Good morning. Tuesday’s report on US consumer price inflation was surprisingly tame (see below), but markets didn’t celebrate. Perhaps the good news was offset by higher oil prices (see below again). However, a day’s trading is always less than you might think. Email us: [email protected] and [email protected].

Cold(er) inflation is good

The decline in inflation is starting now. This is Wall Street consensus after yesterday’s cooler US CPI data, and I have no reason to doubt it. Core inflation, ie excluding food and energy, rose 4% month-on-month in March, or 0.3% from February, below consensus expectations of 0.5%. One of the reasons is the long-awaited used car deflation:

Forecasters see headline inflation at 8.5 percent in March compared with a year earlier, before slipping in the coming months. Here’s Deutsche Bank’s outlook, as good as any consensus:

There are two reasons for this expectation. First, price increases in key regions stopped accelerating. Housing inflation, for example, rose at the same seasonally adjusted pace as last month, suggesting the worst is over. Services rose to 0.6% from 0.5%, but with durable goods deflation of -0.5% – in line with broad forecasts for goods to services post-pandemic.

Second, the base effect is at work. That said, the big price hike a year ago means that bigger prices are now needed to sustain 7-8% year-on-year inflation. Figures for March suggest no bigger gains.

For the market, this is just enough good news for a short respite. The 10-year/2-year yield curve spread widened by 9 basis points. Stocks briefly rallied before the close; the hypothetical explanation was that oil prices broke above $100 a barrel.

The news is good — but only relative to expectations. Amid the red-hot headlines, the Ukrainian commodity shock cannot be ignored.headline and core inflation most divergent 17 years after energy surged 11% in March alone. Among the core indicators, housing inflation, such as Unhedged famousIt’s likely to stick, and an annualized rate of 7% is a very uncomfortable level.

In other words, despite some optimism yesterday, there was more than enough to worry about.Fed looks ready Shrink the balance sheet and raise interest rates within a range rather than steps. But the central bank must pay close attention to the data. Regardless, it doesn’t want to tighten the slowdown, and there are signs it could happen.

The sharp rise in mortgage rates – close to 5% nationwide – is a headwind for growth we’ve been watching most closely. Fiscal policy is another matter.Brookings Institution estimate The fiscal drag on growth was negative 2.1 percentage points in the first quarter. BlackRock’s Rick Rieder points out that inflation itself is an impediment to growth. Food, energy and housing — some of the fastest-growing categories — accounted for 62% of total consumption. The more money you spend on necessities, the less you spend on other things.

But we will accept the good news. If this trend continues, inflation is falling faster than expected, making a soft landing more likely for the Fed. Good, even though we are far from the forest. (Wu Yisen)

Martijn mouse on oil

About a month ago, we interviewed perhaps the most outstanding Bear In the oil market, Citi’s Ed Morse. He made the case for the drop in oil prices based on the following premise:

• The current high demand is evidence of economic recovery, not the long-term strength of the economy.

• The war in Russia is unlikely to disrupt supply as badly as the market expects.

• Production from U.S. shale fields will exceed market expectations.

• Producers around the world are responding to higher prices by expanding production.

Yesterday I spoke with Morgan Stanley’s Martijn Rats, who is bullish on oil prices. He believes the transition to solar will take longer than many expect and, accordingly, oil demand will remain strong for some time. He made a few points for energy exposure investors to keep in mind.

There are currently no clear price signals from the oil market. “Volatility is unbearable,” Ratz said, and has driven financial speculators and traders out of the market to escape prohibitively high hedging and margin costs. This is a bad thing. “Speculators provide risk capabilities to the market – they absorb risk from the market for a fee. They have an opinion on price and value, not pure sellers [like oil producers] or pure buyer [like, for example, airlines]. “Without them, the market would struggle to determine a price range.

Oil at $100 isn’t enough to destroy demand. “All product markets — diesel, gasoline — are very tight. It’s not about destroying. It shows people are willing to pay.” Rats also noted that $100 in oil means about 3-4% of GDP will be used for energy, which is historically normal or even slightly lower.

Oil prices may not reflect fall in Russian oil exports, even without European sanctions on oil. “There is a view that only Europe does not buy the Urals [oil piped from Russia]. But look at Espoo [Eastern Siberia to Pacific] Prices – they have huge discounts compared to Dubai [the Asian regional benchmark], and also. Ratz said the discounts for sending oil east from Russia are bigger than the softening in demand caused by the shutdown in China. “It shows that Chinese refiners are also less keen on Russian crude. “

The logistical frictions involved in shifting Russian exports from Europe to eager markets such as India could cost Russia 1 million barrels per day of lost exports out of 7 million to 8 million bpd overall, he estimated.

To his surprise, market consensus expects Russian exports to fall sharply, even without direct sanctions — around 3 million barrels per day. “The market hasn’t priced in 3 million barrels,” he said, noting that a 1 million-barrel outage in Libya in 2011 was enough to raise the market by $30 a barrel.

What if sanctions are added on top of reduced friction? The price impact is difficult to estimate, he said. But big.

a good book

We’re late but John Thornhill of the Financial Times has written an excellent article piece About what he learned about entrepreneurship.