RE:RE:RE:RE:RE:RE:Oil up, Oil stocks down: Consider a pairs trade Let me address your comment Matt.
"If recession kicks in as you mention and new auto sales tank, there will be layoffs but prices arent coming down. Existing inventory may be discounted to clear them out but they are not going to produce any new goods to sell at a loss."
- first of all, let me say that inflation is a problem until it's no longer a problem. The Central Bank will lose all credibility if they are not able to bring inflation back to a 2% target. That is, it can remain entrenched in the economy until households or corporates begin to scale back on consumption/inventory, etc and then it's no longer a problem. The long term trend may very well be inflationary but this may be over, say a 10 year period. In fact, the 10 year treasury has risen in recent months to account for the next decade to be modestly above a 2% target. As I'm writing this, the 10 year breakeven inflation is currently at 2.37% which is well within the 1-3% inflation target previously mentioned by Jerome Powell. I do believe they will get to a 2% target and it's going to arrive sooner than people think. A recession could be averted if they fail to achieve the elusive 2% goal. This agrees with the narrative "higher rates for longer" or in a nutshell, "higher inflation for longer." Another way to describe higher inflation and lower output is stagflation which is what we find ourselves in at the moment.
In Canada, unit labour costs is above the 5% policy rate and well above the 4% inflation rate. What this is telling me is that margins for businesses are compressing due to unit labour costs rising faster than inflation. When businesses have reduced margins, and workers have a reduced average workweek, the next logical consequence is for corporations to reduce their workforce to "normalize" margins. This is why the price/wage spiral often leads to a recession.