GLOBAL FOODFLATION RETURNS
Lack of global inflation was the one factor that surprised the economic community in 2013. Excess supply in many countries was one of the explanations put forward. The other main driver in our view was the decline in global food prices. As measured by the CRB foodstuff, they plunged 14% in 2013, the biggest decline since 1986. Given the importance of the food component in the CPI of many countries, there was only one direction for headline inflation to take last year. Yet, a key development that has yet to gain much publicity since the start of 2014 is the dramatic rebound in food prices.
As today’s Hot Charts shows, in the span of only 48 trading days, the CRB foodstuff has already regained all of the ground lost in 2013. This development flies in the face of the most recent World Bank projection calling for a continued decline in food prices this year. Many central bankers are still musing about the lack of inflation. Perhaps some of them will soon need to start looking the other way.
The chart below superimposes core CPI (blue) and CPI-Food-at-home. Total CPI slowed from nearly +4% in late 2011 to +1.0-1.5% lately, but the bulk of the decline was due to a big slowdown in energy and food inflation, the latter tumbling from +6.3% in September 2011 to +0.4% in recent months. The “deflation threat” many pundits are talking about is not apparent at all in core CPI and in the median CPI which have both remained in the 1.6-2.0% range in 2013 (see INFLATION WATCH here).
The U.S. Department of Agriculture has predicted that food prices will rise this year by as much as 3.5%. It has warned that the drought in California could have a significant and lasting effect on the price of fruits, vegetables, dairy and eggs.
Food accounts for about 15% of total CPI. If U.S. foodflation were to accelerate from +0.4% to, say, 4% by the end of 2014, it would add 0.5% to total CPI. This could be offset by slower energy inflation (9% of CPI) like in the back half of 2008 and 2011, but it might not be. While 0.5% more inflation may not sound much for most economists (remember how they dismissed the threat of rising mortgage rates last year), it is a big deal for most Americans whose wages are rising less than 2% and core CPI is already at +1.5-2.0%.
Recall that PPI-Food jumped 1.0% in January. Core PPI rose 0.4% following December’s +0.3% gain (+4.3% a.r. last 2 ms) and is up 1.7% YoY. Also, nonpetroleum import prices also rose 0.4% in January.
There are so few observers worried about inflation these days that we must pay attention. Remember Bob Farrell’s rule #9:
When all the experts and forecasts agree — something else is going to happen
Higher inflation would not only hurt the economy, it would also negatively impact interest rates and equity valuation. Rising inflation would decrease the Rule of 20 fair P/E. From its current 18.4 (20 – 1.6), a 0.5% higher inflation rate would reduce the fair P/E by 2.7%.
And, there is also this:
Commodities investors and farmers are on alert after the third official warning in a week of an El Niño weather phenomenon emerging that could affect food and energy markets already reeling from extreme weather in many parts of the world.
El Niño refers to a warming of Pacific sea surface temperatures that occurs naturally every few years and can trigger drought in some parts of the world and floods in others, depending on its strength.
Australia’s Bureau of Meteorology said on Tuesday the tropical Pacific subsurface had “warmed substantially” over the past few weeks, meaning sea surface temperatures were likely to rise in coming months.
A recent burst of westerly winds over the far western Pacific was also the strongest seen since at least 2009, the last time an El Niño developed, the bureau said.
Its warning comes a week after the US weather forecaster said there was a 50 per cent chance of an El Niño developing this summer and days after Japan’s weather bureau raised its forecasts of such an event. (…)
“The last strong El Niño in 1997-1998 is estimated to have caused billions of dollars worth of agricultural damage in the US alone.
Any damage to crops and the rise in food prices could hit poorer countries, some of which are already feeling the effects of higher import prices due to the volatility in emerging market currencies. (…)
Both west Africa and southeast Asia face the risk of droughts caused by El Niño, as do Australia and India. Other commodities at risk include wheat, sugar, cotton and rubber.
A rise in the Pacific sea temperatures would also affect fish catches in Peru, the world’s biggest fishmeal exporter. Fishmeal prices are already at historically high levels due to increased demand from the aquaculture and livestock industries. Any price increases will filter into fish and meat prices as fishmeal is used to feed the multibillion-dollar fish farming industry as well as pigs and poultry. (…)
In another sign of the continued pressures on the fast-food industry, McDonald’s Corp.MCD -0.31% on Monday reported disappointing U.S. same-store sales for February, its fourth straight month of declines, despite aggressive TV promotions during the Winter Olympics of products such as its $5 20-piece chicken nuggets.
MacDonald’s U.S. same-store sales in February fell 1.4%, after a 3.3% drop in January. The U.S. division has missed Wall Street expectations for seven straight months, according to Thomson Reuters. Overseas, European comparable sales rose 0.6%, while sales in Asia, Middle East and Africa dropped 2.6%. International sales have been hurt by weak demand in Australia, Germany and Japan.
Without the weight of a stronger dollar, total world-wide sales would have risen 2.2%, instead of a 0.6% decline in February, the company said.
Like retailers across the board, McDonald’s again cited weather as a negative factor. (…)
But weather does not seem to hit everybody equally:
According to the National Restaurant Association’s 2014 industry forecast, just 29% of quick-service restaurants forecast an increase in sales from last year’s level, versus 55% for fast-casual chain operators. And while 40% of quick-service restaurants forecast profit declines this year, only 16% of fast-casual eateries foresee such declines. Half of fast-casual chains expect profit to rise from 2013 levels.
CHAIN STORE SALES RISE
Weekly chain store sales rose 1.3% last week bringing the 4-wk m.a. up 1.9%. We will be bumping against Easter sales in coming weeks.
UNCERTAINTY CONTINUES TO BE THE ENEMY OF SMALL BUSINESS The one “green shoot” in the January survey, a surge in hiring plans, was crushed by the continued onslaught of a wintry recovery
The Small Business Optimism Index fell 2.7 points to 91.4, a substantial reversal in an unexciting January measure but ends a 3 month improvement trend. Only one of the Index components improved, three were unchanged, and six were lower, indicating that the small business half of the economy is still adding little to growth beyond that needed to support population growth.
Forty-seven (47) percent of the owners hired or tried to hire in the last three months and 40 percent reported few or no qualified applicants for open positions. Twenty-two (22) percent of all owners reported job openings they could not fill in the current period (unchanged). This suggests that the unemployment rate did not change much in February. Thirteen (13) percent reported using temporary workers, down one point from January. Job creation plans gave up January’s welcome gain, falling 5 points to a seasonally adjusted net 7 percent. NFIB owners increased employment by an average of 0.11 workers per firm in February (seasonally adjusted), virtually unchanged from January. Seasonally adjusted, 12 percent of the owners (down 1 point) reported adding an average of 3.0 workers per firm over the past few months. Offsetting that, 10 percent reduced employment (down 1 point) an average of 2.7 workers.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 2 points to a net negative 8 percent, typical of the 2013 experience. Sixteen (16) percent cite weak sales as their top business problem, still above levels experienced in “normal” times. The net percent of owners expecting higher real sales volumes plunged 12 points to 3 percent of all owners, reversing our previous gains.
The pace of inventory reduction continued, with a net negative 2 percent of all owners reporting growth in inventories (seasonally adjusted), two points lower than January and trending toward balance. However, stocks are still considered excessive in spite of this long period of net reductions. The net percent of owners viewing current stocks as “too low” deteriorated 2 points to a net negative 4 percent. This is due primarily to a large deterioration in sales expectations. Consequently, the net percent of owners planning to add to inventory stocks fell 2 points to a net negative 5 percent indicating little appetite to add to stocks in the current environment.
THE FRENCH DIFFERENCE
Markit’s Retail PMI: FRANCE GERMANY