CPI: Barely Bad Enough

The August consumer price index (CPI) report didn’t cause much alarm in the markets. Despite core inflation coming in at 0.3%, the overall trends of disinflating rents and goods remained steady. However, there were signs of lingering inflation risks. Non-housing core services, which is a concern for the Federal Reserve, increased slightly in August, particularly in transportation services. Airfares, which make up 7% of core CPI, rose 2% due to a 5% increase in oil prices caused by OPEC production cuts. The higher oil prices pose risks for inflation through inflation expectations and direct pass-through to core inflation. Furthermore, unexpected increases were seen in other categories such as household furnishings and medical care. All these factors suggest that a top-down approach is necessary to understand the overall impact of inflation.

The Big Bad Basis Trade

Since the 2008 financial crisis, people have been wary of excessive leverage building up in financial markets. Currently, there are concerns surrounding the Treasuries basis trade and the potential risks it presents. The Treasury market faced significant challenges in 2020, leading to volatility and liquidity issues that required intervention from the Federal Reserve. The basis trade involves selling futures contracts and buying Treasuries, aiming to make a small profit from the price difference. While this trade is considered low-risk, the modest returns on investment make leverage essential to generate significant profits. However, increased leverage increases the risk, especially if financing becomes more expensive or the prices of Treasuries and futures move in opposite directions. Selling off Treasuries in a hurry can lead to panic and a liquidity crisis in the market. Regulations and adjustments to business models may be needed to address these risks and prevent further crises.

President Xi’s Cabinet Line-Up

President Xi’s cabinet appointments are drawing comparisons to Agatha Christie’s novel “And Then There Were None.” The uncertainty surrounding who will fill the remaining positions has captured attention and intrigue.