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From Goldilocks and the Soft Landing to Stagflation and the Great Depression 2.0, so many narratives are competing for market attention. It's hard to get a solid read. We'll need to stay the course.
The debt ceiling drama kicked off (again) to add more uncertainty into the mix.
Wells Fargo think it could be a long process...
There's still plenty of runway before the US treasury can no longer meet it's obligations 👇
Based on what we know now, our projections show that the X date most likely falls somewhere between the beginning of July and the beginning of September. Early- to mid-August is our preliminary modal forecast for where the X date ultimately will land if negotiations go down to the wire.
So, for now at least, nothing but a distraction.
The dysfunction of government is a permanent feature. Seemingly, so is the pricing power of companies. It's a topic that's come up a few times in the Macrodesiac chat over the past few months.
Proctor & Gamble (P&G) is the latest company to keep raising prices even if it means lower sales volumes.
From the earnings call 👇
Let me start with elasticities. The overall view has not changed. We continue to see more favorable elasticities than we would have expected on historical data pretty much everywhere, but Europe focused markets.
And you can see with 10% pricing flowing through. And when you strip out the non-consumption-related volume effect, a 3% reduction in volume that is a very benign elasticity that we’re seeing in aggregate and allows us to hold volume share and value share as the pricing flows through
TL;DR Prices up by 10%, sales volumes down by 3% and we're absolutely fine with that. So is the worst behind us in terms of price hikes? Yes... but 👇
In terms of peak pricing, you’re right, many of the large price increases get left this fiscal year. But that doesn’t mean that we’re not putting more pricing in the market.
So for example, we have a number of price increases that go into effect in February. So there’s two components here. One where lapping price increases were executed last year, but we’re also still passing through some of the cost pressures via incremental pricing around the world.
Now, this isn't a sign of runaway inflation. It's a sign of inflation persistence.
Which, because inflation is a rate of change, can show up as disinflation.
Basically, if P&G offered just one product, such as razor blades, and they raise the price from $1$ to $1.10, that's 10% inflation. If they raise prices by another 10c this year, that's a lower rate of inflation (9.09%).
It's still inflation, just a slower rate.
PepsiCo reported a similar price/volume dynamic back in October 👇
PepsiCo reported a nearly 9% rise in third-quarter revenue and again lifted its sales outlook for the year as it continued to increase prices on its snacks and drinks amid rising costs.
In the latest period ended Sept. 3, PepsiCo said average prices were up 17% from a year ago, offsetting a slight decline in overall sales volume, yielding organic sales growth of 16%.
Another nugget comes via Samuel Rines at Corbu (highly recommend signing up to his free e-mails - sample below 👇)
He highlights some intriguing comments from the United Airlines CEO, summarised below 👇
They're hoarding labour because it's...
SR: "Less expensive to overstaff and get passengers in their seats and planes in the air than to provide accommodation / lose loyalty."
February and March booked revenue is already well above 2019 levels 👇
And we're never going back to 'normal' 👇
So far, earnings season could be summed up as – Price is still being pushed – even with a lingering inventory glut – and it is cheaper to hoard labor than lose the revenues. ~ Samuel Rines
So, what's the takeaway? Is this the Goldilocks/soft landing we keep hearing about?
Will the Fed start cutting rates really fast in the second half of the year because of economic weakness?
Who knows? But for now, there's scant evidence that they should. Even Deputy Governor Brainard, long considered a dove, said as much in yesterday's speech: Staying the Course to Bring Inflation Down 👇
The FOMC moved policy into restrictive territory at a rapid pace and subsequently downshifted the pace of increases in the target range at its most recent meeting.
This will enable us to assess more data as we move the policy rate closer to a sufficiently restrictive level, taking into account the risks around our dual-mandate goals. In parallel, balance sheet runoff is continuing.
Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis.
In Brainard's view, policy is now in restrictive territory, but not sufficiently restrictive just yet. Once they pause, they're staying at whatever level that is (likely 5% give or take 0.25%) for some time.
What they say and what they do might not match up with reality, but for now, there's no sign that the economy is weakening enough to force a change of view.
"Stay the course" is a popular theme among central bankers...
There's little doubt that the economy is weakening, but it's a complex, resilient beast and coming from a position of extreme strength.
When Netflix is adding 7.7 million subscribers in Q4 of 2022, can you really say that the global economy is struggling and the consumer is tapped out?
Likewise the lack of a wage-price spiral doesn't mean inflation goes right back to 2%. Brainard mentioned the 'tentative indications of some deceleration' in wages 👇
tentative indications of some deceleration in wages, the evidence of anchored expectations, and the scope for margin compression may provide some reassurance that we are not currently experiencing a 1970s‑style wage–price spiral
But wage growth needs to drop a lot more to bring company pricing power and wage-earners 'consuming power' back into balance.
Central bankers are set to stay the course. We should be prepared to as well.