Complicated

Is that Boris Johnson in a dressing gown in Windsor Great Park shouting at the squirrels? Or Graham Potter with a set of golf clubs? Or the Duke of Sussex, also in a dressing gown, shouting at the squirrels? Or is it a truck load of squeaky-bum time heading the way of Central Bankers as the straight-back-down inflation narrative starts to pop apart at the seams. A lurch higher in the ISM Prices Paid index rattled the cage this week as broader economic data continues to run hot, hot, hot. No wonder 2-year inflation expectations have repriced from 2%, to over 3% in a matter of weeks. “Several more rate hikes are needed” runs the mantra, as FED officials go at it with slack ties and sweaty top lips. Amongst all the fur, there is increasing evidence of a demand problem, as consumers defy the recessionary cat calls and get out and spend. Albeit those at the lower end of the income bracket appear to be spending on credit. It is reported that 36% of US adults now have more credit than savings; and auto loan delinquencies are ticking higher. Hmm. Whilst falling rents will provide dovish balm in the coming quarters, what if other inputs start to put some heat into the CPI prints? And see the upward revisions on labour costs, which the Labour Department quietly admitted they got a bit wrong in Q4. Time will tell, but commodity prices are set to make things a whole lot more complicated. Take natural gas. As the market loosened up off the back of milder weather in Europe and reduced LNG export capacity in the US, the price fell. Crushed, even. Many now chunter the energy crisis is over. And yet, after a decade out in the cold, the gas market has been starved of capital and supply is – some argue – far tighter than widely assumed. Weather is temporary, the role of natural gas in the energy stack is not. Many energy support packages are being wound down, but Pandora’s fluffy pink box has been prised opened and there are tight odds down the Corral that they won’t be the last given winter 2024 will soon loom large. The supply dynamic in the oil market is not so different. Short term there might be a few loose barrels, but if the IEA gets anything consistently wrong, it’s demand resilience. And China, the wild card, is only just getting back to it. Or take copper, where falling ore grades globally, and unrest in South America, are set to collide with massive pent-up demand as politicians go all in on the green agenda. Indeed, for many base metals, inventories are now some 90% below peak levels last seen in 2013. Given the warehouses are all but bare and structural demand – bar a deep, hold-tight global recession – remains ‘good to firm’, courtesy of fast developing EMs led by the likes of India, it seems that that it’s only a matter of time before the squeeze is on for many essential metals. This year or next, the decade of shortages is nigh. And all this in the context of the likes of Stan ‘fat pitch’ Druckenmiller pointing out that once inflation breaches 5% it has never come back down unless the Fed Funds rate has gone above CPI. As in never. An imminent uptick in CPI then, whether a short-term ‘blip’ or not, could well scatter the crows. Unless, of course, this time it really is different. Ho hum.