FX.co ★ Consumer prices went off scale again; 2008 crash prophet talks about the limited capacity of the Fed

US consumer prices rose more than expected in September. This renewed discussions about higher rates of price growth, highlighting the persistence of inflationary pressures in the economy, and forced markets to pull back.

The consumer price index rose by 0.4% from the previous month, according to the Ministry of Labor, published on Wednesday. Compared to last year, the consumer price index increased by 5.4%, which corresponds to the largest annual increase since 2008, although we must take into account the effect of deferred demand here.

Excluding unstable components of food and energy, core inflation increased by 0.2% compared to the previous month.

It would seem that this is not too much. The median estimate in a Bloomberg survey of economists provided for a monthly increase of 0.3% on the general indicator and 0.2% on the base rate. However, it should be remembered that we are talking about the figure of an increase to the already existing level.

A combination of supply chain disruptions, material shortages, high raw material prices, and wage increases have dramatically increased manufacturers' costs. Out of desperation, many were forced to shift some of these costs to consumers, which led to more stable inflation than many economists, including those from the Federal Reserve, initially expected.

The increase in prices observed last month was reflected in the increase in prices for food and housing. Meanwhile, costs in the sector of used cars and trucks, clothing and airline tickets have decreased. The services index, which promised investors growth, did not justify the hopes placed on it.

Higher house prices are finally trickling into the data.

Rent of primary housing jumped in price by 0.5%. This is the highest figure since 2001. While the equivalent rent of homeowners showed the largest increase in five years.

The cost of housing, which is seen as a more structural component of the CPI and accounts for about a third of the overall index, may prove to be a more stable predictive indicator of inflation.

The report is likely to strengthen the Fed's inclination to start reducing asset purchases in the near future, especially because the supply chain problems faced by enterprises are practically not decreasing.

The minutes of the Federal Open Market Committee's meeting last month, which took place on Wednesday afternoon, will provide additional information on politicians' views on employment and inflation targets for reduction.

The New York Fed review on Tuesday showed that Americans' expectations for price growth continued to rise in September, and 1-year and 3-year expectations accelerated to record highs.

The report says that American consumers also faced higher prices for new cars, furniture and accessories, which rose by a record 1.3%. Looking into the future, we can say that increased energy prices should further reduce the wages of workers, since employers will have to save costs at the expense of the salary fund.

The market is nervous... but not too much

U.S. stock futures fluctuated after a report showed a faster-than-expected rise in consumer prices last month, underscoring the persistence of inflationary pressures in the economy.

S&P 500 futures lost a modest gain after the data was released. Nasdaq futures remained stable.

The yield on 10-year US Treasury bonds rose to 1.60%, and the dollar offset the loss. Oil prices, after a slight subsidence, began to rise again.

The question of how inflation will affect the economic recovery that has begun is likely to dominate discussions with the start of the reporting season. The reports will provide an assessment of how businesses are coping with supply chain challenges and rising costs, while economic growth slows and central banks begin to reduce incentives for a pandemic.

European stocks gained about 0.5%, as news that the German software giant SAP increased its revenue forecast led to a rise in shares of technology companies.

Most Asian stock markets rose, but regional growth was limited by a slight decline in Japan and the cancellation of trading in Hong Kong due to typhoon Kompasu, as well as another bad news from the Chinese bank Evergrande, which put the yuan under attack.

Obviously, the world economy is at a turning point. The next futures closing period is December. By this date, the storage facilities should already be filled with gas and oil, and companies submit annual reports and plan expenses for the next fiscal year. In addition, the deadline for settlements under contracts is coming, including for states.

Therefore, October and November, without exaggeration, will decide everything. Or, rather, nothing.

Prophet of 2008 crash: Fed is tied hand and foot

Nouriel Roubini, known for foreseeing the mortgage meltdown that led to the 2008 financial crisis, said it could be difficult for the Fed to tighten policy if growth slows and markets start selling off, as it once did in the fourth quarter of 2018.

"They're going to relax," the chairman and CEO of Roubini Macro Associates said Tuesday in an interview with Bloomberg Television in Dubai. "They're going to delay any completion of rate cuts or rate hikes."

According to him, stagflation, in which growth stops and inflation rises, will persist "for several quarters." He expressed the opinion that next year the basic indicator of personal consumption expenditures in the United States will remain above 3%.

Roubini says that he is a doctor (not in the sense of a scientific title, but in a different way). The economist believes that he is one of the few realists who warns about the trap of global debt.

According to Roubini, supply chain bottlenecks and labor shortages contribute to a significant increase in core and overall inflation and at the same time damage economic growth: "This becomes a very difficult dilemma for central banks. If growth slows, the Fed... eventually will become peaceful."

Back in the spring, we wrote about how rash it is on the part of the Fed to tie itself to employment indicators. Although this indicator is very important in itself, remote technologies have changed the economy of employment forever. In addition, a well-known economic historian has shown on graphs that after the crises, employment has never recovered to pre-crisis levels.

On the other hand, there is a huge problem of shortage of raw materials and components for enterprises in the US and the eurozone: recovering demand requires an increase in production. But contracts for raw materials in most sectors have been concluded until 2023, and suppliers also have no opportunities to increase capacity in the conditions of the ongoing pandemic.

But there is another nuance that is often forgotten in the context of the Fed and bonds: the debt ceiling has already been reached. This literally means that the state can no longer issue new pools of government loan bonds, even if representatives of entire industries storm the Capitol with a request to support the economy.

Today, low interest rates are supported by huge loans made at the beginning of the year. However, it is not possible to borrow more yet – because of the limit. That is why some officials "gently hint" at the need to abolish the threshold of government loans altogether.

And although a lot of cheap cash is spinning in the financial system like never before - take and invest - financiers and investors do not want to invest in the real sector - the risk of new quarantine measures and other factors affecting producers is too high, which seem to only grow from month to month like snowball.

When governments, following the example of 2008, introduced low rates on loans for banks, they counted on the fact that some of the money would fall into the real sector, as it eventually happened in 2012.

But it was not there. In 2020, such interesting tools as ultrashort deals, DeFi and digital tokens were already developing in full swing, and money flowed there.

A stalemate is being created: Goldman Sachs reports huge profits, and factories around the world are closing. Two economies for the price of one.

The government has no money: not only are loans closed for now, but taxes are also being reduced.

And yet, despite this, if economic growth slows down, the Fed will not be able to raise interest rates even by a hundredth, because this will instantly finish off the real sector.

The Fed had a real chance to increase the actual negative rate for banks this summer, when investor sentiment said "we have defeated this coronavirus."

Alas, with the beginning of autumn, when the situation became dramatically worse, the corridor of opportunities for the Fed seems to have closed for the next year and a half.

Although a reduction in asset purchases will be announced at the next policy meeting, as Jan Hatzius the chief economist of Goldman Sachs Group Inc. said on Monday, the revision of rates is no longer possible for the Fed.

According to Roubini, if the Fed behaves gently and inflation becomes unstable, US bond yields will continue to rise, as investors regard a higher premium for inflation risk.

Investors, he said in an interview, can insure against the risk of higher inflation by reducing the duration of bonds or by investing in treasury securities with inflation protection that are tied to consumer prices. And in fact, the calls of analysts that it's time to hedge are heard from all over the world.

Oil prices could rise to $100 a barrel in the next few months from about $83 on Tuesday amid a "sense of scarcity," Roubini said. However, it will also depend on whether the OPEC+ alliance restores supplies and whether Iranian barrels can return to world markets, he said.

"I see an upward trend in oil, coal, natural gas and other energy prices," he said. "Demand is growing."

Commodities, Roubini says, including gold, metals, oil and some forms of real estate, such as infrastructure, will also provide protection from price pressures. Let's add - to some extent.

Judge for yourself. The rise in prices narrows the purchasing power. So, Europe is already reducing its level of natural gas consumption. The same thing happens in any real sector: people are ready to buy most of the goods only up to a certain level - when the price rises, they tend to refuse to buy. Unlike financial markets, where bears and bulls are always fighting, the real sector may experience difficulties with demand. But this does not lead to lower prices, on the contrary: every closed or idle plant increases the shortage of goods, and the price increases further.

As a result, we see how the real sector is struggling for survival, while financiers are busy speculating on financial markets. They can be understood: they are obliged to ensure profitability on managed assets in this difficult situation. But the Fed has exhausted reserves, and there is no money to stimulate the economy. Therefore, the rates will remain at the same level. This literally means that someone will become even richer (much richer) next year, but the rest of the world will pay for it.