Daily Economic Update: October 11, 2024

 Yesterday's CPI report was hotter than expected posting a 0.2% MoM and 2.4% YoY increase on the headline figures and a 0.3% MoM and 3.3% YoY increase in the core levels.  Car insurance, airfares, food and services were all contributors to the higher than expected readings.  The initial jobless claims data was higher than expected but is somewhat murky as it captured some increases due to Hurricane Helene and the Boeing strikes, but auto sector layoffs in Michigan seem a legitimate concern.  

The inflation print didn't do anything to re-inspire confidence in a 50bp cut in November.  Bostic even commented that he might be ok with standing pat at the next meeting. The recent move higher in yields lead to a strong 30Y auction, with strong foreign demand.  We ended the day with stocks backing down from all time highs, the 2Y yield actually falling a little, back under 4% to 3.98% and the 10Y climbing to 4.08%,

Speaking of inflation, the October 7 episode of Macro Musings podcast featured an interesting discussion of a paper titled: *Why Do Workers Dislike Inflation? Wage Erosion and Conflict Costs.* which the author, Jonathon Hazell describes as:

"employers don't automatically give workers raises when inflation is high. Instead, workers have to fight for these raises. That places them in conflict with employers. That's the key idea of the paper. It's bringing forward this notion of conflict. It's saying that when inflation is high, for nominal wages to catch up, to catch up with prices, people need to be doing conflict. That's difficult. That's painful."

and is furhter summarized in a quote from Vox's Dylan Matthews:

"Inflation is a tax on conflict-averse people who are bad at negotiating— me."

It's an interesting take on why people hate inflation so much, despite data showing that generally worker's raises keep pace with inflation over time and timely in the sense that you clearly have seen more worker strikes as a means to achieve pay increases since inflation has taken hold.  In other words inflation imposes an additional unmeasured cost on workers through this "conflict" channel.

Another interesting inflation related article comes courtesy of Mark Higgins substack post.  Mark as a financial market historian, blatanty views the Fed's 50bp cut as possible a "BIG Mistake" at least through the lens of history.  Mark cites the Aurther Burns Fed easing prematurely and, tieing that back to the idea of the "conflict cost" of inflation, how the failure to contain inflation lead to strikes that in some ways then made it harder to control inflation.  

Higgin's view is that the Fed is violating the most important rule established after the Great Inflation:

"The rule is quite simple: It is not enough for the Fed to merely extinguish the visible flames of inflation; they must also extinguish the embers that threaten to reignite it."

Futher characterizing the recent employment and CPI data as evidence that the "embers" remaining aglow.

Time will tell if Higgin's is correct and inflation will reignite, but for the day at least nothing in the data seemed to signal an "all clear" on the battle against inflation.

On the day ahead it's PPI and UofM in data and the threat of an Israeli retaliatory strike against Iran looms large.

XTOD: Israel’s public television just published an “inside-the-room” of the Biden-Netanyahu phone call. Major points: 1) Biden pushed against attack on nuclear / oil; 2) Israel’s current thinking is for a retaliation larger than what Biden would like | #OOTT

XTOD: Big takeaway from the CPI: Disinflation is still becoming entrenched. It was a touch above expectations, but nothing to panic about.   I've been saying this for over a year, but outside of a commodity boom it's hard to see how inflation surges again because the shelter disinflation is so firmly entrenched that something very significant would need to offset it.   Although imperfect, the NTR Index continues to forecast falling shelter prices. It leads by 12 months and is now at the widest spread since its creation. Shelter will continue to put downward pressure on CPI in the coming 12 months. Very hard to see inflation being a big problem in the next 12 months given this....

XTOD: Overall the same story as recently: IF you believe the last six months of numbers are correct and everything before that is outdated or anomalous then we're still in fine shape.  But if some of the last six months is anomalous (in reverse) then inflation is more of a concern.

XTOD: Why is the 10-year above 4%?   This summer, the economy was a party that was winding down. Then, Jay Powell showed up with some booze and China brought the snacks. Party is picking up!   The risk? Trump is pulling up in an Uber outside, wearing a Hawaiian shirt... and bringing cocaine!  The 10-year could be at 5% by January! Will stocks like that? I don't know... I don't think anyone wants to party that hard...

XTOD: “Any time I’m telling myself, ‘But I’m making so much money,’ that’s a warning sign that I’m doing the wrong thing.”   Looking back at his career, B.J. Novak noticed that he could have stalled in a number of places. Instead, he became very well known for The Office and other mega-successes.  

How did he repeatedly choose the right fork in the road? He attributes a lot of it to heeding the above rule of thumb.   If you find yourself saying, “But I’m making so much money” about a job or project, pay attention. “But I’m making so much money,” or “But I’m making good money” is a warning sign that you’re probably not on the right track or, at least, that you shouldn’t stay there for long.   Money can always be regenerated. Time and reputation cannot.

https://x.com/JavierBlas/status/1844464593357393929

https://x.com/cullenroche/status/1844453690536784091

https://x.com/jasonfurman/status/1844364574218387840

https://x.com/Geo_papic/status/1844362622457741322

https://x.com/tferriss/status/1844438093186945383