CNBC Just Posted Fake Inflation News. Here’s The Real Story…

A lower than expected CPI release on Wednesday morning sent the stock market rocketing higher.

But has anything really changed?

And does it mean anything for our bearish stock market outlook and strategy?

After a quick glimpse at how the media handled it, we’ll take a deeper dive into the numbers to see what’s really going on, versus the Wall Street media narrative.

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Headlines on CPI Play it Safe and Continue to Toe the Line

The Wall Street Journal was relatively measured:

“Consumer Prices Moderate After Run-Up Earlier in 2018”

The Journal was mostly interested in the impact on workers’ paychecks, calling the increase a positive signal for workers who have seen bigger paychecks largely eaten by price increases.

Well, I’m not sure about that. One month of “moderate” is not enough to signal a new trend.

CNBC.com saw fit to play the expectations game:

“US Consumer Prices Increase Less Than Expected in August”

This was relative to expectations of economists polled by major news organizations.

The expectations game is an exercise in randomness. We all know that the consensus of economists’ guesses is sometimes close to the mark, and just as often not, with seemingly little rhyme or reason.

But the reports always manage to find an excuse for when they miss. In reality, it’s just statistical noise, particularly in the exercise of the seasonal adjustment hocus pocus.

Bloomberg was a little more hysterical, its headlines blaring…

U.S. Core Inflation Unexpectedly Cools as Apparel Costs Fall”

And their subheads were in our research and analytical wheelhouse:

“Price Gains Trail Forecasts with and Without Food and Energy”

And…

 “Persistent Slowdown in Inflation Could Affect Fed Rate Path”

Well, yeah…obviously!

But is there any evidence of persistence here? Or is there any evidence that this month’s headline reading was even material in the first place?

A quick answer to the second question requiring no deeper analysis is…

No. There’s no evidence that this was even material.

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Overwhelming Evidence Reveals Why the Headlines Are Misleading

The month to month gain in the seasonally manipulated month to month change in the headline number was 0.2%, exactly the same as in July. So, on the surface, there was no change in the trend.

And so what, if apparel costs fell by a record amount? Apparel accounts for 3% of total CPI. It fell by a seasonally adjusted 1.6% month to month. At 3% of the total index, that doesn’t even amount to a rounding error in the headline number.  And who is out shopping for clothes in August?  OK, so we bought a few T-shirts down at the boardwalk. But for some reason Bloomberg made a mountain out of a molehill.

When analyzing this data, I like to get rid of the seasonal adjustment so that we can look at a chart of the actual, not seasonally manipulated data on a chart. A visual is worth all the words in all the media reports put together.

The not seasonally adjusted data told us that, yes, there was a downtick in the annual growth rate from 2.9% to 2.7%. But that was still near the top of the rate range of the past 20 months. Looking at the total index, the trend is absolutely intact. Nothing has changed. If anything, the trend is still accelerating. Amazing, the clarity that a little time perspective on a chart can give us.

Bloomberg made an issue of “core” inflation. Core inflation is the rate of price increase in consumer goods excluding food and energy.

There was a downtick in the annual growth rate from 2.35% to 2.2%, but it’s still near the top of the range of the past 20 months. The trend of the total index is remarkably intact.

Bloomberg explained that stock futures rose “as investors weighed the outlook for Federal Reserve interest-rate increases following the data. While the moderation partly reflects a near-record 1.6 percent monthly drop in apparel prices, a component that tends to be volatile, the broader slowdown follows a surprise decline in producer prices and suggests the path of inflation could be softer than some people expect.”

The report went on to speculate further about the reason for the rally. “Fed policy makers are widely expected to raise interest rates later this month, though a more persistent slowdown in inflation could affect their outlook for future increases.”

In other words, the rally was based on the idea that the Fed might not tighten as fast or as much if inflation is really slowing. It’s perfectly obvious to us that it isn’t.

But if that was the impetus for bulls to buy and bears to cover their shorts, then the rally was driven by a false narrative.

Bond traders obviously knew it. By the end of the trading day, the 10 year yield was right back up to where it closed on Tuesday at 2.96%. On Friday the 10 year hit 3%, then backed off a tick.

And what about the supposed surprise slowdown in producer prices?  Let’s look at producer prices for core finished consumer goods, just one step in the supply chain before retailers push the product out the door.

Here again, there’s no evidence of a material change. The Finished Goods Core PPI rose 2.8% year over year in August vs. 2.9% in July. That’s hardly a slowing.  In fact, the number has been between 2.7% and 2.9% for the past 10 months.

Since Inflation Isn’t Slowing, Here’s What to Do

The idea that inflation is slowing just isn’t supported. Furthermore, the conjecture that it might be slowing is useless, and not supported. The recent rally was based on pure “hopium.” With liquidity tightening, it isn’t sustainable.

There’s simply no reason in the CPI data to believe that the Fed will back off from its tightening regimen. The longer the market stays high and the more it rises, the greater the risk of a severe adjustment.

From the standpoint of technical analysis, this rally is setting up to be a test of last week’s high of 2913 on the S&P 500.

Late on Friday it was still showing signs of trying to get there. A failure to materially exceed 2913, followed by a decisive break of the short term uptrend support now around 2895, would suggest that the top is in.

Sincerely,


Lee Adler

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