Daily Economic Update: January 15, 2025

CPI Day is here.  Data from options markets suggest that we could experience big moves on the release, but we’ll see.  Recall that the Fed’s preferred inflation measure is PCE.  If you’re interested in how CPI and PCE relate, you’re in luck, the Cleveland Fed has a nice infographic explainer.  A couple of the important points highlighted in that piece are that: (1) since 2000, CPI has on average, been 0.39% higher than PCE, (2) PCE considers rural and urban households whereas CPI is focused on “urban” households, (3) the major differences in methodology are around healthcare and shelter.  PCE places a much higher weight on healthcare and a much lower weight on shelter than CPI.  I don’t know if that helps, but every major bank research desk will take the CPI report and attempt to map it to PCE to derive their forecast.

Yesterday PPI headline for MoM came in at 0.2% vs. 0.4% estimated, Core MoM is 0% also below estimates.  The YoY headline increased to 3.3% from 3.0% in the prior month, but was nonetheless below estimates, the YoY core was 3.5%. A report that seemed to breathe some relief into markets.

The S&P ended up with a slight gain and yields were mixed.  The 2Y is 4.38% and the 10Y is ~4.80%.  

Away from the U.S., Chinese yields remain largely the global outlier when it comes to rising yields, as fear of Chinese deflation continues.  A juxtaposition with other developed economies where yields have been rising, even Japanese long yields are hitting multi-decade highs.

CPI, Beige Book, Fedspeak and the start of bank earnings season are the big rocks for the day. The talk of “gradual tariffs” has been a topic of the last few days and Trump cabinet picks will be a hot topic for the coming days, especially Bessent as Treasury Secretary.

Sticking with the theme of r-star or the neutral rate.  Economist Brad DeLong posted his thoughts on the current macroeconomic environment in this substack post.  Heading into last Friday’s Jobs Report, DeLong was of the opinion the Fed should be “rapidly” cutting rates to 3%.  He spends the balance of the post discussing some dissenting ideas.  Ultimately he concludes his post with the following lamentation:

“The interesting analytic question raised by the most recent jobs report is whether my belief that “neutral” is in fact a 3%/year Federal Funds rate is correct. At the moment I still take refuge in the belief that (a) fiscal stimulative multipliers are somewhat higher than I had thought, and (b) irrational financial exuberance driven by the failure of investors to understand that an extra dollar of NVIDIA profits today is not a signal of rapid future economic growth driven by “AI”, but rather a transfer from tech platform oligopolists to NVIDIA driven by their belief that they have no choice right now but to pay NVIDIA through the nose to build “AI” capabilities to purchase insurance against the disruption of their platforms and the erosion of their platform-oligopoly profits. But that is a point for another day. However, let me set a timer: if what I regard as substantially restrictive interest rates do not bring signs of labor-market slowing, I am definitely going to have to rethink my views about what the American economy’s current neutral rate of interest is.”

XTOD: The book “Inner Excellence” by Jim Murphy that AJ Brown was reading on the sidelines yesterday moved up from 523,497th to 1st on Amazon’s best selling list.

XTOD: OF model Bonnie Blue says she has broken the world record by sleeping with 1,057 men in just 12 hours

XTOD: I don't think the average pension realizes how much long duration corporate paper they should own with yields at 6%...Most have a nominal return target in the range of 7-8%.... I don't know the right weight, but def should be higher than where it is today

XTOD: Investigators from South Korea’s Public Prosecution Office and police officers can now be seen approaching and moving past a third line of impeached President Yoon Seok-Yoel’s security to serve the arrest warrant against him. Two others, including his deputy chief of the presidential security service, are also a slated for arrest.

XTOD: Hard evidence of the Chinese Communist Party running the greatest Digital Trojan Horse EVER. TikTok’s supposed independence is a complete fraud.

XTOD: China said they stopped buying USTs on net in Nov-2013 - which is right when FDI into US equities broke out (blue), followed by QQQ.  Buffett called this "selling the family silver to fund consumption" 2 decades ago, but "USD Milkshake" does roll off the tongue a whole lot nicer.

XTOD: Luke fails to mention that this same thing has happened to Sovereign Bonds all over the world starting in 2014.  It's part of the reason we have seen rates rise, USD rise, US equities rise, and Gold rise...together. 

https://x.com/FieldYates/status/1878942604735193423

https://x.com/FearedBuck/status/1878872079577321935

https://x.com/HayekAndKeynes/status/1879012567047405631

https://x.com/sentdefender/status/1879304022575972666

https://x.com/Jkylebass/status/1879302572097552461

https://x.com/LukeGromen/status/1879197487329939571

https://x.com/SantiagoAuFund/status/1879223984669233645