Auour Investments – Nobu’s Notes – September FOMC Minutes

Once again, we would like to introduce you to an informal advisor to the firm, Nobuya Nemoto, who brings an economist’s perspective to the team. His bio is provided at the bottom. Before we jump into his thoughts on the May CPI print, we think it important to attach our most recent newsletter, A New Regime, as it appears that the Fed and other central banks will be continuing their tightening path.

Now on to his thoughts…

A few quick observations

1) September CPI: The core service CPI, the stickiest segment and with the largest weight within the overall basket rose by a whopping +0.8% m/m, more than offsetting the better behaved prices of core commodities unchanged from August. It is a well known fact that inflation is a lagging indicator to the business cycle, especially prices of core services which tend to exhibit a higher degree of auto-correlation (i.e. hysteresis). Combined with the news of OPEC’s decision to cut production aggressively, the latest inflation dynamics are nudging the Fed further along the policy path of “higher for longer”.

2) FOMC minutes: No real new info nor insight in addition to what had been said at the FOMC presser last month. If anything, some investors seem to have taken positive inspiration from the following comment interpreted as a possible imminent dovish tilt:

•  “Several participants noted that, particularly in the current highly uncertain global economic and financial environment, it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook.”

But it is worth noting that “several” does not constitute a majority, while the latter’s view was summarized as:

• “Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.”

Furthermore, hawkish minority views were expressed as:

• “Several participants underlined the need to maintain a restrictive stance for as long as necessary, with a couple of these participants stressing that historical experience demonstrated the danger of prematurely ending periods of tight monetary policy designed to bring down inflation.”

In other words, the minutes revealed a broadly balanced distribution of opinions around the risk-management minded consensus, but the latest CPI release and OPEC’s move are likely to have tipped the balance back into the hawkish camp in the run-up to the November FOMC.

Best,
Nobu

Nobuya Nemoto has a background in macroeconomic and quantitative research. Nobuya was one of the founding partners of Washington-based Potomac River Capital LLC (“PRC”; a macro hedge fund) as the Head of Strategy and Quantitative Research, and helped the fund grow its AUM twentyfold over the course of 10+ years. Prior to PRC, Nobuya was a Managing Director at Citigroup Asset Management (“CAM”) heading its Capital Market Research in charge of developing CAM’s global asset allocation platform and served as a senior member of the Asset Management Committee that produced key asset allocation decisions for firm-wide balanced products. Before joining Citigroup, Nobuya was the Chief Japan Economist at Nomura Securities, ranked multiple times as one of the top three research teams by Institutional Investor Magazine. He has a BA in International Economics from the University of Tokyo and pursued doctoral studies in economics at Columbia University under Nomura’s sponsorship. Nobuya resides in London, UK with his wife and two cats.

Best regards,
The Auour Investments Team

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