In the aftermath of the cooler than expected CPI print and the big retail sales miss last week, risk assets spied higher to a new all time high as a wave of “bad news if good news” euphoria washed over the market, which once again saw a chance for a rate cut in the not too distant future.  

But a different look at the underlying data reveals a potentially much more troublesome picture: as SocGen’s Albert Edwards observes, while sticky inflation remains elevated, this is almost entirely due to very sticky core service (ex inflation) prices – which have little to no reaction to Fed tightening or easing cycles - and especially the relentlessly surging auto insurance, which also is completely immune to the Fed’s tightening cycle. At the same time, core commodity prices – which are impacted by Fed monetary policy - are tumbling, and depending on what data set one uses, one could argue that the Fed has slowed much of the economy far too aggressively and may have already pushed it into a recession.

No surprise then that Edwards begins his latest note with little doubt, blasting that he believes “the Fed is sowing the seeds of yet another policy disaster.” As the SocGen strategist explains, having let the inflation cat out of the ‘transitory’ bag, the Fed now seems determined to regain its credibility by driving CPI inflation all the way back down to its 2% target (even though, as some such as Zerohedge argue that the Fed’s new unspoken inflation target is 3%). This, Edwards notes, has led to a huge divergence between goods and services inflation, a “policy error which is the mirror image of the mistake the Fed made after the 2008 Global Financial Crisis, the very mistake it was castigated for by former Fed Chair, Paul Volker, back in 2018.”