CPI Higher -Markets Unfazed

Ok so CPI was a dud despite being 0.1% higher than expected coming in at 3.7%. However we want to keep things in perspective and we can demonstrate perspective by looking at this chart here of the Core CPI less shelter which stands at 4.08% YoY:

Source: Zerohedge

What we want to realize is that prior to Covid, this number was around 2.9% and now its just over 1% higher. Yes its above 4% but realize that this is also down from 6.8% and this bounce here doesn’t exactly present a full on trend change.

Yea the Krugman types will continue to push a 1970s analog and a resurgence of inflation into the end of the decade. However as long time readers know, we see zero comparison to that world economy back then and todays, not to mention the coordinated efforts of global central banks today along with QE mechanisms is vastly different. So please do not believe that hype.

Rather look at it this way as well, pre Covid this metric of Core above was 2.9% and after the FRB expanded its balance sheet from $4.2T to $9T and after $6.3 Trillion in direct spending and tax cut stimulus out of DC, to only be up 1% after that $11 Trillion or so shelling out is pretty amazing and scary at the same time. Scary because we have pointed out time and time again, that QE and ZIRP were not some magic wealth creators out of fantasy land, rather they were direct targeted weapons of future GDP extraction bringing forward decades of capital that would have otherwise not have been achievable if it were not for the global central banks QE asset purchases.

Now it seems each decade that goes by comes with larger and larger QE programs in order to keep the rigged game, well rigged. This is also why you haven’t seen the FRB balance sheet fall very much, its not even down $1T off its highs, think why? Think why does the FRB still pay IORB? Why don’t they cut their balance sheet faster in lieu of raising rates? Then think who benefits the most from QE (FRB Balance sheet expansion) and higher rates? Fixed income savers benefit from higher risk free rates, and those with excess savings and assets benefit greatly from the prior QE and ZIRP programs and they will benefit again buying everything back up on the cheap after the fire sales…Now think of who doesn’t benefit…well that would be the bottom 80%.

So as usual just seems like the mandates are continuation of status quo of both economics and monetary Keynesianesque central bank planning.

As far as the markets today, the US bond market had to absorb another reopening, this time of the 30Y bond after yesterday’s 10Y note auction. Todays auction was a 1bp tail and sellers were a plenty, but the market seemed to absorb it pretty well. Technically the bond market is holding some very key levels, however if further downside probes are had, it may see some fast stop less selling from bottom pickers here. Although the futures markets are heavily shorted already and most likely from Basis and Swap players so there aren’t many natural sellers left if the FRB is close to being done with this hike regime. In fact Reuters was out with an article about this very trade known as “basis” which we have discussed at length a few times in our writing as this trade is what we have done for decades. Here is a link to the Reuters article, US Treasury Basis and potential gaming

Reuters

What we can tell you is this, the massive bid that will arise once the FRB is truly done raising rates will cause these shorts in the futures to scramble and it will get messy, because in today’s electronic market place, the algo’s are not market makers nor are they liquidity providers, they are purely predatory market takers and all offers will be pulled as they always are when things get nasty.

Here is a look at the December bond futures and to prove that the short rate does not control the long rate, take a look at Fed Funds at 3.75% a year ago and today at 5.50% virtually the same futures level in the bonds despite the 175bp increase in Fed Funds: