By Michael Every of Rabobank
The US PPI print yesterday laid bare the surge in input costs still coming through the pipeline, most notably in that while the headline was up 1.0% m/m, almost double expectations, and 7.8% y/y, the core component ex- food and energy also spiked 0.9% m/m and 6.2% y/y. As we have already seen in China, somebody is going to have to swallow that. Will it be producers, compressing their margins? Or will it be consumers, depressing their real incomes? Considering around 25% of capacity at China’s third-busiest port just closed down again due to Covid-19, which will push global shipping further past its limits just as the US needs to restock for Black Friday and Xmas, the one thing that does not seem likely is a rapid drop-off in supply-side inflation.
That underlying dynamic is not new. Neither is the market’s lack of concern about it, with US stocks at a fresh all-time high: apparently it does not matter if margins are compressed, or real consumer incomes fall. Neither is the will-they/won’t-they of US fiscal stimulus. And neither is Fed speak suggesting tapering soon, this time from Daly, who doesn’t want to dilly-dally: which stands in complete contrast to what Fed Chair Powell says and does when he is in the spotlight.
The key point is that not long from now, our narrative is going to collapse like a house of cards. Either fiscal stimulus will happen and consumer inflation follows producer inflation higher, and we get Fed tapering and a move towards higher rates – and it is a complete mess in liquidity-addicted markets; or fiscal stimulus will happen,...