Just as we wondered last year why the Fed was so fixated on the labor market as an excuse for continuing on with their aggressive easing even while the issue was the supply of labor and not the demand. Just as we kept hearing last year the ‘T’ word while inflation was accelerating every single month and ended 2021 up 7%, we were thinking, ‘what is the Fed thinking?’ So, yesterday I heard the once uber dove Neel Kashkari, now turned uber hawk, say “We are seeing almost no evidence that underlying inflation is coming down.” I beg him to look at more than just the CPI and PCE figures and I wonder, ‘what is he thinking?’ That said, I still believe in the persistence of a higher cost operating environment than what we were used to pre-Covid but my issue with the Fed remains that after over medicating us over the past few years the now shock therapy is overkill.
Conagra, a stock we own, in yesterday’s conference call talked about the still double digit price pressures and increases they are seeing but are expressing relief elsewhere on the cost curve. “There is clear progress happening in supply chain. It’s at Conagra. It’s across the industry, and it’s improving. Service levels have materially improved. Core productivity is tracking well. Clear progress. Is it flawless? No, it’s not flawless, as you heard. Some things keep popping up, as we outlined. So the external environment remains dynamic.”
Now Conagra is another consumer products company that is seeing strong revenue growth solely because of price. In their quarter just reported, organic sales rose 9.7% but that was driven by a 14.3% “improvement in price/mix, which was partially offset by a 4.6% decrease in volume.” Elasticity from here will be really important to watch.
Shifting overseas, negative real wage growth is certainly global and in Japan where the BoJ continues to want to stoke inflation, base pay continues to grow less than the cost of living. Regular pay did accelerate in August to a 1.6% gain, the best since 1997 but about half the rate of CPI. Household spending in turn, while up 5.1% y/o/y in nominal terms in August, was below the estimate of up 6.7%. Yields and inflation breakevens were mixed and the yen is slightly higher. Japanese stocks fell following the US selloff. We still like Japanese stocks with the yen exposure hedged out and if wage gains continue to accelerate, the BoJ will have an even more difficult time maintaining YCC at its current range.
Base Pay in Japan y/o/y
German industrial production in August was about as expected when including the July revision. Its statistics office said “Production is still affected by the extreme shortage of intermediate products. Enterprises still have difficulties completing their orders as supply chains are interrupted because of the war in Ukraine and distortions persist that have been caused by the covid crisis.” If there is a great example of demand destruction and how high prices cure high prices, it is German power prices which have fallen back to its mid August level. That said, it’s still up 4x the level it was at one yr ago.
Also in response to demand destruction, the Dutch TTF natural gas price is at the lowest since late July.
German Power Prices per mwh
Dutch TTF