditions to a significant degree” which seen in this chart is clearly true. It is the Goldman Sachs Financial Conditions Index which he looks at. He also expects “wage growth to quicken a bit more as job market tightens.”
Rate hike odds are still really skeptical that the Fed will follow thru with a September hike. The October fed funds future which captures that September is only priced at 26% using the midpoint of the fed funds rate. Using the effective rate of 1.16% puts the odds at only 12%. If the Fed is really intent on hiking then, they still have 3 months to lay the verbal groundwork and set the market straight on that possibility.
I’m excited for the French and hope that the Macron government can achieve the market liberalization that the French economy so desperately needs, particularly on the labor side. Seize the moment as the unemployment rate is still at 9.3%, well above where it was pre recession at 6.8%. The CAC is still attractively valued at about 15x earnings and remains 14% below its 2007 peak. The euro is flat as are French bonds as the results were widely anticipated and in fact Macron got less seats than the optimistic forecasts. The ECB and its inevitable taper discussion this summer is of course the main risk. I still like the euro but the CFTC on Friday said net spec longs are now at the highest level since 2011 so some of this bullishness needs to come out before any further gains of substance with the euro occur driven by ECB tapering late this summer.
Japanese exports jumped by 15% in May but that was slightly below the estimate of up 16% while imports surprised to the upside with a 17.8% y/o/y rise. On a volume basis, exports were higher by 7.5% and imports were up by 5.4%. Bottom line, this is the 6th straight month in a row of exports and points to continued evidence of the rebound we’ve seen in global trade this year after two years of weakness. The yen is modestly weaker and that helped the Nikkei rally by 2/3 of a percent.
Price changes for apartments in China’s biggest 70 cities were a mixed bag in May. On a y/o/y basis, prices rose in 69 of 70 cities for new apartments for the 2nd straight month and were up in 65 of 70 cities for existing apartments vs 63 in April. On a m/o/m basis though prices were up in 56 cities vs 58 last month for new apartments and 60 vs 61 for existing ones. In the biggest 3 cities prices further moderated but still are rising at sharp levels. In Beijing, prices were up by 13.5% y/o/y vs 16% in April. Price gains in Shanghai slowed to 11% from 13.2% and in Shenzhen they were up ‘just’ 5.4% from 6.6% in the month prior. It was last April when prices in Shenzhen rose 62% y/o/y. Bottom line again is the Chinese authorities continue with their attempts at cooling the overheated housing market but at the same time not wanting to be so aggressive as to dramatically slow growth. There is also a story today that more steps are being taken to slow down housing with mainland banks expected to raise mortgage rates. This is on top of higher down payment requirements and tougher standards on the buying of 2nd homes by non locals and others. Notwithstanding the news, copper is up by 1% after 5 straight days of declines. The Shanghai comp closed up by .7% and the H share index jumped by 1.3%.