Here were Costco’s comments on inflation in last night’s conference call, “inflationary factors abound: higher labor costs, higher freight costs, higher transportation demand, along with container shortages and port delays, increased demand in certain product categories, various shortages of everything from computer chips to oils and chemicals, higher commodities prices. It’s a lot of fun right now. Some inflationary soundbites, if you will. Price increases on items shipped across the oceans, some suppliers or us paying to six times for containers and shipping. Price increases of pulp and paper goods, some items up 4% to 8%…Plastics, resin increases on things like trash bags, Ziploc SKU’s, pet products, PET products, plastic cups, plates, plastic wrap, many items up in the 5 to 11% range. Metals, aluminum foil, mid single digit cost increases, as well as cans for sodas and other beverages…oil, coffee, nuts, they remain generally according to our buyers at 5 yr highs and so on. Higher import prices on things from Europe like cheeses, but the combination of freight and FX. Three to 10% increases on certain but not all apparel items. And fresh foods, inflation is up in the mid to high single digits, with meat leading the way, up high single to low double digits due to feed, labor and transportation costs.”
Nike of course said plenty on logistics and procurement challenges. But don’t worry, this will all be transitory we keep hearing and the Fed can wait another two months before thinking about trimming its asset purchases and even after 7 months of it if they start, the fed funds rate will still be at zero. Powell, Clarida and Bowman are hosting another ‘Fed Listens’ event today at 10am but with Powell in his roundabout way saying this week that the Fed is announcing taper details in November, I don’t expect anything market moving.
I want to use this moment to reiterate my bullishness on gold and silver which has turned out to be financial sadomasochism being bullish and long because of the frustration with their performance this year in light of widespread inflation (although they did well last year). Gold and silver are being sold because many think the Fed’s tapering and maybe rate hikes at some point will be bearish but because it is most likely that this will still lag inflation, I remain positive. Here are 3 charts where gold rose in the 1970’s, mid 2000’s and after December 2015, each moments in time when the Fed was raising rates.
1970’s, gold in white, fed funds rate in orange
Mid 2000’s, gold in white, fed funds rate in orange
From Dec 2015, gold in white, fed funds in orange
Japan said its September PMI rose 2.2 pts m/o/m but remains below 50 at 47.7. The service sector rebounded to 47.4 from 42.9 as the vaccination rate accelerates while manufacturing is still above 50 but 1.5 pts less so at 51.2. Also, Markit said “Private sector firms reported intensifying price pressures. Input prices across the private sector rose at the fastest pace for 13 years, with businesses attributing the rise to higher raw material, freight and staff costs amid supply shortages.” Sounds familiar. Corporate Japan is hopeful though. “Japanese private sector companies were optimistic that business conditions would improve in the year ahead, with the degree of optimism greater than in August. Positive sentiment stemmed from expectations that the impact of the pandemic will diminish following the acceleration of the vaccination program, triggering a recovery in demand in both domestic and external markets.” I remain bullish on Japanese stocks which rallied 2% overnight. JGB yields, along with those in Europe and the US, rose too to a 3 month high for the 10 yr.
Japan did see consumer prices fall by .5% ex food and energy y/o/y in August but again weighed down by mobile phone fees which fell by a record 45% y/o/y. This alone takes 120 bps off headline CPI. Either way, Kuroda’s 2% inflation target 9 years on has ZERO credibility as does he. That said, producer price inflation in Japan is intense as it is everywhere. The 10 yr inflation breakeven is up by 2 bps to .28%, the highest since early July.
Germany’s September IFO business confidence index fell to 98.8 from 99.6 and that was just under the estimate of 99. Both the Current Assessment and Expectations were slightly lower m/o/m. Stagflation was the story. Said IFO, “Problems in the procurement raw materials and intermediate products are putting the brakes on the German economy. Manufacturing is experiencing a bottleneck recession.” The German 10 yr yield is up by another 2 bps to the least negative since early July at -.24%. The German inflation breakeven is just below an 8 yr high at 1.62%. The euro is little changed.
The September UK consumer confidence index fell 5 pts m/o/m to -8 and worse than the forecast of -7. Mostly blame higher inflation and now higher taxes for the drop. GFK said “On the back of concerns about rising prices for fuel and food, the growth in headline inflation, tax hikes, empty shelves and the end of the furlough scheme, September sees consumers slamming on the brakes as those already in economic hardship anticipate a potential cost of living crisis.”
When we look back on this time period, the central bank desire for higher inflation will be repudiated.
The UK CBI retail sales index plunged to 11 from 60 in September. The estimate was 34. CBI said “Demand cooled for retailers… pushing sales below seasonal norms for the first time since March. But volumes are expected to return to more typical for the time of year next month. Low stock adequacy remains a concern across the distribution sector. Respondents to our survey have told us that they do not expect the transport and production issues that are causing these shortages to ease significantly until at least next year and, in some cases, beyond.” Not so transitory. After yesterday’s 10 bps spike for both the 2 yr and 10 yr gilt yields, they are little changed today while the pound is down after Thursday’s jump.
Lastly and shifting to Evergrande, offshore bond holders didn’t get their interest payment yesterday and while there is a 30 day window from here, I’d be shocked if the Chinese government didn’t force that money to go to finishing apartment projects instead.