Core inflation has come down a lot

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Good morning. Former retiree Bob Iger has been given a few more years as Disney’s “interim” CEO, and the cap of his bonus pay has been tripled. this reminds us of an old peter arno Cartoon It depicts a group of ancient gentlemen wearing wrinkled smiles sitting around a long table. Caption: “It was then proposed and seconded that the compulsory retirement age be raised to ninety years!” Do you feel young at heart? Email us at: robert.armstrong@ft.com and ethan.wu@ft.com.

that deflationary feeling

Although we passed the inflationary upswing two months ago, the pace of the coming down of inflation remains in doubt. Yesterday’s CPI numbers offered reassurance on that front. Core inflation, which has looked hot and sticky for six straight months, rose less than 2 per cent annualized in June. Goldman Sachs called this a “turning point”; For Standard Chartered, it was a “game changer”.

The details also look encouraging. Used car prices declined, eventually reducing short-term demand. The prices of core articles declined marginally. Inflation in core services edged up marginally to 0.25 per cent, in line with the pre-Covid average. Moderation in prices of core services was aided by slower fare inflation. Newly-signed leases are joining the CPI data, which also includes older, hyper-inflationary leases. This change takes time, so economists Jason Furman accesses private market rental data To simulate where core inflation will stabilize after CPI picks up. On a six-month annualized basis, if the CPI shelter fully reflected private market rents, the core CPI would be at 2.5 percent.

A few notes of caution are required. Next month’s report may not be so favorable on the service side. The prices of hotels and airfares, two volatile service categories, registered a significant month-on-month decline of 2 percent and 8 percent, respectively. It might reverse. And other service categories like vet visits, recreational services, car insurance and repairs are all still running hot (for an in-depth discussion of car insurance inflation, listen to the Unhaged podcast).

But good news is good news. Most encouragingly, inflation appears to be stabilising. The indices below measure in different ways how widespread inflation is. All three are pointing in the right direction, and one even has a 2-handle:

The market was happy. Falling yields led to a gradual rise in stocks. Calm inflation means rates may not need to go as high or for as long as the market had expected. Following the CPI report, the futures market lowered its forecast for a second additional rate hike this year (July still looks all but guaranteed). The two-year yield fell 13 basis points, confirming the signal from the futures market.

But these were incremental steps, reflecting the incremental information included in yesterday’s report. The data didn’t guarantee a soft landing, but suggested what the path might be. That is: Declining job growth and low core inflation ease the way for the Federal Reserve. That is looking increasingly likely, but things need to keep going well, so Mr. Market is reserving judgement. As analysts at BNP Paribas wrote yesterday, “markets may need either confirmation of a softening trend in inflation or signs that the labor market is gearing up for a regime change”.

Two questions remain. The first is whether progress on inflation will be hard to come by. Growth is still strong, the labor market is still tight, and private market rent indexes have edged up again, suggesting that sheltered inflation won’t be falling forever. The second is what the Fed will do if the soft landing continues to grow. Cut quickly to prevent the delayed effects of policy from derailing the economy? Keep rates high to make sure the job gets done? We’re halfway through this rate cycle, but there’s still a lot of play left to do. ,ethan wu,

one answer on bank capital

There were plenty of lively reactions to yesterday’s piece on the Fed’s Michael Barr’s bank capital proposals. Most of them were approving, but there were also some interesting points of disagreement. Several readers took our friend Matt Klein’s (all subscribed) line overshoot!) explained in an email:

Barr’s Partial Hedge: I think of capital as a way of reducing the risk of runaways from uninsured depositors and other creditors, since runs are typically based on concerns about the distribution of losses. Silicon Valley Bank and First Republic would not have had outflows like this if depositors knew that someone else would be stuck for the underwater bonds and loans. , ,

Given their outflows, more capital wouldn’t have helped, but perhaps a different balance sheet structure would have stopped the run in the first place.

In other words, once the race starts, more capital doesn’t help, but a thin layer of capital makes the race more likely. It’s a laudable approach, though I think it’s probably wrong (bar the point I called “almost complete nonsense”) was the idea that the different capital treatment of “available for sale” securities would separate SVB and First Republic. will help prevent failures). If you read SVB and First Republic’s coverage of Unhaged, you might actually find some support for this point of view. We’ve noted several times that one way to test for weak banks is to see what capital levels would be if the securities portfolio were marked to market. Here is a table from our newsletter for March 14:

The third pillar, the leverage ratio, is a measure of capital strength (Tier One equity capital/assets). The rightmost column is the leverage ratio if capital was reduced to reflect the unrealized securities loss. At the time, terms such as “market to market insolvent” were very prevalent, and in SVB’s case, the term was accurate. And it seems pretty safe to assume that such conversations helped accelerate the bank’s run of upsets.

So you could say with Barr that a few more percentage points of capital could make the race less likely. Of course, First Republic wasn’t mark-to-market bankrupt – not even nearly – and it was also crushed by a depositor; But the condition of the fall of the second bank is different as compared to the first bank. So here appears to be an argument in favor of Barr’s approach, which insists that higher capital levels increase “resilience,” meaning the ability to survive losses, whatever their source.

I don’t buy it. The ultimate source of SVB’s failure was appallingly poor rate risk management, combined with a volatile, concentrated, uninsured investor base. If we think the SVB mess proves we need better regulation and supervision, the target should be the ultimate cause of the problem. Perhaps we should change the way we de-risk long-term government-backed securities. Perhaps we should have asset-liability matching rules, or require more capital only for banks that have a lot of uninsured deposits. or whatever.

But to argue that all banks need more capital all the time because a handful of them have forgotten the basic principles of risk management seems silly to me. Because higher capital requirements have a cost. Higher capital requirements are nothing but a requirement that banks lend less, and especially when the economy is soft, we don’t want less bank credit, we want more of it. I hate to sound like a bank lobbyist, but there it is.

There may be good arguments that show that all banks need more capital. SVB Mess is not one of them.

a good read

The Economist rejects the concept of “greed inflation”, who needed it (good week for them; they also had a good piece minivan taliban,

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