- by New Deal democrat
Over the weekend, in response to my “Weekly Indicators” post, a commenter wanted to know why I was concerned about inflation. After all, hadn’t core CPI just tied its post pandemic low?
And it is true: core inflation (blue), at 2.5% YoY, is equal to its post-pandemic low. Further, CPI less energy (red), a measure I used to cite monthly before COVID stimulus-induced house price inflation dwarfed everything else, did make a new post-pandemic low YoY through July:
But in reply, I noted that not only was headline inflation still elevated, but pipeline price pressures were manifest in both the ISM monthly reports and the various Fed regional reports, one of which - the New York Fed’s Empire State manufacturing survey - was updated for this month this morning, and it showed continued widespread increases in both prices paid (blue) and received (orange). In the graph below, I also show the latest Philadelphia Fed readings (light blue and light orange) through last month:
Interestingly, although prices paid if anything have become more widespread in the last few months, relatively speaking producers are having a difficult time passing them all on. This is going to squeeze profit margins, and that tends to lead to cutbacks.
And gas prices through the first half of August have increased compared to July:
And of course the Strait of Hormuz is still closed, Wall Street futures traders notwithstanding.
So yes I continue to believe that inflationary pressures have been building.
Which brings me to a second point that I made in my piece over the weekend: namely, that the increase in yields on bonds at longer maturities is a negative sign. That point was reinforced with another piece of information that was posted by Apollo Research via Carl Quintanilla, pointing out that yields on speculative corporate credits have - at least somewhat - blown out.
To wit: below is a graph of the last three years of bond yields for CCC grade speculative debt (blue), BBB debt (gold), BAA debt (red), and 30 year Treasurys (black):
Note that I’ve subtracted -5% to CCC yields better to show the comparison in trends. There’s no doubt that there has been some spreading.
Unfortunately, B of A only allows FRED to post the last three years of data. So here is a graph of CCC vs. BB corporate debt going back 30 years:
Whenever bond traders get worried, the speculative high yield CCC debt blows out first and worst. In comparison, the current relative increase in CCC debt is not that significant - at least not yet. Also, when the economy weakens, banks become more wary about extending loans for speculative debt, as shown in the relevant metric of the Senior Loan Officers Survey, which was just updated two weeks ago:
Through Q2 of this year, there was no such wariness yet.
As I’ve written a number of times recently, the current situation is best described as an inflationary expansion. Before it ends, among other things I would expect banks to tighten credit, high yield CCC debt to blow out considerably more against more creditworthy B-grade corporate debt, and I would expect even better rated corporate debt to increase in yield as well.
