Goldman Sees Entrenched Inflation…Maybe
Posted: July 19, 2022 Filed under: earnings reports, Financials | Tags: Goldman Sachs, GS Leave a commentEntrenched Inflation
There are all sorts of names now for today’s inflation. I still like the concept of “Persistently Elevated, Unactionable Inflation.” In its earnings report this morning, Goldman Sachs (GS) highlighted the prospect for “entrenched inflation.” Again, inflation peaking hardly matters if prices continue to increase at a high rate. In an environment where the Fed is scrambling to normalize monetary policy, entrenched inflation is analogous to unactionable inflation. From Goldman’s Q2 2022 earnings conference call (from the Seeking Alpha transcript):
“We see inflation deeply entrenched in the economy. And what’s unusual about this particular period is that both demand and supply are being affected by exogenous events, namely the pandemic and the war in Ukraine. And my dialogue with CEOs operating big global businesses, they tell me that they continue to see persistent inflation in their supply chains.”
Maybe
However, in a classic “on the other hand” moment, Goldman also noted that its economist predicts that “….inflation will move lower in the second half of the year.” So which is it? Goldman gave almost no clue from its plans or actions what it really believes about inflation. One potential exception comes from its plan to “reduce certain professional fees going forward.” Goldman referred to this fee cut in the context of improving operating efficiency.
Goldman Definitely Puts Employees On Notice
Operating efficiency is a great euphemism for tightening spending and constraining labor expenses. I took particular note that Goldman may reinstate its annual performance review. The company suspended this review during the pandemic. That gracious move likely took a lot of stress off an already pandemic-stressed workforce. Now, these looming performance reviews will motivate incrementally more productivity and provide a basis for trimming the workforce after year-end in parallel with a slowed “velocity” in hiring.
Conditions Could Improve
Despite an abiding caution, Goldman was quick to point out that conditions could improve.
“We’re being flexible and being prepared to be nimble in case the environment gets worse. By the way, we don’t know that the environment is going to get worse. The environment might get better, too.”
In the context of an inflationary economy, presumably “get better” aligns with the Goldman economist’s prediction of lower inflation pressures in the back half of the year. However, recession/stagflation is a potential side effect of the Fed’s apparent growing success in clamping down on inflation expectations. In other words, to get better, a rebound from recessionary pressures better move VERY fast.
Goldman Sachs Group, Inc (GS) gained 2.5% post-earnings but remains caught in a well-defined downtrend this year. Both the 20-day moving average (DMA) and the 50DMA have guided GS downward. (Source: TradingView.com)
Be careful out there!
Full disclosure: no positions
So Much For Peak Inflation
Posted: July 13, 2022 Filed under: CPI, Economy | Tags: Brian Deese, Carl Quintanilla, CNBC, CPI, PEP, PepsiCo Inc 1 Comment“How long are we going to keep saying this is the worst of it?”
Carl Quintanilla questioning Brian Deese, National Economic Council Director, about the June inflation numbers – CNBC, July 13, 2022
So much for peak inflation. The Consumer Price Index (CPI) once again came in hotter than “expectations” for both headline and core inflation. The U.S. Bureau of Labor Statistics reported annual June CPI at 9.1%, an increase over May’s 8.6%. Core inflation, excluding food and energy, came in at 5.9%, slightly lower than May’s 6.0%. The monthly increase of 0.7% was slightly higher than the 0.6% of the previous 2 months. The report called the increase in prices “broad based” and “…almost all major component indexes increased over the month.”
Despite being wrong for the last several months, the peak inflation narrative finally has a chance to come through with the next report on inflation. The prices of a large swath of commodities have plunged in recent weeks as it appears the Fed’s aggressive hawkishness is finally breaking the back of inflationary pressures. Financial markets have reflected these declines with large losses for commodity-related stocks. These declines continued today even in the face of the hot inflation print.
However, even if inflation’s momentum abates, prices promise to remain elevated for quite some time. Companies are warning in their earnings reports about this very prospect. For example, PepsiCo, Inc. (PEP) reported yesterday the following observation and expectation on inflation (from the Seeking Alpha transcript of the earnings call):
“Balance of the year inflation is higher than it is for the first half of the year. I think we’ve mentioned in the past, we’re in the teens in terms of commodity inflation. That will continue, but a little bit higher in the back half.”
Company reports are typically more meaningful than the expectations of economists because companies have money on the line and profits at stake.
Ultimately, what matters most is how the Federal Reserve responds to the latest numbers. If the Fed stays the course, inflation’s momentum should take another step down. (Notably, Brian Deese acknowledged on CNBC that core inflation remains too high and outlined the myriad of inflation-fighting initiatives underway by the administration). If the Fed gives in to pressures to slow down and also communicates its belief that its job is near an end, I fully expect a massive rally in financial markets and asset prices…at least in the short-term. If the Bank of Canada’s large (and surprise) 1 percentage point increase in its interest rate is any indication today, the Fed will stay on message.
Be careful out there!
The Fed’s Hawkish Pressure Is Working Against Inflation
Posted: July 3, 2022 Filed under: Agriculture, Bond market, commodities, iron ore, Materials, Monetary Policy, Steel | Tags: 30-year fixed rate mortgage, BHP, BHP Group Limited, corn, FCX, Federal Reserve, Freeport McMoRan, lumber, RIO, Rio Tinto, TIPS, Treasury Inflation-Protected Securities, XME 5 CommentsThe Federal Reserve has stuck by its aggressively hawkish stance despite massive pains suffered in financial markets and growing risks of a recession. Markets are so convinced by and so scared of the Fed that they have raced far ahead of current policy to anticipate a lot of price hikes ahead. Soaring mortgage rates are one example of the Fed’s sharp impact. The 30-year fixed rate mortgage was last this high during the recession of the Great Financial Crisis (GFC).
![Source: Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; June 28, 2022.](https://fred.stlouisfed.org/graph/fredgraph.png?g=RiKx)
These suffocating mortgage rates are an important sign of victory for a Fed whose primary inflation concerns come from housing.
An even clearer sign of victory comes from the bond market, specifically the breakeven rates on five- and 10-year Treasury Inflation-Protected Securities (TIPS). Reuters reported that these TIPS “slid to 2.636% and 2.362%, respectively, a level last seen in September 2021.” Nancy Davis, managing partner and chief investment officer at Quadratic Capital Management LLC, accordingly observed that “the breakeven market, the difference between TIPS versus regular Treasuries, is dramatically downward sloping. It’s barely above the Fed’s long-term average (inflation) target of 2%.” In other words, the bond market is already anticipating that the Fed’s aggressive push to normalize monetary policy and fight inflation will work.
A broad swath of commodities and commodity-related stocks are suffering under the weight of the Fed’s success. The charts below are just a sample: diversified commodities producer BHP Group Limited (BHP), iron ore producer Rio Tinto (RIO), copper producer Freeport McMoRan (FCX), and the metals and mining ETF (XME) (charts from TradingView.com). Even agricultural commodities like corn and lumber look like they have topped. Perhaps these declines represent the early signals of a recession. If so, those concerns may wait for a post-inflationary day.
BHP printed a double-top in 2022 BELOW the 2021 highs.
RIO topped out in 2022 well below 2021’s highs. It now trades at the November, 2021 low and is at risk of challenging the November, 2020 low.
FCX is close to erasing ALL its 2021 gains.
The SPDR S&P Metals & Mining ETF (XME) quickly reversed its entire 2022 breakout.
Spot corn prices closed below the uptrending 200-day moving average for the first time since January. The topping formation for 2022 looks like the dreaded head and shoulders top (shoulders in March and June, the head in April).
Lumber prices topped out in 2022 well below the 2021 highs.
Be careful out there!
Full disclosure: no positions
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