Inflation shock, Musk sells some shares, and Evergrande dodges default again.
Moving
Yesterday’s
surprise inflation number continues to dominate investor focus this morning. The data sent
Treasuries and growth stocks tumbling, while helping push the dollar
close to one-year highs. There was even a moment where Bitcoin seemed to
act like an inflation hedge, but that soon passed with the token plunging late in the session. With economists
predicting even bigger inflation jumps in the coming months,
pressure for the Federal Reserve to act will only increase. Earlier this month Fed Chair Jerome Powell said policy makers will be patient on hikes, but won’t hesitate to act if warranted by the inflation trajectory. President Joe Biden, who is under increasing political pressure over rising prices, said that reversing the trend is a “top priority.”
Tesla
Elon Musk sold more than 4.5 million shares in Tesla Inc. this week. The disposal, worth about $5 billion, is his first sale of stock in the company since 2016. Company filings, which revealed the action yesterday, showed at least part of the transactions were pre-arranged in mid-September. They shed no light on whether a weekend Twitter poll by Musk had any bearing on the decision to sell. Tesla dropped in two days following that social-media experiment. He would have to dispose of roughly 17 million shares to reach the 10% target he set in that tweet.
Nine lives
China Evergrande Group once again averted a default with a last-minute payment of coupons on three dollar bonds before the 30-day grace period ended. It comes amid wider speculation that the crackdown on the property market in China is starting to ease, with a series of articles published in state media signaling support measures may be on the way. A gauge of real estate stocks jumped 5.7% overnight and high-yield dollar bonds rose. Despite the increased optimism on a resolution to the problems, the wider fallout from slowdown in the Chinese property market is clear.
Markets slip
Inflation, and the possible Fed reaction to it, is today’s dominant theme in markets. Overnight the MSCI Asia Pacific Index slipped 0.1% while Japan’s Topix index closed 0.3% higher as the dollar rose. In Europe the Stoxx 600 Index had added 0.1% by 5:50 a.m. Eastern Time, with London’s FTSE 100 outperforming as the pound fell to the lowest level since December. S&P 500 futures pointed to a strong open, oil was under $81 a barrel and gold added to gains. U.S. bond trading is closed for Veterans Day.
Covid
German Chancellor-in-waiting Olaf Scholz called for a renewed vaccination effort in the country as cases topped 50,000 in one day for the first time. Israel began a nationwide drill to test the country’s readiness in the event of an outbreak of a new, more deadly, Covid-19 variant. With total global cases now topping quarter of a billion, and new infections remaining stubbornly high, there is a drive for further vaccinations. In the U.S. a federal judge blocked Texas Governor Greg Abbott’s edict banning school mask mandates.
What we've been reading
Here's what caught our eye over the last 24 hours.
And finally, here’s what Joe’s interested in this morning
Inflation came in hot yesterday. I think Steven Englander of Standard Chartered had the most concise summary of the number in his note, which started off with: "There was no silver lining in the CPI release."
There are always a million ways to slice and dice CPI, and they were all up and to the right.
This number hit with such a thud that Biden came out and said that passing his policy agenda is an element of fighting these hot increases.
As I noted yesterday, it's important to keep the price increases in the context of an extraordinarily fast labor market recovery and observe that aggregate private sector income growth has vastly outperformed price increases since the stimulus measures were put in place at the start of the pandemic. When it comes to "blame" people like to cite all the checks and expanded Unemployment Insurance (in other words, they like to vilify aid to poor people) but when you look at all-inclusive income (wage + transfer payments from the government) the public has come out ahead. Rather than casting about for blame, it makes more sense to talk about who gets credit for a recovery that's been much faster than virtually anyone anticipated.
Nonetheless, everyone wants the lines up there to go down.
While the period of expanded UI and checks started under the last administration, it's very likely that the lines above would be going up even faster were it not for certain policies that the Trump administration put in place. The PPP program probably could have been designed better, but its goal was to "winterize" small businesses, so that they could afford to shut down for a period of time and then reconstitute after the worst of the crisis was over. It seems very plausible that millions more businesses would have gone under had it not been for this program, and had that been the case our supply crunch would likely be much worse today. And in a supply crunch, it's likely that inflation would be even hotter than it is right now. So for all the spending to support that program, PPP was very likely disinflationary, helping to preserve unquantifiable supply side capacity.
Then of course, there were the industry bailouts. Remember, the airlines got a bailout but the car rental companies didn't get a bailout. And now if you look at the charts it's car rental prices (white line) that are soaring, while air fare prices (yellow) are subdued. And again it makes sense. Bailing out an industry from a 100-year storm means preserving supply-side capacity. That capacity is important on the other end when demand returns.
And of course, we know that not bailing out the car rental companies had all kinds of other knock-on effects. They sold off their fleets like crazy to try to stay alive, and now are trying to buy back cars at a huge pace, helping to push the price of used cars to dizzying heights.
It's tempting to look at all the money spent over the last two years and say that's the culprit for higher inflation. But again:
1. Much of the inflation is counterbalanced by the huge labor recovery.
2. Specific supply-side spending measures taken early on by the Trump administration -- the PPP program, bailing out the airlines -- made sure that various businesses were able to make it to the other side. All that is likely one reason why inflation isn't even higher today than it otherwise would be. Credit where credit is due.
Follow Bloomberg's Joe Weisenthal on Twitter @TheStalwart
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