Radio Show: Why US inflation is over-rated

Thursday, November 24, 2016 // Written by Enzio von Pfeil

Contrary to what the press writes, America's orders and sentiment are decidedly weak, i.e.non-inflationary

  1. US durable goods orders have come in better than expected. The US Commerce Department said orders for durable goods – products such as cars, and household items which are designed to last longer than three years – jumped 4.8% in October. That’s a big improvement from the 0.3% decline recorded in September. Excluding the volatile transportation component, orders were up 1%, also topping expectations of a 0.2% increase.
  1. You must strip-out that volatile transportation component. It accounted for 80% of that 4.8%  headline figure
  2. I prefer to use annual percentage changes in order to see what really is going on.

                                         i.    Excluding that volatile transportation sector, durable goods orders bottomed at an annual -5.2% back in September 2015; by this October, they turned positive at an eye-popping 0.3% per year.

                                        ii.    This is hardly something which the Fed looks at when formulating policy.

2. Consumer sentiment has also surged.  The University of Michigan said its final reading of consumer sentiment rose to 93.8 this month compared to an October reading of 87.2.

  1. Consumer sentiment shrank by an annual 4.5% this October
  2. Crucially, inflationary expectations keep tumbling from their high of an annual. 4.6% back in April 2011; by this September, expectations rose by a yearly 2.4%
  3. This is hardly something which heralds much stronger inflation.


3. Those data and the prospect for higher inflation has seen a renewal of the sell-off in government bonds and the dollar push to new 13-year highs.

  1. As just suggested, inflationary expectations remain muted: they rose by about half the rate which they did at their peak back in April 2011.
  2. And that is because consumer sentiment SHRANK this October.
  3. But perceptions are realities. My view is that the real driver of bond yields is that markets expect US budget deficits to rise in the wake of Trump’s phantasised tax cuts.

4. The minutes of this month’s Fed meeting reinforce the impression that an interest rate rise is on the cards. However, several members wanted to see further evidence of full time employment and inflation reaching the Fed’s 2% target before raising rates. Federal fund futures markets are pricing in a better than 98% chance of a rate hike next month.

  1. Throughout the hot part of the Presidential campaign I have suggested that the Fed would not tighten until Clinton got elected. Well, I was wrong re. Clinton, along with BREXIT.
  2. However, I feel that now, the Fed is emboldened to tighten if for no other reason than the proverbial “get it over with”.
  3. A major reason to tighten is so that they create room to loosen later on….

You can listen to the RTHK podcast here. Enjoy! 

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