Editor's note: This edition of "360 Degrees" examines the debate over inflation. After Wednesday morning's hotter-than-expected CPI report, there was immediate discussion about whether the incipient inflation was already priced into the market. For a day at least, the answer seemed to be no, but
experts chimed into Columnist Conversation with their views throughout the day, and we share those opinions below.
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Steven Smith 5/17/06 8:32 AM EDT
The CPI rose 0.6%, greater than the 0.5% increase expected.
The core rate rose 0.3%, also a larger increase than the 0.2% rise forecast. Stock index futures have turned quickly negative.
CPI Core Inflation Up to 2.3% YOY
Richard Suttmeier 5/17/06 8:43 AM EDT
U.S. Treasury yields moved higher, but key support levels held: The Two-Year is anchored to the 5% funds rate with my quarterly pivot at 5.007, while the 30-Year finds a home at its monthly pivot at 5.256.
Comex Gold is back above $700 an ounce, but this morning's high at $720 is between daily and weekly pivots at $716.8 and $723.2, which in my judgment is a muted reaction.
Nymex Crude Oil is a major raw material for top-line CPI, which was up 3.5% YOY. My semiannual support is $64.58 with a daily resistance at $71.48, quarterly pivot at $72.34 and quarterly resistance at $75.94, which is below the April 21 high at $75.35.
The Euro remains strong between weekly and daily pivots at 1.2671 and 1.2891, but below Monday's high at 1.2970.
The dollar vs. Japanese yen remains weaker, but is above daily and semiannual supports at 107.93 and 105.75.
Michael Comeau 5/17/06 9:04 AM EDT
"Four dollars? You know what four dollars buys today? It don't even buy three dollars!"
-- Frank Manero
Given today's inflation data, I'll throw a question out: Is inflation already priced into the market? We've known for quite a while that the government inflation measures are pretty goofy, and plenty of market pundits/strategists have insisted that prices are rising much faster than the government says.
Aaron Task 5/17/06 9:14 AM EDT
Michael, my very unscientific survey data suggest the consensus view on Wall Street is that inflation is
a problem (repeat:
a problem). How else to explain the eagerness among market participants to embrace the "one and done" view for the past several FOMC meetings?
It seems to me that many are focusing on where inflation isn't showing up: wages (which
the biggest input, though creeping higher of late), textiles, electronics, etc.
And in all seriousness, I think the key question -- which I've put to Anirvan Banerji off-line -- is whether we're in a cyclical inflationary cycle in the midst of a secular deflationary cycle.
Position: Now asking in public forum
Anirvan Banerji 5/17/06 10:04 AM EDT
Yes, Aaron, we're in a cyclical inflationary cycle in the midst of a secular disinflationary cycle (deflationary in some sectors) -- but that cyclical upturn in inflation started a couple of years ago. The real question is not where we are, but where we're headed, and for an answer, it's no good looking at coincident measures of inflation, whether based on the CPI, core CPI, or core PCE deflator. This is why we look at ECRI's forward-looking Future Inflation Gauge, or FIG, which anticipated the cyclical upturn in inflation and kept rising through last fall. It has eased off a bit since then, but I'm keeping a close eye on it to gauge whether the easing in underlying inflation pressures is real and sustained.
More on Inflation
Howard Simons 5/17/06 10:08 AM EDT
Michael and Aaron, as Bill Clinton would say, depends on what we mean by inflation. If the Chinese yuan continues to appreciate, we are going to be importing less disinflation in our consumer goods. And as yesterday's PPI showed, we already have higher costs in the pipeline.
The expected inflation number embedded in the TIPS market is rising, but the term structure of inflationary expectations shows the
has a great deal of credibility on the issue.
Credit demands are rising as evidenced by the increase in "real" interest rates, but the efficiency of monetary use as measured by the velocity of M2 is increasing as well. M2 is rising at a 4.9% annual rate, while nominal GDP is rising at 6.7%.
This "on one hand, on the other hand" game can go on for a while. I think the Federal Reserve is going to get their hand forced into being more aggressive than they might like. Even though they've raised rates 16 times in a row, no one can say credit is expensive or money is tight.
Anecdotally, I had to pick my son up from school last week. As Illinois ranks up there with California in gasoline taxes, I always fill up in Wisconsin. My little way of "sticking it to the man." Two stops, $100 bucks. When I first bought gasoline in 1970, I could not put $5 in the tank of a Ford Maverick (12 gallons, 28.9 cents per gallon!). I now can put $50 in a tank. That's a shocker, even for someone who has spent most of his life in and around the oil business.
Good thing that doesn't show up in the core inflation data. Otherwise, I'd be concerned.
Inflation, YTD Performance
Barry Ritholtz 5/17/06 10:36 AM EDT
Hey Aaron, Howard,
I have a very simple definition of inflation: purchasing power of the dollar. If your buck buys you less goods and services than it used to, there is inflation. How much inflation is really a measure of how much buying power you have lost.
We have learned to accept a modest amount of inflation as an ordinary course of life. It's been apparent to every cab driver, business owner and housewife I have spoken with over the past year that there is lots of inflation. Indeed, everyone but most of the Wall Street economists had inflation figured out a long time ago.
Meanwhile, I just punched in a few indices into excel -- Here's some surprising YTD numbers: The Nasdaq 100 (NDX) is down -2.26%; The Qs are off -2.08%; The Nasdaq Comp is a few ticks above flat. Utilities are also off -2.00%.
has gained 5.46% and the
is up 2.62%. The big winners are the Russell 2000, up 8.29%, and the Dow Transports, up 13.08%.
And, glutton that I am, I just re-entered the Q trade long. (Monday's trade was about a tiny loser.)
Editor's note: Barry disclosed at 11:26 a.m. that he had been stopped out of this trade.
Position: Long QQQQs
Guy Lerner 5/17/06 11:20 AM EDT
Aaron, your statement that "the consensus view on Wall Street is that inflation is
a problem" is interesting in light of what the markets have been "saying."
Spikes in gold, which we had in October 2005, generally precede spikes in long-term interest rates by about 26 to 52 weeks. I discussed it in
this article. This spring's spike in interest rates is as expected.
The spike in interest rates generally
has been a high risk time for equities.
In the seven instances over the past 25 years, spikes in interest rates following spikes in gold have always led to increasing rates of inflation.
In Large, Red Friendly Letters It Reads, "Don't Panic!"
David Merkel 5/17/06 11:56 AM EDT
So, one bad inflation number, which is predictable if you understand the owner's-equivalent rent calculation, throws the market into a tizzy? My oscillator (only useful at extremes) is indicating that we have a high probability of a short-term bounce. Enjoy it while it lasts.
As for me, I have some cash, but nothing has hit a rebalance point yet. My insurance stocks are life companies running matched asset-liability books (so book value gets hit, but not post-FAS 115) and short-tail P&C lines, neither of which will be hurt by an increase in inflation. My broad market portfolio has more inflation sensitivity than most, with energy, materials, consumer staples, foreign stocks, etc. Beyond that, the bonds for my balanced accounts are primarily floaters, TIPs and foreign, with the TLT as a hedge if something blows up. Not negatively affected by inflation for the most part.
This is a storm that I have been waiting for. After the bounce, maybe I'll get to see some real deals. But for now, I'm just sitting.
Position: Long TIPs (in a variety of forms) and TLT.
The Fed Made Me Do It
Robert Marcin 5/17/06 2:20 PM EDT
Aaron, there is a good chance that the Fed will be cutting rates before year-end, in my opinion. I think they went too far in raising rates. Inflation is a lagging indicator, and current readings do not contain the real estate and consumption slowdowns I expect will be very visible in the second half of this year. I think the stocks are reacting to a Fed that's gone too far,
not far enough.
Justin Ferayorni 5/17/06 3:08 PM EDT
I agree with Bob on the rate outlook for the rest of the year. We could have demand problems showing up, especially if oil stays up here, which, in my opinion, causes deflationary effects in other parts of the economy, as it is a built-in tax mechanism. Others have said oil is a small part of discretionary spending, but that doesn't account for the extremely long car lines I see at the discount Costco pumps. I have to say I am very pleased to see commodities selling off today as well. Staying composed is key to this ugliness, and making smaller moves than you initially think you should is prudent as well.