Huge PPI Miss

Markets are calm after a huge PPI miss (in my opinion). I expected PPI would come in cool because of falling commodity prices, and thereby set-up a strong rally into tomorrow's CPI report that would either fail miserably or trigger a melt-up squeeze before giving way to new lows. There is still a risk of a cooler CPI for bears, but the odds of that are lower following the PPI.

ZH: Food Cost Jump Sparks Hotter Than Expected US Producer Price Inflation

Ex-Food, Energy, & Trade, PPI rose 0.4% MoM (double the expected +0.2%).

Both Goods and Services PPI are rising with Food increases dominating...

Finally, we note that the pipeline of PPI pain is easing further as intermediate goods inflation eased further...

Inflation is cooling for sure and monetary effects are lagging. Yet remember what Powell said this summer (paraphrasing), "We don't really know anything about inflation..." Yesterday, this article went viral on finanacial social media: Fed’s Inflation Fight Has Some Economists Fearing an Unnecessarily Deep Downturn

Traditionally, the Fed set policy based on forecasts of inflation, which lags behind changes in output. But officials now are reacting more to the latest inflation data “because they have absolutely zero confidence in their ability to forecast inflation,” said Nathan Sheets, chief global economist at Citigroup. He said he is concerned the Fed will overdo rate rises but concedes inflation in the service sector is “pretty concerning.”

I don't see how a central bank cannot overdo it when fighting inflation because it is the only way to be sure. They have to nuke inflation from orbit. The added factor is that they don't trust their inflation forecasts. Every month that doesn't show collapsing inflation is a month that doesn't cause any doubt about rate hikes at the Fed.

My scenario for this year is that inflation does cool, but then accelerates in 2023. Another scenario that will take longer to develop: the market sinks even as inflation drops because the Fed won't change course. Real interest rates will accelerate via falling inflation. Assume the Fed pauses at 4.75 percent. If CPI falls from 6 perecnt to 3 percent, real interest rates rise from -1.25 percent to +1.75 percent. In bear markets, all macro scenarios result in lower stock prices.

Not much has changed with charts the past few days. Some charts remain important such as USDCNY because I still expect a possible yuan depreciation, but that's not chart-centric. Instead, ZB looks the most compelling because it is sitting near the 52-week low. It is also coming within spitting distance of the measured move off the topping pattern (yellow horizontals indicate the top and the target). Note I am ignoring the March 2020 spike when measuring the top.

I've been wrong about ZB, TLT and government bonds finally catching a bid as the market drops. However, if there is a capitulation drop coming this month, then I envision ZB making a quick drop to around 121 before recovering, but equities continue falling. This "safe haven" behavior will indicate equity investors are finally capitulating and also turning to the "safety" of bonds. Safety in quotes because this year has shown they are not safe. The shift in psychology will be investors deciding bonds are safer than stocks. 

If I'm wrong, so be it. I have no position on TLT at the moment. I will also note TLT broke my lifetime support line. It's also possible a twin crash happens in stocks and bonds simultaneously.