Three Data items today:
#1: Commodity prices and consumer inflation. Next week’s Producer Price Index report will get a lot of attention as a measure of “inflation in the pipeline”. The March 2021 reading of 4.2 percent for final demand was the highest reading since September 2011’s 4.5 percent. Given the easy comps from April 2020, we’re expecting to see April 2021 PPI hit +6 percent.
Commodity price inflation, essentially the front end of that “inflation pipeline”, is getting a lot of attention, so let’s talk about it. Here’s a sample of March PPI prices for key commodities and some of their relevant end markets:
- Plywood (construction): +53 percent vs. last year
- Cold rolled steel (durable goods): +75 pct
- Copper (construction, durable goods): +43 pct
- Corn (food, animal feed): +44 pct
- Wheat (food): +32 pct
Those are the scary headlines you’ve no doubt been reading, but what usually goes unmentioned is that these commodities are predisposed to wild swings. Here’s an annual inflation chart back to 2000 for each of the items just mentioned (plywood – black, steel – red, copper – purple, corn – yellow, wheat – grey). All have seen swings of at least +/- 40 percent at some point in the last 20 years, most notably before and after the Great Recession.
Now, let’s address the other inflationary gorilla in the room: do higher commodity prices inevitably lead to lasting consumer price inflation? This chart shows PPI Commodity inflation (black line) and CPI headline inflation (red line) back to 1970.
As you can see, the relationship has changed somewhat over time. In the 1970s – 1980s, the two lines track closely. From the 1990s onward, though, commodity inflation has had a weaker effect on consumer inflation. The two are still correlated, but commodity prices are no longer as dominant an influence on CPI inflation.
Takeaway: US consumer inflation is not as tied to commodity prices as it once was. The history since 2000 shows the cost of commodities can certainly nudge CPI higher over the short term but the effects are transitory. We expect things will play out the same way in 2021 – 2022 but certainly recognize that there’s going to be some eye-popping commodity inflation in the near term that could capture market attention.
#2: US Money Market Fund balances – how and when “money on the sidelines” gets back in the game. This chart shows weekly retail money market fund balances back to 2000. Since the last time we showed you this chart in February, these balances have started to come down fairly quickly (just visible on the extreme right-hand side). It’s not a big number so far – $37 bn – but it’s there.
The history of this data says that once retail money market funds start to drop post-crisis, they continue to decline at a pretty healthy clip for another 3 years. That was the case from 2002 – 2005 ($200 bn redeemed) and 2009 – 2012 ($400 bn). US equity markets posted positive returns in 2003 – 2005 and 2009 – 2012, so there’s at least some correlation here to asset prices.
Takeaway: we certainly should be at the tipping point for US money market fund balances, and there’s actually more capital here than just the spillover from fiscal stimulus checks. Investors have been adding to their cash positions ever since 2018, as the chart above shows. Whether it is spent or invested remains to be seen, but history says it’s going to go somewhere.
#3: As bullish as the prior point may be, the latest Investment Company Institute money flow data for long term mutual/exchange traded fund flows paints a less optimistic picture. We now have data through April 28th (essentially month end); here’s how it looks:
- Fund investors redeemed $17.8 bn from US equity funds in the final week of April, enough to flip whole-month flows negative to the tune of -$7.8 bn.
- There were also $4.6 billion in non-US equity fund redemptions, but April’s total is still positive by $17.6 bn.
- Fixed income fund flows, by contrast, were strong last week (+$19.2 bn) and April as a whole looks like inflows will total $76.2 bn. That’s the best month for this asset class since January’s $93.8 bn of inflows.
- Commodity fund (mostly physical gold) inflows last week were slightly positive (+$119 mn) but April’s outflows still total $1 bn.
Takeaway: it’s just one week of data, but the sudden and sizable reversal in US equity fund flows after 2 solid months of inflows isn’t something we can just dismiss, especially given the money market fund data. Perhaps investors are starting to sell positions with large capital gains (those would more commonly be in US vs. non-US equities) now that the current Administration’s tax plan is out. Perhaps stimulus money going into US equity funds has run its course. Perhaps late April’s sales were just rebalancing. Perhaps it’s all of the above. One thing is for sure: it will be much easier for US equities to continue their rally if flows turn positive again. We’ll know soon enough.
ICI Money Flow Data: https://www.ici.org/statistics