Dallas Fed Paper: PCE Inflation to be Revised Higher



Here's a little red meat for the inflation and monetary policy junkies out there. Two economists at the Dallas Fed released a short paper yesterday entitled, "Getting a Jump of Inflation.”

I was hoping for something like an inflation jump to conclusions mat.But it’s even better than that. These guys totally buried the lede...they close with this (emphasis mine):

“The BEA estimated April 2017 PCE
inflation at 1.72 percent (as of August
2017) and June 2017 PCE inflation
at 1.42 percent. Based on Fed survey
results, it’s likely these figures will be
revised higher—to 1.90 percent and 1.55
percent, respectively—at the next annual
revision in summer 2018. Thus, the
economy may be closer to the Federal
Reserve’s definition of price stability
than is commonly believed.

Take five minutes and read this thing--they describe how only a couple of high-frequency data points (the Fed aggregate prices paid index and to a lesser extent, ISM prices paid) predict inflation just as well as the second and third revisions of the PCE data set. Bottom line--these guys see underlying price pressures that aren’t yet showing up in the headline inflation data. Could be a sign that the market has gotten too complacent on Fed expectations, and the market is overextended in the usual suspects like short USD and breakevens.   

And commodities keep on truckin’


Copper is partyin’ like it’s 2012...the luxury shopping malls of East Santiago will soon again be teaming with shoppers spending new found loot. Wasn’t so long ago that $3/pound seemed like a cruel memory of a lost time to your average Chilean economist.

Woe be the trader that ignores the ides of September...or Jackson Hole!
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Flowthrough
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August 24, 2017 at 2:24 PM ×

Good stuff. When everyone thinks something is dead, often it is not. And a modern trend is that things go on longer than anyone thinks possible, but at some point end. If the great bond bull ends, how, and it cannot mean good things for stocks.

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August 24, 2017 at 8:00 PM ×

"Here's a little red meat"........Says Shawn.

Well, here's a little red meat for you. It's 4.48am Sydney time and I'm going through the horrors of having finished a whole bottle sambuca 3 hours ago and these horror spells have woke me to a future trade bias due to having remembered a dream I had a couple days ago and working out the underlying direction of it. It went like this, someone was telling me they were going to have a car crash in the near future and all they do these days is live in hope that they walk away from it. It was like they were telling me they were going for a coffee next week and hoped that the barista doesn't overheat the milk in their latte. And this morning horror patch has finally solved it.Its all about Trump. He has confirmed the curse is alive and well. Have you ever seen a guy reverse into a curse so hard that that harder he puts his foot the floor the stronger the grip it has on him. Think market direction boys.

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August 24, 2017 at 8:22 PM ×

I think its a virus now, I'm shaking.

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abee crombie
admin
August 25, 2017 at 3:20 PM ×

love it amps.

@IPA got lucky with ULTA, finally ;-). Another one i like short is IRBT.

Looking for some fireworks in EU today. Look to short at 1.20

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IPA
admin
August 26, 2017 at 3:15 AM ×

@abee, kudos to you for sitting thru ULTA earnings. I literally chickened out after what they almost did to me at the last report. Considering I was purely in puts I had to get out thinking premiums would be sucked out of them if it was a non-event. Followed my plan.

My ULTA gains have been reinvested into more XLE, XOP, OIH, UNG and CHK. I am a sucker for more crude and nat gas plays at these levels.

Lol, that iRobot thing still in business? What a joke. That's some crazy parabolic chart! What happened? AMZN wants a piece of them? Who else would be in play? Combine Alexa and Roomba? I can't believe I just came up with that.

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August 26, 2017 at 6:20 AM ×

@abee, I am sitting here trying to figure out the direction of the S&P500 and what can I say. The index goes no where from here until they "Dump the Trump" and take away Murdoch and Fox's love child (and Fox all together as a gift). Capitalism in America will be better for it. There is a theory as to why but, as you know.....AMERICA CAN'T HANDLE THE TRUTH....

ps....are we clear?

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Unknown
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August 26, 2017 at 4:42 PM ×

irobot thing is quite trending in China, and maybe next India. I have not looked into its earning report but similar products are in demand there, given young families want to avoid house cleaning works.

About oil, is CAD's rally overdone? Housing bubble seems to be a secondary concern for now. Wonder how long it will last.

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IPA
admin
August 26, 2017 at 11:59 PM ×

@Unknown, interesting... I see iRobot is growing sales in Asia at a 30% clip YoY. I would say Braava is even more intriguing than Roomba. I mean what if I am onto something and traders think Braava/Kiva combination is coming to Whole Foods near you? Cleanup on aisle 5! And might as well restock a few items on the shelves while you are there. Is it all priced in though? Hefty valuation here...

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August 27, 2017 at 2:30 AM ×

@abee, there is news though. Murdoch is no master. A master passes on the baton. He'll take the nails in floorboard with him.

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August 27, 2017 at 10:21 AM ×

Sorry, Warney. I've got my own gang.

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August 27, 2017 at 10:23 AM ×

Sorry,Rusty. I've got own my gang.

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August 27, 2017 at 10:24 AM ×

Sorry,Snapchat. I've got own my gang.

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August 27, 2017 at 11:44 AM ×

Well, that's me for this weeks Macro-Man horsetrading. I'm going for a beer with my Westie mates. ( I don't give a fuck anymore)

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August 27, 2017 at 12:38 PM ×

Hear that Murdoch, Hear that Packer. I don't give a fuck anymore. Begone!

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August 27, 2017 at 11:22 PM ×

Its now 8.30 am in Australia and just in case you missed it Murdoch and Packer. Shove your silver spoons up your fucking ass and fuck off!

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IPA
admin
August 28, 2017 at 4:32 AM ×

Pretty surreal footage coming in from Houston. Seems like the entire city is under water. I think we'll see $2 RBOB by Labor Day. To anyone affected by this monster storm, please stay safe! Our thoughts and prayers are with you!!

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August 28, 2017 at 10:57 AM ×

You loving this curse or what!

ps.....I'll be here forever cheering it on because I know its not about the money anymore.lol

http://www.smh.com.au/business/media-and-marketing/murdoch-scores-owngoal-on-ten-network-20170828-gy5l5e.html

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IPA
admin
August 29, 2017 at 3:36 AM ×

My year-end gold and GDX targets may be finally coming to life. Bought back GDX short 32 calls and will enjoy the ride on my long 24s. Traders are starting to think that Fed is not going to hike when the second largest economy in US is literally under water. US dollar has been pretty much in a freefall. Looks like the Up Kid vs Donald Duck fight is about to start. Ten rounds and a TKO? Gold will love all of the above into 1500, imho. Will add on pullbacks, if those ever present themselves. Is the 1300 level now the floor?

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endy smith
admin
August 29, 2017 at 5:54 AM ×

That is really wanderful to be there and have the information like that. Just take a look at it quality english proofreading services use it.

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johno
admin
August 29, 2017 at 10:38 PM ×

Traveling the past week and now getting properly caught up.

Thought we'd get another no-news thrust higher in EURUSD from Jackson Hole and was long very short-dated 1.185-1.20 calls for that (had to be away from screens all day Friday, so wasn't going to run a cash position). Worked out and took off, putting some profits into 2-month call spread with RKI on top strike, which gives some nice extra gearing for hardly any extra premium. Similar idea to the 109-107 with 105 RKI on bottom strike I pitched here a couple weeks ago in USDJPY. Cashed out of my USDRUB short yesterday, my biggest delta-one position, leaving all FX exposures in option form except a small short USDARS.

And then, we have today's price action. DXY goes clear through the bull's call-it-quits level at 92, and then rallies back above. Hope those bulls were using end-of-day close. This looks to be a possible near-term turning point for FX, so I neutralized my net short-dollar exposure and will see where we go in the next days. Actually, netting long now. That wasn't the plan .. I figured on being short up to the debt ceiling resolution, but I'll take a tight-stop gamble on today's price action.

Another interesting one. EURCHF. Good for me in July, then closed out cash position and put 1/10th of the PnL in 1.14-1.145-strike calls cheapened with RKOs. Expiring before too long. I'm also long 1Y 1.20 digitals from not-too-shabby levels. I'm very familiar with the contra-case and everything I see is skeptical that EURCHF goes much higher, but ... look how EURCHF is holding up despite missile launches and gold breaking 1300. Speaking of gold, it seems to be at a critical level here. I was long through a call 1275-1300 call spread from spot=1230 (or 1240?), but took off too early when spot was in the 1270s.

One theme I'm seeing the sell-side pickup is the re-building of cash balances by the UST post-debt ceiling resolution. This is going to be a USD liquidity suck of a couple hundred billion USD when it comes (though a liquidity injection up until the resolution). While the 3-month USDJPY basis hasn't yet moved much, it's moving in forward space, perhaps anticipating this. Some USD bulls seem to pin their hopes on this. Maybe.


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IPA
admin
August 30, 2017 at 4:06 AM ×

All these TX refineries shutting down and WTI is still above $46? Makes no sense, right? What doesn't kill you makes you stronger. Once the storm is gone (can't be soon enough) I feel like a relief rally will take WTI up to $50. XLE, XOP and OIH are sensing the rebound, building a s/t double bottom, smartly bounced off of their lows retests today.

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Skr
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August 30, 2017 at 8:15 AM ×

Gold - usd/jpy spread trade is off by 4%.

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johno
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August 30, 2017 at 3:58 PM ×

Impressive how gold has hung in here. Got long with tight stop and also bought some GCV7 calls spreads (vol low, skew high => call spreads) risking 1 to make 4.

Taken profit on yesterday's DXY trade. Want to see this hold above 92.75 to re-engage from long-side.

Embarrassing confession: I bought some SPY put spreads. Yeah, yeah, money down the drain and all ...

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johno
admin
August 30, 2017 at 4:03 PM ×

Of course, every time I put some faith in "levels" in markets, especially using intra-day or daily charts, I get stopped. We'll see whether that happens yet again. Anyway, as always, take my trades for what they're worth -- nothing, or maybe worse.

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IPA
admin
August 30, 2017 at 6:00 PM ×

@johno, on gold and dxy. Something interesting... Pull up 2009 weekly on dxy and see how similar the decline looks with this year. April marked the last time a close above 8ema was achieved in both years. It took all the way until Dec to overcome the downtrend (back then). Gold may be sensing this possible continued weakness in dxy still to come. Stoch was locked in embedded sell mode all the way back then, just like now. Rally to 8ema and sell it.

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johno
admin
August 30, 2017 at 8:41 PM ×

Thanks, IPA. My guess is gold is going to move from here, higher or lower, i.e. distribution is bi-modal. Vol is cheap, so bought some puts in addition to the call spreads. Low conviction view, so sized small.

Again flattened my net dollar exposure. Maybe Harvey clears the way for debt ceiling and funding resolutions sooner than anticipated. Maybe.

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IPA
admin
August 31, 2017 at 7:13 PM ×

A full-fledged panic in RBOB. Things are so out of whack. Sep contract is up into the stratosphere, simply a blood bath for shorts, up 14% just today (well passed my $2 target). WTI is looking to do some damage here as well, imho. Shorts are scrambling to cover. Another storm is possibly coming into Gulf. Not good... Just don't short those things right now, serious shortage, will last for a while.

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johno
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August 31, 2017 at 11:15 PM ×

Wow, wasn't paying attention to that, IPA.

Went back to net short USD this morning. Not badly timed. I'm starting to think the dollar is going to have to get really ugly (DXY=88?) before we get a proper rally. Still time (months) before the Treasury-driven liquidity suck that could give USD some bid. Interesting to see gold holding above the 1307-ish level some (oldschoolmacro.com) have argued is a regime dividing line.

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IPA
admin
September 1, 2017 at 3:25 AM ×

Guys, grab some nat gas here. Coiled spring will unwind above 3.10 and take the price all the way up to 3.40 on a 3-mo old box measured move. Got some inverted h+s formation inside the box too (just to spice things up a bit). Been yapping about 3.10 level for a while. I think the time has finally come to get above it for good. The storage glut is over. If a new storm comes into the Gulf, all bets are off for shorts.

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johno
admin
September 1, 2017 at 3:39 PM ×

Typical NFP hilarity. The ECB-sources article minutes after a disappointing #. Cost me a bit, but have to laugh (after some swearing and cursing).

Have to respect this dollar action. 92 holds again.


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johno
admin
September 1, 2017 at 5:02 PM ×

Inflation is down for the count. Phillips curve is binned (see latest Philly Fed research). Meanwhile, world growth is great -- China, Europe, and today we see US ISM at highest since 2011! So maybe we see corporate investment picking up, just as CB's throttle back balance sheet growth, and we get higher rates. Higher nominal rates + low inflation = higher real rates => hard to be fundamentally bullish gold, especially with this dollar action. I admit though, there's really no geopolitical premium in gold here and the technicals (which others know far better than me) are interesting.


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johno
admin
September 1, 2017 at 6:14 PM ×

Oil is capped by shale => boon to world consumers (we're safely past the deflationary hit from the '14 collapse too, though there's a slow-burning issue for Gulf oil producers a couple years out). Inflation is dead => central banks will tighten slowly. Whether you think USD could have a snap-back or not, there's growing acceptance that USD peaked and is in a bear market. Sure, in the next EM recession there may be a big dollar squeeze given all the USD-denominated debt out there, but that could be years from now. Between now and then, we may have a dollar liquidity suck in Q4 post-debt ceiling resolution, but maybe that just affects xccy basis. ISM is highest since 2011, household's debt service to disposable income is the lowest since the 1980s, and yet the Russell is flat on the year! China is fine and it won't be apparent until Q1 how seriously they're going address leverage/tighten. It just seems very hard to justify being short risk here. Geopolitical risk can only be played via deep, deep out-of-the-money options because the market will never price it until the bad scenario has actually happened (fading geopolitical risk is maybe a stronger reflex now than JBTFD).


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IPA
admin
September 2, 2017 at 5:00 AM ×

@johno, what does not go down will go up. Both crude and gold will surprise to the upside, imho. I have year-end targets which may be too aggressive for some: WTI to $60 and GC to $1500. Also, looking for related equities to benefit and put on a face-ripping rally into the end of the year as well. Hence, GDX to 32, XLE to 70, XOP to 40, OIH to 30. It's not that hard to achieve if you look at charts from a long-term perspective. The fundamentals and the risk change on almost daily basis. I simply can't keep up. Will stick with charts for now.

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johno
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September 2, 2017 at 6:34 PM ×

Hey IPA,

As a DXY and real rates story, it's hard to get too enthusiastic about gold. BUT, there is perhaps a new emergent narrative. Namely, oil and gold settled in RMB. I give you a link to the most recent article on this and then a link to an absolute must-read by GaveKal that touches on the subject and puts it in context.

https://asia.nikkei.com/Markets/Commodities/China-sees-new-world-order-with-oil-benchmark-backed-by-gold?page=1

http://www.zerohedge.com/news/2017-08-19/gavekal-coming-clash-empires-russias-role-global-game-changer

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johno
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September 2, 2017 at 10:15 PM ×

I will note that the RMB-settled HK gold contract (XDPA Comdty) only trades ~$10m/day, so can't say it's taken off. Still, early days ....

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IPA
admin
September 3, 2017 at 1:22 AM ×

@johno, thanks for the links, very interesting. The chart below may argue for just that. The 0% line is $92 on DXY.

http://stockcharts.com/h-perf/ui?s=$GOLD&compare=$USD,$WTIC&id=p04873558824

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September 3, 2017 at 4:08 PM ×

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IPA
admin
September 3, 2017 at 10:41 PM ×

Sad state of affairs. Gold @ 1500 by the end of September? God help S. Korea!

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