• Posted on October 11, 2024
  • by MI2 Research

“Month to month, there’s wiggles and bumps in the data, but we’ve seen this pretty steady process of inflation moving downwards…I expect that will continue”

One might have expected yesterday’s CPI data to be of significance for asset prices. As it happened the figures were interesting, with the inflation data surprising to the high side: marginally, but still a miss, while core CPI actually increased for the 2nd month. Hardly proof of resurgent inflation but notable in the context of a series which has been trending lower since Sep 2022. But asset prices didn’t seem to notice the miss. Perhaps that’s because policymakers hardly noticed it either. The quote above came from the NY Fed Williams yesterday, and seems to be representative of policymakers’ focus shifting from inflation to the labor market. So perhaps markets took that cue and paid more attention to the rather striking weekly claims figure (258k).

Our focus was on the shift in rate markets sentiment, which appeared to have been suffering from a touch of “irrational exuberance” in prior weeks but was now coming back to its senses. We were also struck by how Helene and Milton now seem likely to cover policymaker’s tracks (and potential blushes) till well after the elections are over. The storms will muddy the economic waters, making it nigh on impossible to get an unambiguous read for the next few months. Instead, the economic data will turn into a policy Rorschach, where policymakers will be able to read whatever they want into the data. Is inflation picking up? A transient effect of the storm damage and the reconstruction effort. Claims increasing? A feature of the pre and post-storm disruption. Both are perfectly sensible arguments but either give policymakers a free hand to focus on whatever risks Fed officials wish to prioritise. Given they had decided that the lowest risk course was to cut prophylactically in September, the odds are they will view everything through that prism going forward.

Not that it matters but the natural disasters normally involve a short-term hit to output, followed by a longer boost as reconstruction kicks in. The latter is likely to support CPI (to some extent) for two reasons: two storms in quick succession are necessarily enormously disruptive to logistics but also because the destruction creates sustained demand for construction materials and crew. What is a disaster for homeowners is a sustained windfall for contractors across the wider region.

The catastrophe for bond owners and insurance companies was limited because much of the damage will be excluded. The consensus seems to center around $20bn dollars of insured damage but $160bn of total damage, which seems a little rough on hard-hit Floridian real estate owners. As if the previous problems with insurance costs and the wave of South Florida condo assessments weren’t enough (we discussed insurance problems too). It never rains but pours.

https://www.gocomics.com/calvinandhobbes/1987/05/18

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