CPI Quick Take: What Happens When The Battle Is ‘Won’?
Ok, so the knee-jerk reaction to a hotter-than-expected CPI print was as expected much to the chagrin of everyone who (probably correctly) said the market was making too big a deal out of a single data point.
But again, you can't really blame people for being nervous. I mean, the whole narrative here is rising inflation exacerbating the ongoing bond selloff and it's that bond selloff that was the proximate cause for the global equity market correction that unfolded this month. So you know, one
Ok heisy, let’s think this through for a second.
First step is to identify the dominant market narrative that everyone is myopically focused on: inflation pressure drives yields higher putting bonds and equities equities at risk. Correlations go positive, nowhere to hide, blah blah blah. Check.
Second step is to identify what this market narrative could be ignoring: deflationary pressures? I mean, look at the contribution from tobacco products alone to the ex food/energy CPI print. Many of these categories barely moved higher or even declined (deflation). Improved productivity drives real growth higher? Unlikely, since our current industrial system has basically maxed itself out. Real growth decelerates and even moves negative? Very real possibility here, considering productivity has basically hit a ceiling and especially as rates tick higher and so servicing debt steals market share from consumption.
What am I missing? Can we take this discussion to the second derivative instead of just focusing on the obvious? I want to make some money!!