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TODAYS COMMENTARY Get a Cup of Coffee & Enjoy Catching Up! If you aren’t reading this daily you are missing out on a wealth of information that could prevent unforced & unnecessary trading errors.

INFLATION REPORTED TODAY: April YoY CPI is expected to come in at 8.1%. March was 8.5% YoY. The only reason this month is expected to come in lower YoY is simply because the increase in inflation from April to May this year is expected to be lower than the same period last year. Even so, an 8.1% increase YoY in April still represents quite a large unsustainable jump. Last years March to April jump was 1.6% leading to a CPI of 4.2%. The 8.1% estimate represents a YoY increase of 8.1% higher than prices were AFTER the 4.2% a year ago (That’s roughly 12.5% price increases over a 24 month period). In order to hit the Feds target rate of inflation of 2% YoY, we should expect an average jump of 0.17 month to month. So, in order for inflation to be increasing at sustainable rates, we should look for 8.5%+0.17%-1.6%= roughly 7.07% (I say “roughly” because when we’re talking about a rate of increase we should factor in the compounding nature of inflation) . Therefore the consensus of 8.1% actually represents a jump of 1.03% month to month higher than sustainable levels. What we want is inflation to be increasing at a rate lower on average than experienced in the trailing 12 months. Last months 8.5% increase in YoY inflation assumes an 0.71% increase on average month to month while this month is expected to be an increase of 1.03% month to month. So what I would like to see is the CPI coming in lower than 7.61% for April 2022, although current April consensus is 0.49% higher. So to get the true feel of how bad inflation is, look at the MoM numbers … not the YoY numbers. Now … I don’t know how the hell analyst came up with that 8.1% consensus. I was expecting much lower given the 1.6% month to month jump last year. But understanding these numbers is important. We don’t want to get lost in the assumption that YoY inflation coming in lower in the latter month than the previous represents a decline in the rate inflation is actually increasing month to month.

THE MARKETS MAY PUMP WITH THE BAD NEWS OUT OF THE WAY: We’ve all seen it before, … the markets price in bad news days or weeks prior, & once released its almost as if folks say “OK, we have another month before the next bad news release, lets swing this.” It’s happened in most months where inflation was supposed to be bad, save those months where inflation surprised much higher than expected.

THE WORST IS NOT BEHIND US: Summer is coming, & with summer comes vacations & road trips. Historically energy prices increase over the summer which is especially bad news when energy is among the highest drivers of inflation. $5gal unleaded would not surprise me in June/July time frame. And given how oil/gas futures function it also would not surprise me if $4gal gas would be a price we would long for moving forward. An increase in energy prices, raises the prices of everything!

NEXT BIG ECONOMIC NUMBERS: We have the Producers Price Index coming tomorrow at 0830ET. The month to month increase is expected to come in at 0.5% (consensus estimate). Remember the PPI is the firms version of the CPI. Whereas the CPI measures inflation from the consumers point of view, the PPI measures inflation from the producers point of view.

A NOTE ON WAGES: Wages are increasing as a result of the scarcity in the labor market. Remember, raw wages only tell half the story. Not only are people paying more for the increase in consumer prices than they receive in wage increases, but they also pay more in taxes both on income & sales tax. Also firms must contribute their half of social security & Medicare taxes paid by employees. So lets not assume that a 3% increase in wages means firms are paying merely 3% more for labor. When we account for taxes & benefits (Like social security, Medicare, 401K’s, healthcare, life insurance, unemployment insurance, paid time off & more), its much more. Therefore the hotter the labor market, the higher inflation becomes.

Significant News Heading into 05.11.2022:

• Stock futures are higher ahead of key inflation reading

• Chinese stocks jump; data shows China’s inflation in April heated up above expectations

• European markets climb as investors look ahead to U.S. inflation data; Stoxx 600 up 1%

• 10-year Treasury yield falls to 2.93% ahead of key inflation data

• Don’t panic? Strategists give reasons to stay invested despite market turmoil

• Natural gas prices in Europe jump after Ukraine blocks Russian flows

• Shanghai’s big automakers saw production plunge by 75% in April after lockdowns began

• China’s consumer prices hit a six-month high as Covid prompts locals to stock up on food

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