Yields have come up on Treasuries, and inflation expectations are starting to widen, but longtime deflationista David Rosenberg is having none of it.
In his latest note, the Gluskin-Sheff economist continues to pound on the inflation threat:
The risk is to treat last Friday’s U.S. GDP report with a cavalier approach. There was really nothing benign about it. It is abundantly clear that the economy is in a spot of trouble. Weak exports and fiscal retrenchment mean no exogenous boosts at a time when real final sales growth is slowing and now barely positive. A chronic large gap in the labour market will result in decelerating, if not falling organic personal incomes, putting consumption at risk at a time of a rising trend in the savings rate. Indeed, real personal disposable income growth throttled back to a mere 0.5% annual rate in Q3.
Investment will be tepid, at best, in view of the high degree of excess capacity and the overall weakness in housing and commercial real estate activity. The best days of the inventory cycle are behind us. With all this in mind, one would expect the base-case scenario to be one of economic contraction and price deflation with regard to final goods and services. The New Abnormal that dots the editorial page of the weekend WSJ (A16) is well worth a read.
Notwithstanding the boomlet in commodity markets, and heightened inflation expectations in the TIPS market, curiously before the Fed has even announced anything, the economic data still support the overall notion of deflationary momentum. The personal consumption expenditure price index excluding food and energy (core PCE) came in at a tepid 0.8% annual rate last quarter and this took the YoY trend down to +1.3% from +1.7% at the turn of the year.
There is no more significant source of inflation than the U.S. labour market and we found out on Friday that total employment costs slowed to just +0.4% in Q3 and the YoY trend is extremely tame, at +1.9%. Wages came in at +0.3% sequentially and just +1.5% on a YoY basis.
We can understand the temptation to believe in the inflation story because of what the CRB index has been doing, but our advice is to resist that temptation and remember what we were talking about, quite unexpectedly by the way, six months after oil hit $140/bbl back in 2008. Deflation.
In many cases, pricing power is hard to achieve and so the bump in commodity costs serves as a margin squeeze as opposed to a sustained source of final stage inflation. For real-life examples as opposed to the data, what did the NYT have to say about Colgate’s profit results? This — “Colgate’s revenues in the United States, which produces 19% of its sales, grew 2%, while the company sold 3% more products. Price cuts reduced earnings in the United States by 1.5%.”