Weak CPI more impactful than Kim Jung-on

Week ending Friday August 11th 2017

War talk, especially from the opposition, sends the USD up and bond yields and equities down. It is undoubtedly a bad thing for growth expectations. War itself tends to cause rapid recoveries in bond yields and equities and send the USD down, most famously on the actual outbreak of the first and second Iraq wars.

Deflation

That said, worse than war talk is weak CPI numbers. Although only mildly disappointing on Friday the CPI was disappointing enough to dramatically cause a fall in the USD as lower short term rate expectations had more impact than Kim Jong-un’s posturing. The weak CPI thus contributed to more than undoing the flight to USD safety seen earlier in the week. Clearly, short-term trading conditions contributed too, as USD bulls had to bail out causing an overreaction in the other direction.

Equities may have suffered some from the war talk, especially globally integrated, especially Asian integrated, tech companies. Thus, Nasdaq drives the S&P500 at the moment – but has little information about the US economy itself. The USD and bond yields have much more information content at present.

Pressure back on non-USD bloc central banks

The overall result is that non-US central banks are going to have to go some to reverse the seemingly well-established weak USD trend – and avoid seriously tighter monetary policy hurting their economies.

Many pundits are backing emerging markets equities precisely because so many emerging markets have their currencies tied to the USD and see the weak USD as helping them out, monetarily-speaking. It won’t help that much if the weak USD is really due to weakening US economic prospects – as we believe.

Weakening US economic prospects driving down USD

The weakening CPI is now telling the same story as last week’s dire unit labor costs data – and earlier data on weak PCEPI, Core PCEPI – slowing nominal growth.

Sadly, we were deprived of one way of measuring of broad labor market activity when the Fed opted to stop producing the LMCI, apparently because it wasn’t producing accurate signals. We suspect it was producing accurate signals, just not the ones that fitted with the Fed’s obsession with the false Philips Curve theory.

There were no significant economic surveys last week but our analysis of the medium and long term trends showed just how dismal is the economic situation.

The first surveys of current month activity arrive next week as well as firmer data from the output side in July industrial production figures.

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