What is the CPI Rate for 2022

Powell's optimism about the Fed's ability to bring inflation back under control - beware - without hurting the economy and corporate earnings, contributed to a good rebound on Wall Street, with the S&P 500 rarely recovering 0.92% and the Nasdaq 100 even better (+ 1.47%). Treasury yields, consistent with this optimism, fell across the curve, albeit slightly. A commendable act of trust, if you think that the FED President is the same one who 8/9 months ago said that inflation was transitory, while in the second half of the year the CPI made the record since the 80s. the Fed Funds to zero and the Fed engaged in QE for a couple of months.

To think that the stance needed to bring inflation under control will not have any consequences on the cycle seems risky to me. Of course, it may be that, after the frenzied stimulus phase and the production bottlenecks have passed, the structural disinflationary forces reaffirm themselves, and the CPI re-enters largely autonomously. This appears to be the market's view, judging by bond levels. But this mean revertion has been insisting for a while, and in the meantime we are at 7%. Let's say that the concept of risk premium at the moment does not seem very popular among investors, ousted by more recent acronyms such as TINA (there is no alternative), FOMO (fear of missing out) and BTFD (buy the fucking dip).

Asia welcomed the turnaround in sentiment very well. All major indices except Jakarta (at the stake) show robust progress, with Chinese "H" shares leading, along with Hong Kong, with gains close to 3%. Third place, Tokyo, followed by Seoul and Vietnam, with the Chinese "A" shares showing more limited but still good progress. The soul of the rise in "H" shares is the tech, those stocks like Ali Baba also listed on Wall Street that were harassed by regulation and the risk of delisting in late 2021, and are now violently squeezed.

The good sentiment that prevailed among Chinese assets is presumably also due to the December CPI which dropped from 2.3% to 1.5% vs expectations for 1.7%. Producer prices also slowed (10.3% from 12.95 and vs expectations for 11.3%). The reasoning is always the same: falling inflation ergo more room for maneuver for the PBOC in the direction of easing. This places the Chinese central bank in direct antithesis to the other major banks. Won't this divergence fuel capital flight in the long run? And then, what will be the effect on prices of an increase in omicron lockdowns?

Apart from that, a lot of Chinese real estate debt is due to maturity shortly and a lot of spectacle is expected. Reuters reports that unpaid commercial papers are flying. Their assets continue to suffer a lot.

On the Covid front, a certain optimism is fueled by the fact that in the UK cases are starting to decline, while hospitalizations and musts have not risen that much. The UK's role as "sentinel of industrialized countries" on Covid bodes well.

Good news, certainly that it increases the probability that the bulk of the countries will see the peak of the wave in January. From the point of view of the markets, support for sentiment? It may be, but in reality Omicron's "dip" was recovered quickly, and a variable such as oil has already returned above the prevailing level before its appearance.

The European opening saw, once again, continental equities catch up with the Wall Street rally last night. After that, in the absence of any relevant data, markets waited nervously for the US CPI due out this afternoon. The same goes for the currency and the yields.

At 2.30 pm, the show.

The numbers are not too far from the consensus (matched in the case of the year-over-year headline data) but have all the characteristics to cause headlines in the media, with 7 as the first digit, and 5.5% and historical records.

It has been observed that a large contribution to strength comes from used cars, while housing, which is the largest component of the core data, has slowed the ride slightly. And then there is energy which has a very strong effect on the year-over-year data, even if the month-over-month contribution was negative. Too bad that oil is making new highs for the period today.

The market reaction is similar to that seen yesterday after Powell, and on other recent occasions in which the numbers were relevant, but expected and therefore discounted in the short term. Of course, from the point of view of the fundamentals it is so counterintuitive that it makes the desire to comment go away. In fact, in the face of a level of inflation at its highest for decades, and with the Fed clearly lagging behind, what do we have? Dollar and yields are falling, and stocks and commodities are rising. Obviously it is not the case to focus on the single session. But, as mentioned above, the risk associated with inflation entering 2022 at this level is not negligible. What if, once again, the return expectations turn out to be wrong? Especially since a wave of Omicron in China could further exacerbate supply difficulties in the coming months. Incidentally, in November there are Mid Term Elections in Congress, and Democrats are already panicking about price levels. Bet that if the CPI does not slow down quickly, the pressures on the FOMC will become high (or worse, we are talking about price controls, which are detrimental to margins).

The opposite reasoning is: if 7% inflation has not undermined expectations, and made meatballs of the rate curve, what can it do? What prevents us from continuing like this, with real Fed Funds negative by handfuls of percentage points, the best of all possible worlds for Corporate USA?

I don't know, but experience shows that if something sounds too good to be true, it usually isn't. Before Covid, a certain school claimed that one could make a fiscal deficit at will without fear of creating inflation, which was now dead. At this point I would say that we have proof to the contrary.

European equities were happy to take advantage of the US reaction, closing with good progress. Naturally, the correction of the Dollar resulted in a strengthening of the €, while the Eurozone yields fell in sympathy with the US ones. The spread is also down. The strength of commodities was spectacular, with copper up by 3%, oil by 2% and even precious metals up. A movement, that of industrial metals and energy that underlies a strong economy. On what basis, then, will prices slow down, with strong commodities and a resilient cycle? Posterity will judge.