Recession Thoughts

Early this week, with the severe inverted yield curve and other signals flashing recession, I planned to use this letter to delve into the data. Then Thursday’s CPI data convinced markets to blow the all-clear whistle.

Lack of any “green shoots” would have been out of historical character and frankly quite alarming. We got at least some. This is how the transition back to a disinflationary trend starts. But we’re not there yet.

This CPI report was not an all-clear signal to the Fed. The headline rate year over year was still +7.7%. The core rate was still +6.3%. Those numbers are still way too high. Whatever the market thinks, the Fed is still on inflation watch.

CPI Cheer

There are indeed a lot of good things to like in that CPI data. Let’s review a good summary from my friend David Bahnsen:

“The CPI news on Thursday caused the largest single-day bond rally I have ever seen in my career, as the 10-year bond yield fell a stunning 33 basis points (down to 3.81%). What was that CPI news?

“The headline rate year over year was +7.7% whereas in September it was +8.2%.

“The core rate was +6.3%, down from 6.6% the month before. This, despite energy (+1.8%) and food (+0.6%) going higher. Paradoxically, food and energy going higher was deemed a positive because the overall rate came down despite them going higher, not because of them going lower. Also, that food increase on the month was the smallest increase of the year.

“The ‘owner's equivalent rent’ absurd contribution to inflation still caused it to move higher, not lower (by +0.6% on the month, though less than the +0.8% of last month). I say ‘absurd’ because rents are not going higher but this is taking into account leases signed a year ago (current lease levels), and is 30% of the CPI reading, so the lag effect as leases roll off month by month is severe.

“Health insurance prices were down on the month but still up 21% on the year.

“But core prices on GOODS dropped 0.4% on the month and the yearly price dropped to 5.1% from 6% last month. Goods inflation has come down each month since I initially called a peak in goods inflation five months ago.”