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Let’s Replay the Inflation Tune One More Time

Yesterday we had the producer price index (PPI) released and it came in hotter than expected – in large part because of energy costs. Today we have the consumer price index (CPI) and forecasters are indicating 3.6% increase year over year. At the moment the 10 year treasury is trading at a yield of 4.57%–obviously traders aren’t expecting major surprises. Certainly any surprises in the CPI of more than .1%, either way, could send yields shooting higher (or maybe lower).

It was funny, at least to me, that most of the Fed officials are now talking dovish–and a hot PPI is announced–with CPI today if we see a hotter number this dovish tone may prove to be unwarranted – or at least way too early.

I see it is an important day for those drawing their Social Security – today the annual cost of living increase is announced. I see the ‘talk’ is for a 3.2-3.4% increase. Of course part of the increase will get chewed up by medicare increases in cost (which I have seen yet). All in all we will see a monthly increase that will buy a nice steak dinner.

I have been nibbling this week – I want to write more about it and hope to today or tomorrow. My thesis is fairly simple–with interest rates near a peak, quality issues have substantial capital gain upside. A capital gain of 10% and interest/dividends of 7% gets me to 17%. The fly in the ointment, of course, is that maybe interest rates continue higher–this is why we nibble versus going ‘all in’. My assumption is simply for interest rates to hold flat–I am not counting on rates falling–this is a ‘bonus’ possibility.

So let’s get the day underway and see what kind of roller coaster ride we get.

12 thoughts on “Let’s Replay the Inflation Tune One More Time”

  1. The Fed is apolitical and operate on empirical data alone.
    Sounds a good basic algo-robot could do that, huh?
    Just gotta know what the robot-algo is.
    So I’m back to The Fed and guesswork.
    America is in love with cicular analysis. Crazy Children.
    PS: My wife just told me we’re getting a 3.2% SS increase in Jan ’24. Sounds about right after all the torture about Inflation. ???

  2. I picked up a brokerage cd today for 6.06% for around a month. I bought all they had. Wells Fargo has around 250-350 brokerage cds a day. My question is how many do TD Ameritrade and other brokerage houses have daily. Wells Fargo makes you call in to buy which is a pain.

  3. Tim, just FYI, the baby bond PMTU is trading and should be added to the New Issues list. Coupon 8.5%, currently at $24.10 for a yield of 8.81%. Maturity 09/28. Even though PennyMac is deservedly in the dog house, this looks pretty tasty.

  4. A preferred channel (ETF dot com) just interviewed the managers of JHPI, a small preferred ETF sponsored by John Hancock. They reach the same conclusion you (and probably many of us) do. They think interest rates are near a top. They think retail ($25) preferreds (versus institutional or $1000 preferreds) are oversold, have good yield and are trading under par so they offer good opportunities.

    As you might expect from an ETF with an insurance company parent, the managers are conservative but switch investments opportunistically. They prefer utility preferreds over financials, although on an absolute basis, financials are their biggest holding. Among financials they prefer TBTFs. Among other banks they prefer regionals over smaller banks.

    JHPI’s 1-year price performance lags the other ETFs I follow, but their Forward Yield is higher by the same amount. (I tend to see these ETFs as interchangeable more influenced by interest rates than clever stock picking. )

    Just my opinion. DYODD. No position in JHPI.

    1. Bear this piqued my interest hearing a well known name but when I researched JH it came up as a subsidiary of the Canadian company MFC not sure for the dividend it pays it’s something I would be interested in.

      1. I haven’t researched the tax status of dividends for JHPI but John Hancock is the US subsidiary of Manulife, which is a Canadian insurance company. So I do not believe that the JHPI ETF’s dividends are subject to the Canadian withholding taxes, but I haven’t checked. (I was more interested in their strategy and largest holdings.) In any event there are other preferred ETFs out there and lots of other things to look at since rates have gone up.

  5. The best reason I have heard for raising rates now or in December is that 2023 will be the Fed’s last chance to raise rates absent a major surge in inflation. An increase in rates in 2024 would be politically inconvenient. If inflation improves, the increase could be reversed in March.

  6. Increases in cost of goods is still happening although my soup can observation is balancing on the fence.
    I am still raising prices here and there as I was behind the herd when everyone else was raising theirs. I was more interested in keeping and gaining customers. The customers are not complaining, and I haven’t had any feedback that competitors are dropping prices. Soup in the grocery aisle is still high priced but I keep looking for sales and seeing a few.
    The report by Cobank shows there is high costs and low margins in the Ag sector. I was hoping the price of alfalfa pellets and C.O.B would be coming down but I see high costs may still be with us for a while.

  7. I think it is wise to understand which Fed ‘yakkers’ are voting members and which are not.

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