Today is inflation day, as can happen on the occasional month. The US CPI came in without signs of acceleration despite the relinquishment of the Verizon effect on the statistical bucket. Financial markets are unenthused by all this, but you might not know why.
The spread between 5- and 30-year Treasury yields, as well as the gap for 2- and 10-year maturities, tumbled Wednesday to the lowest levels since 2007, at 37.2 basis points and 45.7 basis points, respectively. The flattening accelerated after consumer price index data came in largely as expected, perhaps bringing other market-moving events, like President Trump’s threat of a missile attack on Syria, into focus. “CPI, or any other economic data release, is a back-burner item when you have so much geopolitical risk on the forefront,” Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings, said in an email.
Or, the CPI behaving as expected (now) is contrary to the narrative that has been hammered on for month after month. Scarcely a market piece on inflation was written and published that didn’t include the words “labor” and “shortage” while at the same time referring to the unemployment rate as definitive in all cases. Enough time has passed for the bond market (long end) to at least pause and wonder what all the fuss was about. At some point, the boom has to boom; or had to have.
This is, obviously, more than a question for the US economic system and its authorities. I noted earlier this week the European contribution that behaves as if “somehow” directly connected to the rest of the world, including the United States. On the other side of the globe, China also reported its inflation indices for March today, too.
Last month, for February 2018, China reported its CPI had jumped to a four and half year high. Easily explained as the base effects of food prices, the latest estimates for March were even lower than perhaps should have been taking that into account. Year-over-year, the index gained just 2.1%, still considerably below the 3% official target for all of those four and a half years.
Again, this is not surprising given the monetary conditions globally. In China, the PBOC remains constrained by the asset side of its balance sheet. Therefore, by simple arithmetic and accounting, the liability side, the money side, must be as well; as it clearly has been.
What appear to change or have changed are interpretations and expectations. This difference is very clearly illustrated by China’s PPI. After jumping in early 2017, having been negative for about five years through the middle of 2016, it has continued to fade at the same time this Western inflation hysteria gained ground in narrative form.
For the first time, however, there was no similar follow-through in China’s CPI; which suggested increasingly unfulfilled expectations driving particularly commodity prices. In other words, investors in the commodity space smelled “globally synchronized growth”, figured maybe policymakers might prove the proverbial stopped clock, and then bet (heavily) on it – only to realize later last year it wasn’t actually happening. They got way ahead of themselves.
The whole “reflation” trend stalled right around September (so much happened that first week in September). Now the PPI is coming back down and only partially on base effect comparisons to last year’s peak (February 2017). The March estimates, which were only 3.1% more than March 2017, decelerated substantially from February’s 3.7% even though the magnitude of that statistical bulge was far less.
Interpretation of all this is also quite simple and easy. After being told emphatically that the inflation genie was about to be unleashed, that a global boom evident, purportedly, all across the world was not just looming but right in front of us, people have rightly started to wonder where is it? It should have shown up somewhere by now, if not in full then at least in some visible part whereby a plausible path toward the inflationary recovery scenario directly opens up.
Instead, month after month is at best more of the same, interspersed more frequently with the sense of rolling over. It’s not just that nothing has changed from last year, but nothing has really changed (as an upside) since 2012.
In many ways, that’s what was so cruel about the global QE’s and how central banks were given every benefit of the doubt right at the depths of their biggest failure. There was in 2009 and 2010 a partial recovery, which was then purposefully distorted and used to string everyone along as if QE might still be the answer if given enough time and the right magic number. In many ways, they are still appealing to the same time factor.
That’s not what happened, of course. The 2011 crisis was the definitive, figurative nail in the global monetary coffin. We see it all over the world, in deflators here, HICP’s in Europe, and CPI’s in China. The deflationary drag isn’t constant, nothing ever goes in a straight line, but over enough time there is no escaping from it. Global growth has been synchronized alright, only with a constant anchor that limits any upside and continues risks always to the downside.
What changes, again, is that every few years enough negative pressures abate such that hope is reborn, though with less rational justification behind it with each upswing (in 2014, for example, at least the more optimistic could point to QE3 and QE4 as one possible if unlikely reason to think that way; this time, just because?)
To be right back in the same place as before, that’s a huge disappointment for 2018. Especially when everything was supposed to have definitively changed, for the better, in 2017.