To Go Too Far or Not Far Enough

TL;DR

Tension is building in the market as data points related to CPI and the labor market will determine the effectiveness of the Fed's strategy. The Fed will continue tightening until CPI reaches 2% and the labor market is balanced.

Transcript

foreign baked in Welcome to the Real Vision Daily Briefing it's Friday October 21st 2022 I'm Ash Bennington joined today by Warren pies founder of 314 research quick reminder our live chat function on the real Vision site is temporarily down so please drop us your questions in the comments section of the real Vision website in the live chat on YouT... Read More

Key Insights

• 😥 CPI is expected to decrease regardless of the Fed's policy, but the timing and direction of data points will be crucial in resolving market tension.
• 😵‍💫 The labor market shows imbalances between job openings and seekers, potentially leading to wage-price spirals.
• 👪 Shelter inflation, particularly owner's equivalent rent, is a critical factor in CPI, but its deviation from lagged home prices may pose challenges for the Fed.
• ❓ Energy stocks, including Exxon Mobil, show potential for outperformance and diversification in portfolios.
• 🌐 The persistence of China's zero COVID policy and lockdowns continues to impact oil prices and global markets.
• 🍘 The SPR (Strategic Petroleum Reserve) may continue to be released, and its impact on CPI depends on base effects and crack spreads.

Questions & Answers

Q: What is the current tension in the market and how does it relate to CPI and the labor market?

The tension in the market stems from the need for the data related to CPI and the labor market to align with the Fed's expectations. If the data does not meet the Fed's criteria, it may lead to a hard landing with negative implications for the economy and earnings.

Q: How does the labor market contribute to the tension in the market?

The labor market shows imbalanced job openings and job seekers, which can potentially lead to wage-price spirals. However, factors such as work-from-home dynamics and response rates to surveys impact the interpretation of the data and its implications for the market.

Q: What is the significance of owner's equivalent rent in CPI?

Owner's equivalent rent is a component of shelter inflation in CPI. It is calculated by asking homeowners how much they would rent their house for, equating the cost of living in a house you own with rental prices. Changes in owner's equivalent rent can impact CPI and the interpretation of inflation.

Q: How does the current tension in the market impact earnings?

The current tension in the market affects earnings as market participants weigh forward earnings and interest rates. A more dovish Fed stance and the achievement of estimated forward earnings could be received bullishly by the market, while uncertainties may lead to a consolidation phase.

Summary & Key Takeaways

• The tension in the market arises from the need for data to align with the Fed's expectations in order to back off on policy while maintaining a strong economy and earnings.

• The labor market shows imbalanced job openings and job seekers, potentially fueling wage-price spirals. However, there are factors such as work-from-home dynamics and response rates to consider.

• Shelter inflation, particularly owner's equivalent rent, is a sticky component of CPI. A deviation from lagged home prices could impact the data next year and present a dilemma for the Fed.