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    Macro Voices

    MacroVoices #383 Juliette Declercq: Update on Immaculate Disinflation Thesis

    Thu Jul 06 2023
    Immaculate disinflationMarket updatesUpcoming economic data releasesAggregate demand and supply modelWage growthLabor marketsInflation expectationsAI revolutionEmotional premiumFrance's security situationMarket trends and predictions

    Description

    This episode covers various topics including immaculate disinflation, market updates, upcoming economic data releases, aggregate demand and supply model, wage growth, labor markets, inflation expectations, AI revolution, emotional premium, France's security situation, market trends and predictions.

    Insights

    Immaculate disinflation and future outlook

    Discussion on immaculate disinflation and future outlook

    Market updates

    S&P 500 up, US Dollar Index consolidating, WTI Crude up, gold in consolidation, copper consolidating, uranium stalling, US 10-year treasury yield up

    Upcoming economic data releases

    Jobs numbers, CPI and PPI inflation numbers, Bank of Canada monetary policy report, University of Michigan consumer sentiment

    Aggregate demand and supply model

    Explanation of aggregate demand and aggregate supply model

    Wage growth and labor markets

    Discussion on wage growth, tight labor markets, and labor supply shocks

    Inflation expectations and AI revolution

    Insights on inflation expectations, AI revolution, and its impact on the economy

    France's security situation

    Overview of France's security situation and its potential impact on the economy

    Market trends and predictions

    Analysis of market trends and predictions for various sectors including crude oil, S&P 500, NASDAQ, and volatility levels

    Chapters

    1. Juliet de Clerk returns as this week's feature interview guest
    2. The Fed and central banks are concerned about asset prices.
    3. The US jobs workers gap is expected to hit full capacity in December 2022, shrinking the labor force.
    4. Recession is always coming, but the main question is when
    5. If there is an emotional premium, workers in care sectors and other areas where human interaction is valued will benefit.
    6. I mostly focus on institutional and family offices.
    7. Low levels of volatility are being observed despite the rally in the market.
    Summary
    Transcript

    Juliet de Clerk returns as this week's feature interview guest

    00:06 - 08:45

    • Discussion on immaculate disinflation and future outlook
    • Market updates: S&P 500 up, US Dollar Index consolidating, WTI Crude up, gold in consolidation, copper consolidating, uranium stalling, US 10-year treasury yield up
    • Upcoming economic data releases to watch: jobs numbers, CPI and PPI inflation numbers, Bank of Canada monetary policy report, University of Michigan consumer sentiment
    • Juliette Tclerk's recent analysis and recommendations discussed
    • Explanation of aggregate demand and aggregate supply model
    • Supply curve is convex while demand curve is concave for products with inelastic demand
    • Negative supply shock combined with positive demand shock led to steep price increases in certain sectors
    • Record inventory buildup reversed the trend leading to manufacturing deflation
    • Price pressures have largely evaporated according to recent PCE report
    • The focus now shifts to the scars left by inflation on the economy and asset prices

    The Fed and central banks are concerned about asset prices.

    08:22 - 17:08

    • Core services ex-housing have been running at around 4.5% year on year for the past 18 months.
    • The Fed may tighten policy if the budding drone trend persists.
    • Wages are a key factor in the outlook, according to the Bank of England Sylvanate.
    • Companies and workers are resisting lower profits and wages due to strong aggregate final demand.
    • Global manufacturing weakness and disinflation have led to reflation in the services sector.
    • Weak manufacturing and disinflation have caused a repricing of rate cuts.
    • The fantastic services sector recovery in 2023 allowed firms to rebuild profits by keeping prices sticky despite lower input prices.
    • June flash PMIs hint at a peak in final demand and potentially renewed services disinflation.
    • Persistent wage pressures contribute to pricing headaches for companies.
    • Real wage inflation is a nonlinear convex function of spare labor capacity.
    • Labor supply shocks are turning permanent as baby boomers retire from the market.

    The US jobs workers gap is expected to hit full capacity in December 2022, shrinking the labor force.

    16:42 - 25:13

    • The old age to working age population ratio will likely explode in most of the OECD in coming decades, leading to reflationary effects and tight labor markets.
    • Tight labor markets support real income for workers and retirees, allowing for increased spending and supporting global consumption.
    • In hot labor markets, workers tend to use their strong bargaining power to recoup lost purchasing power, leading to increased wage demands and higher inflation expectations.
    • Wage gains are lifting real incomes and fueling hopes for increasing purchasing power, supporting global consumption.
    • Wage growth in the Eurozone is yet to break for negotiated wages but collapsing inflation expectations should see wage gains retreat.
    • Wage growth in the UK is driven by strong headline inflation rather than falling inflation expectations, causing concern at the Bank of England.
    • Workers in Japan have not insisted on nominal wage increases despite losses in real income triggered by global inflation.
    • Real earnings expectations are still catching up in the US and Europe due to a strong labor market and low job loss probability.
    • Central banks' monetary tightening has lifted demand rather than constrained it, creating a temporary economic sweet spot with elevated final demand.
    • Nominal wages may level off but secular labor market tightness could continue beating inflation expectations and lead to further real income gains.
    • The timing of the anticipated recession depends on wages.

    Recession is always coming, but the main question is when

    24:45 - 33:21

    • Inflation will end and wage growth will catch up to stabilizing inflation expectations
    • The lag effect of tight monetary policy will hit demand
    • US credit impulse will start to matter again
    • Temporary disconnect between aggregate demand and credit this year
    • US rates likely to hit 6% due to normalizing real wage and incomes
    • Real hourly earnings still below 2%, not consistent with Fed's inflation target
    • AI revolution will see a productivity explosion but cut short the wave cycle for workers
    • Inequalities will somewhat rebalance around major wages, benefiting big tech companies
    • Defensive trade will become long NASDAQ versus long bonds
    • Aggregate demand likely to sink without substantially higher rates due to AI revolution
    • Greater than expected cuts ahead as lower inflation expectations and fading real income gains are revealed
    • 'Modified teller rule' shows that cuts are already needed in interest rates

    If there is an emotional premium, workers in care sectors and other areas where human interaction is valued will benefit.

    32:57 - 41:16

    • Productivity gains in sectors like banking, medicine, and law could create a pool of money that leads to higher prices in non-AI produced goods.
    • The outcome depends on whether humans fall in love with robots or if there is an emotional premium for human interaction.
    • France's situation is serious, with growing lawless zones and drug trafficking spreading beyond Paris suburbs.
    • Inequalities and the collapse in real earnings may contribute to the deteriorating security situation in France.
    • Large group protest situations often result in burning down property without solving legitimate grievances.
    • JDI Research offers research notes with graphs and charts to understand current market trends and make predictions for the future.

    I mostly focus on institutional and family offices.

    40:47 - 47:50

    • I haven't changed prices for a while, so I'm anti-inflation.
    • I offer macro voices subscribers a discount if they mention the interview.
    • The EIA inventory was delayed this week due to the American holiday.
    • A clean breakout above $74 on WTI is needed for a new bull trend.
    • Crude oil is still in a pronounced downtrend.
    • The S&P 500 is holding above the 61.8% Fibonacci retracement level.
    • The upper expected move for July 21st op-ex is 4530 and the lower expected move is 4370 for SPX.
    • There may be some downward price action in equities over the next couple of months.
    • The first three weeks of July are historically strong for the market.
    • If the S&P 500 stays above 4420-4440, it could bounce back to highs; otherwise, it may pause and revert down to moving averages.
    • The NASDAQ has been showing relative strength all year.
    • There may be selling in tech and rotation to small caps.
    • Volatility levels remain low with anticipation of a narrow range for the rest of the month.

    Low levels of volatility are being observed despite the rally in the market.

    47:24 - 54:31

    • The VIX is currently at around 15, indicating about 1% moves in the S&P each day.
    • No forced action is taking place in the market currently, but a surprise event like a big Fed rate hike could lead to increased interest in buying insurance.
    • The US dollar index is trading within a wide consolidation zone and needs a big macro event to drive a meaningful trend.
    • There is potential for good money-making opportunities when volatility increases, but it may not be imminent.
    • Gold has shown some weakness recently and there is technical significance at the current level of trading. However, the path of least resistance suggests further downside.
    • Yields on the 10-year Treasury are approaching previous highs, and it will be interesting to see if they break out to new multi-year highs or retest previous levels.
    • The two's 10's yield curve on treasury shows deep inversion again, approaching March lows. It remains to be seen if this trend continues or if bottoms are reached.
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