750 bps behind the curve

Macro Perspectives: Fri 11 Dec 22

Inflation data for January came in hot, again. In consideration of the "inflation is petering out" scenario (believed by some), we took a look at Chinese PPI and broad commodities prices on Tuesday.

This is the equivalent of "running to where the ball is going." The price of the products we will be buying in the months ahead, will be determined (in large part) by the inputs into Chinese production (prices of which remain near 26-year highs).

Commodities are the key input, and those prices, after a small dip following the Omicron news in late November, have been racing higher (as you can see in this chart below). Add to this, the bull cycle in commodities is still in the very early stages. 

With the above in mind, the Fed is now 750 basis points behind the curve (with rates at zero and inflation at 7.5%).

Not too surprisingly, comments from a Fed voting member hit the wires in the afternoon suggesting the Fed could hike by as much as 100 basis points by July. This is the Fed's way of setting market expectations, which can be a form of (in this case) tightening (i.e. the Fed's "forward guidance" tool).

A Fed that is posturing more aggressively, should be good for markets. Unlike the "taper tantrum" of 2013, the policy error this time isn't removing emergency policies prematurely - it's a Fed that has been/is too late.

In this case, the more, and the earlier, the better. The less, and the later, the dangerous.