Tinderbox-Timebomb Not Made in China

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Good morning,

Powell announced we’ve entered a disinflationary process just in time for Valentine’s Day’s inflation report, and one economist thinks the market is headed for a 'tinderbox-timebomb' that will be worse than the 1929 crash.

US CPI and retail sales will be the key focus for this week, but keep an eye on Japan’s announcement for who the next BoJ governor will be. You can’t be worse at predicting a winner than Jim Cramer (or Joe Biden) is at guessing Super Bowl winners. 

Let’s dive in.

Economy Heat Check

As of 2/10/2023 market close.

But first, a message from Fintech Takes. 

Fintech is changing, keep up.

The fintech industry is valued at around $180 billion as of 2022. It’s also the one suffering the biggest layoffs and shifts with the economy.

There are massive changes happening in the space and Alex Johnson, a former credit expert, covers it all in his weekly newsletter, Fintech Takes. Subscribe for free. 

Bad News Briefings

Market movers like to bury bad news Friday afternoon, so we excavated them. 

• Google lost more than $110B in three days after an ad showed its AI bot making a mistake (Fortune)

• Moderna said it will likely charge $130 for its Covid vaccine (Forbes)

• The SEC is investigating the Mormon Church’s past efforts to keep its investment portfolio a secret (WSJ)

• A US judge dismissed a lawsuit accusing Robinhood of misleading investors about its financials and growth prospects when conducting its 2021 IPO (Reuters)

• Yahoo is letting go of 20% of staff, nearly 50% from its ads team (CBS)

• A McDonald's president who made $7.4M last year said a proposal to pay fast-food workers $22 an hour is “costly and job-destroying” (Yahoo)

Macro Watch This Week 

Inflation, Egg Smuggling & Renting Chickens

The price of eggs is driving people to some creative and illegal solutions.

If there’s one thing we can count on Jerome Powell to do, it’s the bare minimum. And on his own timeline. This Valentine’s Day is no exception. The hype around tomorrow’s CPI report gives you the perfect out to avoid an inflation-adjusted date altogether. 

The February 14th Consumer Price Index report is poised to deliver a significant blow to the equity market. The market has been on a meteoric rise since the start of 2023, fueled by dreams of falling inflation and the possibility of interest rate cuts from the Fed. 

If the report reveals the expected change in trend from the previous couple of months of disinflation, it could shatter market hopes and cause a significant market reversal. The report could mark a turning point in the equity market's expectations for inflation and interest rates, with far-reaching implications.

One of those implications? Egg Smuggling. 

If you’ve noticed that the scrambled eggs in your bacon, egg and cheese bagel have increased in price recently, you could, as every analyst cop-out would, thank J Pow. But it’s a bit more complicated. Let’s discuss. 

According to data last month from the Bureau of Labor Statistics, the price of eggs has gone up 60 percent over the last year because demand has risen. Meanwhile, production has dropped due to deadly avian flu hitting U.S. chicken flocks.

The increase in the price of eggs has also brought with it another consequence – a surge in egg smuggling from Mexico. According to NPR, officials with U.S. Customs and Border Protection (CBP) are reporting more people trying to sneak eggs into the U.S. because prices are lower south of the border.

In case you were too hungover on your college spring break flight home, we’ll recap. Purchasing eggs in Mexico and then attempting to bring them into the U.S. is illegal. It has actually only been the case since 2012 when the USDA banned eggs from Mexico “based on the diagnosis of highly pathogenic avian influenza in commercial poultry” like bird flu and Newcastle disease, a contagious virus that affects birds. In other words, it was restricted due to the consequences we’re currently seeing play out. 

While egg smugglers are having weed ones hold their beers, on the other side of the border, farmers want in on the fun too. News outlets near the border are reporting on local farmers who “rent chickens” to suburban city folks. They then keep them in their backyards, most likely against the homeowner and zoning rules. The farmers provide the chickens, the coop and an 100 pound bag of chicken feed.

Despite potential legal ramifications, people continue to try to smuggle eggs. According to NPR, a carton of 30 eggs sells for $3.40 in Juárez, Mexico, while some places in California are charging well over $11.00 for only a dozen eggs. 

If caught smuggling eggs, the standard fine is $300. While one can’t condone smuggling, we also don’t condone working 80+ hours a week for a bonus worth less than your Miami NFT Week tickets. 

Let’s assume your neighborhood Whole Foods is charging $11 for a dozen eggs and you find a friendly partner in Juárez charging $3.40. You’d need to smuggle 40 cartons over to break even after the fine. 

Then again, if 2022 taught you anything, it was how to take a big L or two. It can’t be any worse than Bitcoin last quarter. 

Signal to Noise

This week’s market preview and whether you should care. 

• Tuesday: US CPI (Jan), BoJ nominees 

• Wednesday: US Retail Sales (Jan)

• Thursday: US PPI (Jan), Jobless claims 

• Friday: Monthly OPEX expiration

Signals 

US CPI (Jan)

Prices of US goods and services, as most expect in tomorrow’s print, are expected to have climbed last month at a pace that remains discomforting for consumers. But they’re not the only ones shifting in their seats. Fed policy makers are seeking greater progress in their battle to beat back inflation. This increase is the last thing they need. 

January CPI’s release on Tuesday is expected to increase 0.5% from a month earlier, spurred in part by higher gasoline costs. That would mark the biggest gain in three months. Excluding fuels and foods, so-called core prices — which better reflect underlying inflation — are seen rising 0.4% for a second month.

Combined with January’s strong employment report, this increase would likely keep Fed rhetoric hawkish. In that case, expect Powell to emphasize the need for ongoing rate hikes. That means a low probability of a pivot toward easing this year. 

BoJ Nominees

Current Bank of Japan Governor Kuroda’s term ends on April 8th. The world will get the first glimpse into his replacement this Valentine’s Day, February 14th, when the Japanese government plans to present nominees for its new Central Bank head to Parliament. 

Desks expect an official announcement on a successor by February 17th. Sources on Friday suggested the Government is reportedly likely to nominate Kazuo Ueda as the new Governor. Meanwhile, ex-FSA Chief Hamino and BoJ Executive Uchida are tipped to be the next Deputy Governors. Ueda previously served on the BoJ’s Policy Board between 1999 and 2003. 

Japan’s core inflation rate rose to a new 41-year high of 4% in December. That being said, initial commentary from the nominee suggests he’s in no rush to exit the BoJ’s current monetary policy. 

Monthly OPEX Expiration

Last month’s mass options expiry day marked the biggest January event in a decade. Sitting on the sidelines when the contracts roll over has proved a winning strategy of late. In 12 of the past 14 months, the S&P 500 has dropped around the time of OpEx.  

Some analysts see the options market exerting a big influence on markets, and more specifically, the S&P 500. The thinking goes that: losses in stocks may reflect the unwinding of hedges by market makers, or traders using a liquidity window to sell stocks.

Noise

US Retail Sales (Jan)

The Census Bureau will release January retail sales figures this Wednesday, indicating whether consumer spending held up last month. Retail sales are expected to come in hot to start 2023, with increases projected at well over 1% after a weak reading in December. The headline rate of retail sales is expected to rise 0.9% M/M in January, paring back some of December’s 1.1% decline. The core measure of retail sales is expected to be a more subdued +0.4% M/M (prev. -1.1%). 

One change of note: the Retail Control group is seen falling 0.3% M/M in January after -0.7% in December. A surge in vehicle sales is expected to account for about half of the headline gain, while higher gasoline prices relative to a month prior could also provide a boost.

US PPI (Jan)

The Producer Price Index (PPI) drops on Thursday, tracking inflation from the standpoint of manufacturers and wholesalers. Producer prices are expected to have risen 0.4% last month, rebounding from a 0.5% decline in December. 

On an annual basis, that means price growth will have likely decelerated to 5.4% from 6.2% in December. This decrease would mark the smallest year-over-year gain since March of 2021.

Jobless Claims 

Last week, the number of Americans who applied for unemployment benefits in early February rose by 13,000 to 196,000. Hold your beer. Application statistics are still hovering near pandemic-era lows. It’s a sign the jobs market remains “quite strong.” 

The latest round of jobless claims comes out this Thursday. The jobs market has, on the whole, been strong since the early days of “transitory.” Don’t hold your hopes on any change this week. There are much more fun ways to lose money. 

Meme Bank