Inflation is not going quietly

Inflation is not going quietly

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Good morning. We enjoyed meeting Unhedged readers on Tuesday at the FT Alphaville pub quiz in New York, where a team from GIC, Singapore’s sovereign wealth fund, brought home some gold. We would have bombed the quiz ourselves. The questions included: “To the nearest thousand dollars, what is the highest value of pizza that the CEO of Domino’s Pizza received as part of his compensation last year?” » Email us: [email protected] and [email protected].

IPC: blocked

If three data points establish a trend, then U.S. inflation appears stuck at 3 percent. That’s the message from yesterday’s March Consumer Price Index, the third stubbornly high inflation report in a row. The three-month average for core CPI sits north of 4 percent, and the longer-term averages aren’t far behind:

It’s not as bad as the chart above suggests, because personal consumption expenditures inflation, which the Federal Reserve targets, is nearly a percentage point lower than the CPI. But the recent trend is clear and inflationary concerns are justified.

The market reaction on Wednesday was significant. Stocks fell, futures markets further lowered their rate cut expectations and yields jumped across the curve, led by the two-year rate which rose 23 points. base. The two-year is still below 2023 highs but has risen nearly 75 basis points this year. All of this reflects the idea that the Fed will keep rates high for longer and may not cut them at all in 2024.

This reaction is justified by the composition of the March CPI data. Core services inflation rose 6 percent annualized and, unlike the previous two reports, there were no major anomalies to blame. The argument over the CPI seems hot because a “January effect” price adjustment at the start of the year only works for a limited period. Used car prices, which rose in February and pushed up overall goods prices, fell 1 percent in March; goods deflation has also resumed. Airfares and hotel prices, two volatile categories that can disrupt data, both performed well.

Instead, inflation has been strong in service categories that seemed persistent for some time: housing, medical care and auto services. Housing inflation once again contradicted long-held predictions that it would decline to match the more benign trend shown by new lease data from companies like Zillow. Medical care was boosted by sharply rising prices for hospital services (up 1.2 percent in March), likely reflecting recent large wage increases in major hospital systems.

Meanwhile, auto insurance and auto repair increased 2 percent and 3 percent, respectively, in March. These two categories account for 7 percent of basic services inflation and present some rather frightening long-term charts:

Line chart of CPI categories, 6-month annualized average, % indicating I'll just take the bus, then

There is still reason to be optimistic. Although the labor market has already largely normalized, wage growth has slowed more slowly. The latest data suggests wage growth of 4 to 5 percent, compared to 3 to 4 percent before the pandemic. This could mean that it is only a matter of time before slowing wage growth reduces price pressure, for example on hospital or auto repair inflation. Housing inflation could also fall further, as analysts have long predicted. No one knows the “correct” mismatch to expect between Zillow rent data and CPI rent data; it might just take longer than expected. Three months of persistent inflation is concerning, but could be a bump in the road.

Overall, we believe this CPI report is a significant blow to optimism for rapid disinflation and creates significant uncertainty about the timing of rate cuts. It is therefore logical that the markets fell yesterday. The big question for investors: How much of the recent recovery depends, in the first place, on impending rate cuts? (Ethan Wu)

Apple lawsuits: different this time?

I’ve been covering tech companies on and off for about 20 years, and throughout that time I’ve been periodically told by smart, knowledgeable people that one lawsuit or another is going to do serious damage to this extremely profitable company . model of a large technology company. Microsoft is the best example, but there’s also Oracle versus Google, Motorola versus Qualcomm, various efforts to restrict Google’s advertising business, and so on. It is only a slight exaggeration to say that none of this ultimately mattered in the slightest. Microsoft, which has more legal goals on its back than anyone, is the most valuable company in the world.

So it’s hard for me not to ignore the lawsuit filed by the US Department of Justice against Apple, which accuses the iPhone maker of being a monopoly. This kind of thing has never mattered before. Why should he now?

Dan Ives, an analyst at Wedbush who has a buy rating on Apple, says “it’s different this time because pressure is building globally and the DoJ struck when the iron was hot.” He says the dispute is, on a risk scale of 1 to 10, an eight, while other tech disputes in recent decades have been a two or three. Although he believes the chances of the Justice Department forcing an overhaul of the company’s business model are low — less than 20 percent — it would have a significant financial impact.

The war against Apple is indeed on several fronts. In Europe, competition authorities fined the company €1.8 billion for removing competition from rival music streaming services on its platform. It’s a sum that Apple will recoup from the couch cushions, but it’s a taste of the fines and remedies that could arise from the EU investigation into Apple’s app stores and of Google under the Digital Markets Act. In the United States, the legal battle with Epic Games is not going to go away. Game maker Fortnite claims Apple violated a judge’s order allowing app developers to direct customers to transaction platforms outside the App Store. And the Justice Department’s antitrust lawsuit against Google’s search business threatens the payments Google makes to Apple to become the default search engine on the iPhone – a significant portion of revenue generated by a markup pure.

All the legal challenges focus on a single two-sided issue: Apple’s ability to trap consumers in its iPhone ecosystem and extort payments from competitors who want to prey on those consumers. This fundamental problem applied to music streaming, transaction management, watch-phone pairing, digital wallets and “superapps”.

Nick Rodelli of CFRA Research, who specializes in legal issues, estimates the DoJ has a three-in-four chance of winning the case and surviving Supreme Court review. This result could take as little as three years, he says. That puts Apple’s services revenue, which accounts for about a third of operating profit, at risk. Its main argument is a 10 percent drop in earnings per share, which is a lot for a company whose profit growth is no longer particularly rapid.

Gene Munster of Deepwater Asset Management offers a more benign, but nonetheless realistic, view. He too sees a significant chance that the DoJ will succeed in applying corrective measures to Apple in many of the areas it targets: watches, wallets, superapps, etc. But he thinks more openness may not lead to as many consumer shifts. “Just because it’s easier to change doesn’t mean people will.” People trust Apple as a brand, he says, because the products work well. “It always comes down to who has the right products,” he says. The biggest concern, according to him, is therefore the loss of Google’s money.

This view is consistent with Unhedged’s core belief in the immense laziness of most people in most areas. Investors need to think about the following equation. Estimate how much better a competing product is than Apple’s, in terms of price or (subjective) quality. Subtract the (subjective) cost of the change. If the result is negative, Apple should be OK. And remember, people hate changing digital and financial infrastructure, even if it doesn’t take that long.

To simplify even further, the key question surrounding Apple still isn’t about the legality of its business model. It’s about the quality of its products. Are they even better, or at least not much worse?

A good read

Problems in uptown.

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