Consumer Prices

"The effects on underlying inflation have so far been tepid. What is worrisome is that market participants still do not see consumer price inflation returning to the ECB’s 2% target on a sustained basis, let alone going above it, over any reasonable time horizon," Goldman says. And while the bank is ultimately confident that the Goldmanite in charge of the ECB will succeed in driving up inflation over time, the market would be wise to note that the US and Japanese experience with QE don't provide much in the way of empirical support for that contention.

The days when Russia scrambled to prevent the plunge in its currency in December of 2014, pushing its interest rate to an eye watering 17%, are now a distant memory: moments ago, the CBR announced that following the most recent cut from 15% to 14% on March 13, it once again cut rates by a greater than consensus 150 bps, to 12.50%. The majority of analysts, or 25 of 40, had expected a cut to only 13.00%.

The biggest overnight story was neither out of China, where despite the ridiculous surge in new account openings and margin debt the SHCOMP dipped 08%, or out of Japan, where the Nikkei dropped 2.7%, the biggest drop in months, after the BOJ disappointed some by not monetizing more than 100% of net issuance and keeping QE unchanged, but Europe where for the second day in a row there was a furious selloff of Bunds at the open of trading, which briefly sent the yield on the 10Y to 0.38% (it was 0.6% two weeks ago), in turn sending the EURUSD soaring by almost 200 pips to a two month high of 1.1250, and weighing on US equity futures, before retracing some of the losses.

Whether it is in sympathy with the now relentless surge in the Shanghai Composite which tacked on another 2.44% overnight to close at a fresh multi-year high just shy of 4400, well more than double from a year ago, or because Mrs Watanabe was unable to read the latest Japan trade data whose first trade surplus in 3 years hinted that there will be no new easing by the BOJ any time soon, but overnight the Nikkei closed above 20,000 for the first time in 15 years, with "makers of chocolate, mayonnaise, potato chips and household appliances" helping lift the Tokyo market according to the WSJ. The now daily Asian euphoria however did not last long in the European session, and after opening higher, the Stoxx Europe 600 slipped into negative territory just an hour into trading, and was down 0.4% by midmorning, lead by a near 1% decline on Athens' mains stock index, which has since recouped losses stemming from the overnight report that the ECB is considering an up to 50% haircut on Greek bank collateral, a move that would wipe out the Greek financial sector with ease.

Following February's big bounce back MoM, Consumer Prices in March rose 0.2% MoM (less than the expected 0.3% rise) but it is YoY that is the great news for Americans. CPI fell 0.1% YoY in March (below expectations of unch) which means Consumer Prices haven't risen YoY in 3 months. However, while this clear disinflationary signal is peersisrtent, Core CPI continued to rise 1.8% from last year  (above the 1.7% consensus) driven by big jumps in the cost of shelter (thank you Fed) and healthcare (thank you Govt); which should send shivers through the risk-bulls as The Fed may be forced to pull rate hikes forward.

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Judging by the recent action in equity futures, the continuously rangebound US market since the end of QE may be entering its latest downphase, catalyzed to a big extent by the recent strength in the JPY (the EURJPY traded down to 2 year lows overnight), especially following yesterday's not one but two statements by Abe advisor Harada saying a USDJPY at 125 isn't "justified" and a 105 level would be appropriate. A level, incidentally, which would push the Nikkei lower by about 20% and crush Japanese pensions which are now mostly invested in stocks. Not helping matters was the pause in the Chinese and Hang Seng stock bubbles, with the former barely rising 0.3%, while the former actually seeing its first 1.6% decline after many days of torrid, relentless rises.

It's become a running theme, at least since last September, but the latest release of CPI numbers from around the world has brought our simple average World CPI proxy to its lowest level since the financial crisis. For the period ending in February, our World CPI proxy hit just 1.01% year-over-year. This is the lowest rate of change since November 2009. The year-over-year rate in our World CPI proxy has been falling for six months straight.

Weidmann had warned us about this...a new index, created by Handelsblatt, measuring the inflation of asset prices in Germany confirms the suspicion many have held - while German CPI stagnates (printing modestly hotter than expected today, driven by continued rises in higher gasoline prices and food prices), asset prices are rising sharply amid an over-relaxed monetary policy.

A look ahead at the major drivers in the days ahead.  

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• Yemen Houthi militia sweeps toward Aden in threat to president (Reuters)
• In Nigeria, Oil Price’s Slide Deters Theft (WSJ)
• Saudi Arabia building up military near Yemen border (Reuters)
• Quant Who Shook the Financial World Tries More Humble Approach (BBG)
• Executive Pensions Are Swelling at Top Companies (WSJ)

Following the first YoY deflation since 2009 in January, February's CPI YoY data managed to scrape its way back to unchanged (very modestly better than the 0.1% drop expected). Consumer prices rose 0.2% MoM - the most since May 2014 with gas prices up MoM for the first time since June. So what is the narrative now: if tumbling gas prices didn't get consumers to spend, rising gas costs will? Ex food and energy, prices rose 0.2% MoM (slightly hotter than the 0.1% rise expected) led by the shelter index (which increased 0.2 percent) accounting for about two-thirds of the monthly increase. The rent continues to be too damn high for most, and finally the BLS is starting to realize this.

It is a centrally-planned "market" and everyone is merely a bystander. Last night, following a dramatic China PMI miss, which as previously reported tumbled to the worst print since early 2014 and is flashing a "hard-landing" warning, the Shanghai Composite first dipped then spiked because all a "hard-landing" means is even more liquidity by the PBOC (which as we suggested a month ago will be the last entrant into the QE party before everyone falls apart). Then, this morning, a surprise beat by the German (and Eurozone) PMI was likewise interpreted by the algos as a catalyst to buy, and at this moment both European stock and US equity futures are their session highs. So, to summarize, for anyone confused: both good and bad data is a green light to buy stocks. In fact, all one needs is a flashing red headline to launch the momentum igniting algos into a buying spasm.

A look ahead at next week.

Recall Lenin’s quote: “The capitalists will sell us the rope with which we will hang them.” Today, of course, the capitalists don’t even sell the rope; they give it away, for nothing. But what’s not to like? Stock investors are getting rich. Bondholders are making money. The government can spend as much as it likes. And the voters are bamboozled by it; they think it helps make the economy work better. This is going to be a hard habit to break. So, here’s the gist of my conclusion: Governments won’t break the habit of getting something for nothing. It will break them. But how?