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Stocks To Surge & Bonds To Sell Off Before Recession Hits By Early 2024 | Market Analyst Darius Dale. Sep 22, 2023
9:40 We have been experiencing a significant amount of immaculate disinflation for both the services side and goods. We are now starting to see sticky inflation start to come into the picture primarily through the lens of headline inflation which has broken down much faster and sooner than the services components of inflation.
9.57 So what I'm showing this chart is headline CPI. We popped up to 3.9 percent on a three-month annualized basis in the most recent months. That was driven by a modest acceleration in food inflation at 2.4 percent but primarily driven by this big pop to 25.4 through methane wise energy inflation and this is the first time we've seen three-month annualized energy inflation in the U.S economy on a positive basis since going back to the second half of last year so that's concerning. But when you juxtapose that from core inflation and things like services inflation you know it's suggesting that we are now kind of at the vanguard of what could be a sticky inflation thing that we think will kind of be consensus amongst market participants let's say in at least three months or so.
11:14 It could be the case that if we continue to see wage pressure in the weeks and months ahead that this number could really start to move in a very adverse manner as it relates to asset markets in the FED reaction function.
11.54 In this basket of inflation indicators is about eight indicators. Wages are a part of that basket as well so we do know that wages are tend to be lagging the business cycle with respect to inflation but there's a couple of other reasons why we continue to think that wages are likely to be sticky through this process. They're likely to continue decelerating but decelerating at an above trend pace that ultimately means inflation is going to remain sticky through until we get to the other side of the recession.
12.22 So I'll give you a couple charts to kind of support that thesis. So if you look at corporate profitability what I'm showing in the spread area in this chart is our what we call our corporate profit cycle model and so that's nominal GDP gross domestic income the year of the rate of change gross domestic income and we subtract the spread between unit labor costs and productivity from that nominal gross domestic income growth and what we see is that on a structural basis is actually quite low. That spread is 177 basis points wide versus a mean a long-term average of 574 basis points wide. So we know there's a tremendous amount of margin pressure on corporate right now. So they are going to have some issues in terms of generating earnings and cash flows and as long as that margin pressure remains elevated they're going to have no choice but to pass on the price increases to their customers.
13.09 So in the blue line in this chart I'm showing private sector average hourly earnings growth on a year-over-year basis minus non-farm productivity on a year over year basis and that spread has historically been correlated to big spikes in inflation.
It's not always correlative inflation, there's times when inflation is kind of doing a whole heck of a lot of nothing, but whenever you've seen these big spikes in inflation dating back to the 70s and obviously now in the 2020s, whenever the private sector's wage growth is significantly outpacing their growth of their productivity, the goods and services that they're producing in the economy that's when corporations feel like they have to pass on producer price inflation to their customers.
And we are in fact seeing an acceleration and producer price inflation if you look at the last PPI report we popped to the 4.2 percent on a three-month annualized basis in headline PPI. It's the highest number we've seen since the middle of last year as well so we are now moving in the wrong direction for some of these leading processes of inflation in terms of causing inflation to get sticky at a level that's inconsistent with the Fed’s two percent mandate.