September 14, 2021
The inflation data this morning came in softer than expected.
But if we look a little closer, within the report, we can clearly see the hottest inflation we've seen in many decades.
Below is the percent change in the CPI index components over the past year. You'll notice a lot of big numbers …
And the housing component in the report doesn't accurately represent the spike in housing prices we've seen across the country. The S&P/Case Shiller U.S. National Home Price Index is up 18% from the same period last year (the report shows it up 3.6%).
Bottom line, today's data will/should do nothing to change the Fed's course of beginning the removal of the punch bowl.
That said, as we discussed yesterday, if a "risk" to the stability of markets should arise, as the Fed begins the wind-down of its big QE program, we should expect them to quickly abandon the taper plan. The history of the past 13 years has shown us that the Fed will do whatever it takes to maintain stability in financial markets.
So we asked the question yesterday, will they be able to complete the wind-down of their asset purchase program – or will something derail it?
With that, let's talk about some potential risks looming.
First, as we discussed yesterday, we have the risk that the employment picture could worsen from here, as the recent Biden vaccine mandates trigger firings and walkouts in the coming months. Importantly, a jump in unemployment on this basis would come without the accommodation of healthy unemployment compensation. Clearly, that would damage the growth picture.
Risk number two, and perhaps considered a more immediate risk: The Chinese financial system.
A huge property developer in China, Evergrande, is reportedly in default. With $305 billion in liabilities there is speculation that it could melt the financial system in China (like a Lehman moment). While this is getting attention on Wall Street, it seems very unlikely. China is in a position of strength globally, coming out the pandemic, and the Chinese Communist Party is nationalizing parts of the economy (taking more control). Intervening and controlling outcomes is what they do.
So it’s unlikely that they will let a catalyst like Evergrande trigger a real estate bust. Better bet, they will prevent it.