The CPI rose in September more than forecast, rising by 0.4% from August.  Compared with a year ago, the CPI rose 5.4%, matching the largest annual gain since 2008.  The core rate—ex food and energy—rose 0.2% and is 4.0% greater than last year.  June’s 4.5% annual rate was the only month that the core annual rate was higher since November 1991 as per Bloomberg.

BlackRock’s Fink, the world’s largest asset manager and economic cheerleader for ESG investing and other progressive causes, stated “inflation is definitely not transitory.”  JP Morgan’s Dimon commented that he does not think inflation will drop over the next few quarters.

Goldman Sach’s Waldron remarked inflationary expectations have already been built in because of supply chain disruptions but warned “it could take a year or two maybe more for those challenges to ease.”

Commenting about OER which is about 32% of the CPI, rent of primary residence jumped 0.5%, the most since 2001. A study from the Cleveland Fed indicated one of the best predictors of OER inflation was previous OER inflation — in other words, high OER inflation tends to be followed by high OER inflation.

I think most can argue transitory is perhaps now in the same league as other infamous Fed statements such as Irrational Exuberance and The Sub Prime Mortgage Crisis is Contained.

Market reaction was not what one would have suggested.  Long dated Treasuries rallied as it now believed the Fed will raise interest rates sometime late in 2022, perhaps believing the Fed will be ahead of the proverbial curve.

However, the Fed is extremely behind the curve as the 10 year and 30-year Treasury historically trades 200-250 bps above the prevailing inflation rate.  If this is indeed the case and if inflation remains around 4%, long dated Treasuries should be trading with a “six handle” not the current “ high one handle.”

Wow!  What a disconnect.

Regarding the release of the Minutes from the recent FOMC Meeting, the Committee broadly agreed to start reducing purchases in mid-November or mid-December, initially slowing Treasury buys by $10 billion a month and mortgage buys $5 billion, wrapping up around the middle of next year.

As widely discussed, the Fed is buying $1.44 trillion of Treasuries and mortgage back securities annually.  According to Bill Gross, formerly head of PIMCO, this is equivalent to 60% of net Treasury issuances.

I again rhetorically ask who will pick up the slack, an environment heightened by the insatiable demand for funds by the federal government as budget deficits amount to around $1.5 trillion for the foreseeable future.

It is written “the most obvious conclusions are those that are ignored.”  Can we write such an environment may be unfolding in the bond market…inflation that is not transitory, the end of a major buyer, all amplified by insatiable needs with prices still around all-time record highs?

The PPI is released today.  How will the data be interpreted?  The headline rate is expected to increase by 0.6% and core by 0.5%.

Just an aside, social security payments will rise by 5.9% next year, the result of higher inflation and the cost of living adjustment.  This is the greatest increase since 1982’s gain of 7.4%.  Over the past 12 years the average increase was 1.4%.

Wow!  What are the potential ramifications to the social security trust fund?

Commenting about yesterday’s equity markets, mega cap technology rose on the drop in Treasury yields and the Dow was flat.

Last night the foreign markets were up.  London was up 0.73%, Paris up 0.89% and Frankfurt up 0.88%.  China was down 0.10%, Japan up 1.46% and Hang Seng down 1.43%.

The Dow should open nominally higher.  Bloomberg reports in the earnings season so far, executives at S & P 500 companies mentioned the phrase “supply chain” about 3,000 times on investor calls as of Tuesday—far higher than last year’s then record figure.

The 10-year is up 5/32 to yield 1.53%.  Oil is up another 1.5% to almost $82/barrel.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.