JACKSON HOLE, Wyo. -- The December
producer price indices
released this morning.
The core (excluding food and energy) finished goods index has (generally) been decelerating since December 1998. It was rising at a 2.5% year-on-year rate then; it is rising at a 0.9% rate now (see our data
page for a chart).
The core intermediate goods index has been accelerating steadily since February 1999. It was falling at a 1.8% rate then; it is rising at a 1.9% rate now.
The core crude goods index has been accelerating steadily since December 1998. It was falling at a 16% rate then; it is rising at a 13.6% now (and keep in mind that these core indices, by definition, do not include oil).
Two lines of thinking here.
(a) Tip for tap.
If the central bank wasn't easing while commodity prices were plunging (between August 1997 and December 1998), why would it tighten now that they're merely reversing? PPI increases don't belong in the policy equation unless they're clearly translating into bigger core consumer price numbers.
(b) Take me to the river.
The PPI measures (by definition) "average changes in prices received by domestic producers of commodities in all stages of processing." If Agent J is receiving higher prices, therefore, then Agent C is paying them.
What's C doing as a result? One of three things.
Passing them on to Agent F.
Fishing another 2-point productivity increase out of the big bucket of them that's always there when she needs it.
In one form or another, real-world price increases always show up somewhere.
released this morning. Two notes here.
(a) The numbers (along with upward revisions to November data) were so big that fourth-quarter
personal consumption expenditure
is now likely to print between 5% and 6%. Fourth-quarter
gross domestic product looks to print similarly.
(b) End-of-year consumption proved so strong that Christmas spending ended up blowing away even the optimistic profile we presented
here a full month before the November sales figures were available. It ended up soaring 10.5%, which easily goes down as the best Christmas of the cycle.
There will be no meaningful consumption slowdown until there's a meaningful income slowdown, and there will be no meaningful income slowdown until there's a meaningful employment slowdown.
Or here's another way to look at it.
There will be no meaningful slowdown period until the central bank quits providing so much of the money-credit amphetamine that makes the economy gogogo.
This is what we were guessing at the beginning of the year.
(a) Average-strong employment report this week.
(b) Average-strong-to-way-strong retail report in 10 days.
(c) Way strong employment report in a month.
A meaningful bond rally? Eventually. Here? No. Not yet.
We're still cool as of right now.
Which is probably why we ought to be worrying at least a little.
I trust that I am not the only one tired of hearing constantly about what a great buy bonds are? No matter how much prices fall (and yields rise)?
The yield on the bond settled at 6.20% on Dec. 13.
The guy was
buying on Dec. 14 (yield at 6.31%). He was buying
again on the 20th (6.44%). And
again a day later (6.46%). And
again about a week later (6.45%). And
again today (6.70%).
The bond contract has dropped by more than 3 full points over this period. Yields have risen by half a percentage point.
Do you not wonder, like I do, precisely how poorly this trade has performed? Do you not wonder why the long calls keep coming anyway? Do you not wonder if there's ever been any selling -- and if so, why we never hear about that?
And that ain't even the really fascinating part.
No, that would be this.
If you've been bearish on stocks for a while now? And if you stick with the position (and continue to plug it) no matter what?
Well, you're an idiot.
If you've been bullish on bonds though? Even through their worst year ever? And even as yields continue to rise?
That's something entirely different altogether.