The question of whether inflation presents a credible threat to the comfortable status quo will be confronted on three different sectors in the coming days. First and most obvious is today’s release of the CPI. Prices are coming off of COVID suppressed levels so any uptick may be exaggerated.

Analysts are expecting a 0.5% headline rate and 0.2% ex food/energy. The year over year expectations is a 2.5% increase, 1.5% core.

But a major issue at hand companies on both the manufacturing and service sides of the economy are reporting a steep increase in input prices, which than offers up a stark choice: accept margin compression and therefore lower earnings or try to pass the costs onto customers which would further elevate pricing pressures.

Second major issue coincides with the above…profit reports and margins.

Third is the auction of $24 billion in 10-year Treasury bonds after being asked to absorb $58 billion yesterday in the three year and $38 billion in the 10-year.

The federal deficit more than doubled to a record in the first half of the fiscal year, amounting $1.71 trillion versus $743.5 billion for the same period last year. This does not include the most recent stimulus.

Total spending in the first half of the fiscal year was $3.41 trillion, double the level of revenue.

These numbers are unfathomable!!

Fed Chief Powell has adamantly stated inflationary pressures are “transitory.” The US, however, has never before pursued government spending and monetary expansion of this magnitude amplified by a strong economy—perhaps the strongest since 1983.

Will the word “transitory” be viewed in the same manner as “the subprime crisis is contained?” I hope not.

Last night the foreign markets were mixed. London was down 0.18%, Paris up 0.26% and Frankfurt up 0.14%. China was down 0.48%, Japan up 0.72% and Hang Seng up 0.15%.

The Dow should open flat but hat could change significantly if the CPI is sharply different than the expected view. The 10-year is off 5/32 to yield 1.69%.


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