Inflation Nation

Well folks, today we have a special report for you on the current state of inflation as the US Bureau of Labor Statistics releases July’s figure tomorrow at 8:30 AM eastern. We hope you enjoy it and that you’re following our short trades on $PLTR & $COIN from yesterday which are both up double digits at the time of writing.

“I’m far from being god, but I work god damn hard.”
-Jay Z

Special Report: Inflation Nation – Stickier than expected…
July’s inflation numbers are set to be released tomorrow and analysts are expecting a decrease from June – however, this may only represent the eye of the storm. Headline inflation will likely decline due to the drop of gas prices, which are at their lowest levels since February of this year. While the market may see a temporary boost of confidence, this decline may serve as a way to see the true inflationary burden that we’re stuck with.
One factor that could impede the decline of inflation is the red hot job market. July’s unexpectedly strong payroll data shows 528k jobs were added in July, far above expectations of 258k. It was also reported that all jobs lost as a result of the pandemic had been recovered. While this may be a positive signal to many, after reading through the lines we believe there will be further troubles in the labour market throughout the months to come.
Involuntary part-time workers, meaning those who need to work part-time for economic reasons, jumped by 303K on a seasonally adjusted basis, while full-time workers decreased 71k month over month.
This figure is troubling as it signals that either:
  1. Lower-income people are struggling to make ends meet in their current role
  2. Full-time work has more barriers to entry than previously
  3. Less full-time positions are being offered
  4. Businesses don’t have the capital, or certainty to commit to hires
  5. Or all of the above
Unit labour costs grew 10.8% last month compared to expectations of 9.5%, this is a double whammy for the US economy as it signifies a stagnation in productivity, alongside an increase in wages. For context, unit labour is defined as the ratio of labour compensation to real value added, it’s the equivalent of the ratio of labour compensation per hour worked to labour productivity. Meaning that this ratio climbs as hourly compensation grows more quickly than productivity. As this wage growth increase continues, inflation is far more likely to become entrenched in the economy.
Further to the inflationary side, while commodities have declined significantly since their peaks throughout the past 12 months, higher good prices are set to remain due to the length of the supply chain. This recently was displayed when Ford reopened ordering, and raised the price of their electric F150 by single and double digits due to “higher input costs”.
This increase is seen across commodities as a whole, both consumables and industrials. It should also be noted that the commodity index prices have returned to 2014 levels. The period from 2008-2020 marked the height of globalization, and global market efficiency as a result. However, as globalization created deflationary effects, recent efforts to onshore production and manufacturing will create inflationary effects.
So, what does this all mean for markets? We predict that a lower headline number will inspire confidence in the market at first, as most media outlets, and likely the Biden White House will proclaim “inflation has peaked”. Potentially resulting in a continuation of the recent market upswing. Although, The red hot job market, and this jump in wages relative to productivity point toward the possibility of a special FED meeting being called in August for an additional rate hike. Either way, we expect September’s print to more accurately represent the amount of inflation the US economy will be burdened with for the foreseeable future.
Chart of the Day – Hedge Funds vs. Market Indices