Daily Commentary

MarketMinder’s View: We agree with part of this screed about Fed communication (e.g., more transparency is generally fine), but this argument is guilty of vastly overrating “forward guidance’s” usefulness. On the first point, this article provides interesting history about the transparency movement, as Texas Democrat Henry B. Gonzalez pushed for the release of Fed transcripts in 1993—an effort that led to the FOMC releasing those documents (albeit, at a five-year lag). Transcripts detail what participants actually say at a FOMC meeting and can provide useful context about officials’ decisions. If you want more transparency, why not release the transcripts sooner than five years after the fact? That aside, most of the article frets how Fed head Kevin Warsh is allegedly using his “guidance allergy” to avoid answering other questions about the economy and monetary policy, worrying that, “If central bankers don’t have to explain their thinking, the public will struggle to hold them accountable when they are wrong, much less isolate exactly where the mistake originated.” Look, we aren’t saying the public should blindly trust policymakers, but there isn’t a ton of evidence that more detailed central bankers’ verbal explanations are better educating the people. For instance, a study from 2019 found nearly 40% of those surveyed thought the Fed targeted an inflation rate of 10%(!) or more. The PCE price index—the Fed’s preferred gauge—didn’t even hit that rate in the early 2020s, during the recent hottest inflation stretch in 40 years. Pundits often don’t even seem to know what inflation rate the Fed targets. And, in reality, nobody holds the Fed accountable for errors—many still celebrate the Bernanke Fed’s actions in 2008, when the transcripts make clear it erred in dramatic fashion, likely exacerbating the scope of that downturn as it failed to act as lender of last resort. Moreover, with forward guidance, the Fed is judged frequently for saying one thing, then doing another. Without that pitfall, the Fed could be judged simply on whether it fulfils its mandate. We just don’t see a case that more forward guidance is better for investors and the public at large. For more, see our June commentary, “Kevin Warsh and the Magical Delete Button.” 

MarketMinder’s View: Here is yet another example of nations’ adapting to the fighting in the Middle East, which has disrupted popular shipping routes. “A 35,000-ton container vessel will leave the Chinese port of Ningbo on Friday at the start of a journey to the UK that promises to herald a new era in world trade. … If the experiment goes to plan, it will establish the Northern Sea Route – as the new trade lane is known – as the quickest maritime link between East Asia and north-west Europe. The sailing from Ningbo, south of Shanghai, to Felixstowe, Suffolk, Britain’s biggest container port, is expected to take 20 days. That compares with between 32 and 40 days for the established China-Europe route via the Suez Canal.” Now, as the article explains, polar sailings aren’t new—shipping companies have researched the journey for years, and as one expert notes, “… year-round operations will be required before the Arctic can be viewed as a genuine alternative to traditional sea lanes. ‘There’s no doubt that the sailing time on the northern route is shorter, and that’s enticing,’ [executive Lars Jensen of Vespucci Maritime] says. ‘But last year there was really only one week when the Arctic was genuinely ice-free and there was no need to rely on icebreakers and favourable conditions. ‘So if I was a shipper, I’d be sceptical about whether things will actually arrive on time. In reality, you are looking at least a decade into the future to have fully reliable conditions.’” So while the benefits may not show up overnight, it is a development that highlights the shipping industry’s ability to innovate in a dynamic global economy.    

MarketMinder’s View: We see three hits and two misses on the takeaways here for July’s inflation reading. As the first notes, headline and core (ex. food & energy) CPI inflation readings ticked down a tenth of a percentage point to 3.4% y/y and 2.5%, respectively. “Both numbers helped feed a narrative that while inflation is still a problem, it seems less so after two consecutive months of benign readings.” We would lean more on the “benign” part as we don’t think inflation is problematic—prices have returned to their prepandemic growth trends and, outside energy, they haven’t budged from those this year. But the second takeaway frets, “Crude oil has jumped 10% over the past week, posing upside risks for the August CPI reading unless things cool down in the Middle East.” That may lift CPI’s energy component, but without galloping money supply growth, prices are unlikely to accelerate broadly. Inflation still looks benign to us longer term. We also award a point to the third takeaway since it notes that “Owners’ equivalent rent [OER], an important category that puts a hypothetical rental value on owner-occupied properties, has held fairly steady during the same period.” Now, “important” is in the eye of the beholder, but given OER makes up a quarter of CPI, the acknowledgment here that it is imaginary—no homeowner pays this—counts as a hit in our book. The fourth takeaway also gets it right, putting it all together, “Were it not for all the turmoil in the Middle East, inflation outside of food and energy—especially the latter—would be heading right back to target.” Lastly, though, as is customary, inflation reporting attempts to pinpoint what it means for the Fed, which we think is useless speculation, including takeaway five. As noted, markets were pricing in a “70% or so probability” of a Fed rate hike a month ago—and not so much now. Yes, the Fed is “data dependent,” but there is no way of knowing exactly how. Voting members aren’t predictable. We suggest tuning the noise out. For more, please see today’s commentary and counsel: “On Inflation, Look Past Today’s Headlines.”