Apr 21, 2005

CPI and Chinese GDP are Lagging Indicators

Lots of comments on the CPI setting a 5 month record yesterday but my thoughts are that it is a lagging indicator. Last week Wednesday the markets decided the growth phase was over. I would attribute it to the unrest in China the weakness in the copper and steel sectors. Not sure to what extent one led to the other but they certainly got a reaction in the Nikkei and global markets, eventually even causing interest rate markets to consider an end to Fed hikes. Oil is well off recent highs (some see that market as a double top) which fits nicely with a view that Asian growth has already peaked. The deterioration of U.S. export growth also added some fuel for those that wanted to see an international slowdown underway.

Long story short the world changed last week and if that change is correct the CPI, record or not, is meaningless. It is a lagging indicator plain and simple.

Chinese GDP which also came in stronger than expect has the same problem. Demand in the commodity sector is a much better indicator of what future expectations are for Chinese growth.

Bond yields peaked yesterday around 8:45 AM and I am guessing it is the "lagging indicator" logic that caused it. The beige book came in weak but that was much later in the day, after the market had made up its mind.

On these data points I am not expecting any impact beyond what we saw immediately after the release. I disagree 100% with the view that these inflation number force the Fed's hand and need to be reflected by higher bond yields. Even if I did see the CPI (or Chinese GDP) as a reason to adjust growth expectations, I would prefer to go long copper or oil futures. For bonds to run into trouble here I think we need to see the dollar slip further.

I will try to put up several posts today to round out my views on where the economy is going and my interpretation of recent market moves.

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