Strange Data and Confusing Market Reactions

More strange data and confusing reactions. I would love to be able to tell you what to do right now, with a high degree of certainty, but not only is the data strange (even unprecedented), but the market reactions are often confusing (even as a die-hard contrarian). CPI Not only was CPI high last week (the headline was a 0.9% monthly increase), but most people I talk to think it is heavily understated. The Owner Equivalent Rent, a measure for housing, which represents almost 25% of the index, is only up 3.1% in the past year. I cannot find anyone who believes that is how little housing costs have gone up. That was only one of many anomalies that people are chatting about. So not only is inflation running hot, consensus is finally catching up to me that it will continue to run hot, but it may also be understated. That understatement in official data is a concern, as it makes D.C. less likely to act. CONsumer CONfidence Bob Janjuah, my strategist when I was trading credit default swap (CDS) Indices during the Great Financial Crisis (GFC), used to joke that they put the con in consumer confidence. I don't often look at it, but not only was Friday's result stunning in many ways, it is diverging from so much else. CONsumer CONfidence It is difficult, at least for me, to believe that: Consumer confidence is lower than it was last spring when the pandemic was raging and we had very little data and nothing to stop it. In the past two decades, consumer confidence was only worse during the GFC and European Debt Crisis. Yet, a record 4 million American quit their jobs in September. Traditionally the quit rate tracks confidence (which is logical, as if you are confident, you are more likely to quit and find a new job), but they are diverging. Stocks, while not as good at tracking confidence, do seem to move more or less in line with confidence, and they too are diverging. The are some plausible explanations that give me comfort this is sustainable (signing bonuses, the gig economy, the wealth being generated in crypto, people expressing sentiment as a statement (the difference between Democrats 81 and Republicans 37 was eye opening). On the other hand, maybe this reflects growing inequality (the haves can leave their jobs at will, while the outlook looks bleak for those left behind), or maybe, just maybe, the average American is seeing things deteriorate ahead of the data. The Biggest Question to Resolve Amidst all this confusion, I think one thing needs to resolve itself, now that higher-for-longer inflation is becoming the consensus: Will the Fed hike and slow down growth? This will flatten the yield curve and in the past has been bad for stocks, but at the moment, big tech seems to respond well to lower long-end yields regardless of the reason for those lower long-end yields. Will the Fed be stubborn and not hike, losing some control at the long end of the yield curve sending those yields higher? I think the latter, but there is so much confusion, that I'm cautiously positioning myself for that outcome (see last week's note), while waiting for confirmation to pound the table.

Strange Data and Confusing Market Reactions

One thing needs to resolve itself now that higher-for-longer inflation is becoming the consensus.

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