Midweek Macro Note: CPI/PPI T-Ball, Snoozefest Week as VIX Declines, Cyclical Energy Patience

In the Midweek Macro Note - we discuss the CPI/PPI T-Ball Prints, highlight the snoozefest week as the VIX declines, and talk about the patience required for a new cyclical energy cycle

Don Johnson (@DonMiami3), Chief Economist

Good Thursday evening MacroEdge Readers & Community,

This week validated our projections on both CPI and PPI - with t-ball inline prints that should be taken only at face value. These prints (designed for some midterm padding by the Administration) will not help the November numbers - and Iran continues to dig in as it pertains to Hormuz and Bab traffic - with ship attacks happening now for the last 11 days. I see it as very unlikely (and increasingly so) that we see Hormuz traffic levels normalizing before the end of the year - because Iran (by proxy of China) knows the damage that will inflict on the incumbent party.

Prediction markets are seeing the declining chance that I am - over the course of the year - that traffic is going to return to normal, pricing just a 36% chance of that happening.

Markets continue to mechanically tick higher on the back of a record July budget deficit month - nearly $500 billion - and this crazy runaway fiscal train is showing no signs of stopping for the time being until some sort of tax hike comes along (won’t be until post-2028) and both sides simply cannot help themselves by pulling forward everything toward the short-term solutions of today that they are addicted to. For markets - this has meant a continuation of a more ‘third-world’ style equity market - as the lower 90% in the ‘i-shaped’ continues to get bulldozed by stagnant wages and high inflation - and those holding most the assets are seeing the value of those assets compound at a rate that wages won’t ever come close to matching. The tariff refunds and buyback window have provided another short-term stimulative dose for markets and the economy, and conversations I’ve had with business owners have highlighted these refunds acting like a short-term boost for them. Whether or not it’s by design, the operators of the system are simply addicted to the short-term solutions, and that will have long-term consequences, as it has been for the last 20+ years.

Overall, not a very eventful week with some earnings here and there - layoffs remain at similar levels to the last four months - and retirements are surging massively on the back of this equity rally - which is distorting a lot of the employment data.

This evening, we’re going to dive briefly into the CPI/PPI T-Ball, discuss the snoozefest week that this has been, and highlight the continued need for cyclical patience as an energy trader in this record tight oil products market.

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Let’s dive in.

CPI/PPI T-Ball

Rate hike odds for September have ticked lower - to about 35% on the back of a soft CPI/PPI reading ->

This was completely expected, as the last thing the Trump administration wants is a rate hike one month from the midterm election. While I don’t really think it will impact anything - September is probably the Fed’s last chance to hike this year - and we’ve also got Jackson Hole coming up - where we could get a Warsh that commits to taking this brutal underlying inflation more seriously (though I don’t totally have my hopes up). I continue to believe that regardless of what Warsh does now, energy markets and the bond market are starting to take the driver’s seat on the inflation fight, and that will probably have far more significant implications for the economy than a 25 basis point hike.

The CPI is 5+ years above target and still running hot. Another spike in energy prices, and this will begin ticking back up - feeding back into everything.

PPI saw some reprieve on the back of a softer commodities print:

These are really just noise at the end of the day - with the 10Y ticking slightly lower to close trading today, and we’re sort of right on the threshold where odds for a hike in September start to trend much lower if data continues to roll out in this fashion (even though yields and underlying inflation may not change by a whole lot between now and then).

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