MacroVoices #387 Jeff Snider: On Deflation and Soft Landing

Episode Summary

Executive Summary: Macro Voices Episode 387 centers on Jeff Snyder’s case that recent inflation is a transitory supply-shock episode, not a new 1970s-style secular monetary inflation. He argues consumer disinflation should continue into deflationary recession, supported by producer prices, yield curves, and weak global data from Europe and China, while the markets remain anchored to a soft-landing narrative that he sees as vulnerable.

Main Topics: Inflation: supply shock vs. monetary inflation (Priority: 5/5): Jeff Snyder distinguishes post-pandemic price spikes caused by supply constraints and fiscal shocks from sustained monetary inflation driven by ongoing credit expansion, arguing the current episode fits the former, not the latter. Historical analogs and the expected endpoint (Priority: 5/5): The discussion compares 2020-23 with the 1946-48 and 1950-52 supply shocks, emphasizing that transitory inflation can last years before resolving into disinflation or deflation, often via recession. Producer prices as the leading signal (Priority: 5/5): Snyder argues that PPI data in the U.S., Europe, Japan, and China are already deflationary and will continue pulling consumer inflation lower, making a soft landing less likely than a recessionary outcome. Yield curves and market pricing of recession (Priority: 5/5): The near-term forward spread and other forward-rate measures are used to show markets expect lower rates in the future, which Snyder interprets as confirmation of deflationary recession rather than persistent inflation. Soft landing narrative vs. macro reality (Priority: 4/5): Eric and Jeff debate whether investors and the Fed are overconfident about a soft landing. Snyder argues labor-market obsession and a low unemployment rate are poor guides compared with broader cyclical indicators. Global macro weakness: Germany, Europe, and China (Priority: 5/5): The interview broadens to show Germany already in recession, Europe’s weak producer prices and GDP, and China’s sharp trade and PPI deterioration as evidence of a globally synchronized downturn. Post-game market positioning: oil, equities, dollar, gold, copper (Priority: 4/5): Patrick, Eric, and Nick analyze technical levels across crude oil, the S&P 500, Nasdaq, VIX, the dollar, gold, and copper, finding risk assets extended but not yet decisively broken, with crude showing the most constructive bullish setup.

Key Arguments: Current inflation is best understood as a supply-shock episode triggered by the pandemic, lockdowns, and fiscal helicopter drops, not as a sustained monetary inflation cycle. Supply-shock inflation can persist for years and then decelerate gradually; the current CPI path resembles 1946-48 more than the 1960s-70s inflation regime. If this were true monetary inflation, bond markets and yield curves would not have inverted as they have; forward rates instead point to lower future rates and recession. Producer prices are already deflationary across major economies, and historically PPI weakness leads consumer-price weakness. The U.S. is not isolated; Germany, Europe, and China are deteriorating in ways consistent with a synchronized global recession. The Fed and many investors are overly focused on the unemployment rate and labor-market resilience, but those are poor predictors of recession timing. The soft-landing thesis is attractive because it allows the Fed to stop hiking without signaling recession, but the broader data do not support that view. Equity markets are trading the soft-landing story and may be forming a bull trap that breaks when labor data weaken materially. Crude oil may be transitioning into a more durable uptrend after holding above key moving averages, while gold remains capped by rising yields and a stronger dollar. The dollar’s rebound and the weak reaction to the Fitch downgrade suggest markets are still prioritizing relative growth and rate expectations over headline credit concerns.

Data Points: Macro scoreboard: S&P 500 futures: down 126 bps to 4,537 - Weekly market snapshot as of Aug. 2, 2023 Macro scoreboard: U.S. dollar index: up 155 bps to 102.60 - Weekly market snapshot Macro scoreboard: WTI crude: up 90 bps to 79.49 - Weekly market snapshot Macro scoreboard: Gold: down 172 bps to 1,975 - Weekly market snapshot Macro scoreboard: Copper: down 154 bps to 384 - Weekly market snapshot Macro scoreboard: Uranium: up 53 bps to 5,640 - Weekly market snapshot Macro scoreboard: U.S. 10-year Treasury yield: up 21 bps to 4.08% - Weekly market snapshot CPI timing: Inflation inflection in the middle of last year - Jeff Snyder cites the June/July 2022 shift as the point disinflation began Supply-shock duration: ~30-36 months - Jeff Snyder notes historical supply shocks often last multiple years before resolving 1940s inflation episode: 1946-48 - Historical analog used to compare with post-pandemic inflation Korean War supply shock: 1950-52 - Second historical supply-shock comparison U.S. unemployment rate: 3.6% - June 2019 and June 2023 compared as equal, despite different Fed narratives German PMI: below 40 - Used to illustrate severe contraction in German manufacturing Chinese retail sales: 3% - June reading cited as weak by historical Chinese standards Chinese PPI: deflationary, near extremes seen only in 2008-09, 2015-16, and 2020 - Used as a global bellwether for disinflation/deflation SPX spot price: about 4,515 - Nick’s options-market levels in the post-game SPX call wall: 4,650 - Options market resistance level SPX put wall: 4,500 - Options market support level SPX implied move for Aug. 18 OPEX: +/- 100 points - Expected trading range near the time of the discussion Nasdaq spot price: about 375 - Nick’s options-market levels in the post-game Nasdaq call wall: 385 - Options market resistance level Nasdaq put wall: 370 - Options market support level VIX: around 16 - Post-selloff volatility level after earlier multi-year lows

Pivotal Quotes: "The distinction we need to make here is that the supply shock version is not because of money printing or bank credit or anything of that kind of nature." — Jeff Snyder: Explaining why current inflation differs from true monetary inflation "I absolutely believe that's the case. And I think, you know, after you think about it this way, when did stocks hit their high? That was late 2021." — Jeff Snyder: On the possibility that the current equity rally is a bull trap "If we had seen something like the 1970s, the bond curves that we've seen over the last couple of years would not have happened." — Jeff Snyder: Using yield curves to argue against a new secular inflation regime

Implications: Listeners should treat the disinflation narrative cautiously: Snyder sees recession/deflation risk still building globally, while equity and rate markets may be pricing too benign a soft landing. Key confirmation points are labor data, producer prices, and yield-curve behavior.