The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

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THE DAILY EDGE: 16 FEBRUARY 2022

ADVANCE MONTHLY SALES FOR RETAIL AND FOOD SERVICES, JANUARY 2022

Advance estimates of U.S. retail and food services sales for January 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $649.8 billion, an increase of 3.8 percent (±0.5 percent) from the previous month, and 13.0 percent (±0.9 percent) above January 2021. Total sales for the November 2021 through January 2022 period were up 16.1 percent (±0.7 percent) from the same period a year ago. The November 2021 to December 2021 percent change was revised from down 1.9 percent (±0.5 percent) to down 2.5 percent (±0.3 percent).

Retail trade sales were up 4.4 percent (±0.4 percent) from December 2021, and up 11.4 percent (±0.7 percent) above last year. Gasoline stations were up 33.4 percent (±1.8 percent) from January 2021, while food services and drinking places were up 27.0 percent (±4.4 percent) from last year.

Supplier Prices Jumped Last Month as U.S. Inflation Surged Latest figures seen as reinforcing case for the Fed to raise rates at March policy meeting

The Labor Department on Tuesday said the producer-price index, which generally reflects supply conditions in the economy, rose a seasonally adjusted 1% in January from the prior month, the sharpest rise since May 2021 and a pickup from December’s revised 0.4% rise. (…)

Producer prices rose 9.7% on a 12-month basis, nearly the same as the prior month. Stripping out pandemic-driven data distortions still showed that inflation was unusually elevated. Producer prices jumped at a 5.6% annualized rate from the same month two years ago, the fastest pace since records began in 2012 and well above the pre-pandemic peak of 2.9% in October 2018. (…)

Goods prices leapt 1.3% in January from the previous month, up from a 0.1% decline in December. Much of that was driven by a sharp increase in the prices of foods and energy. However, core goods still climbed 0.8% last month, accelerating from 0.4% in December. (…)

Energy prices rose 2.5% in January from December, pulled up by sharp increases in liquefied petroleum gas and diesel fuel. Residential electric power and natural gas ticked up just 0.5%. The price index for motor vehicles and equipment climbed 0.7%.

Prices for services rose 0.7% last month, holding at the same pace as in December. This was driven in part by a jump in prices for hospital outpatient care, portfolio management, legal services and traveler accommodation. Vehicle wholesalers and clothes retailers also raised prices. Prices for passenger transport and physician care fell. (…)

Haver Analytics phrased it differently but rather smartly: “Pricing power at the wholesale level strengthened last month.” Given that expectations were for a rather high 0.5% increase in the January PPI, a 1.0% jump means the inflation pipeline must be bulging.

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An optimistic eye would say that PPI inflation is cresting on a YoY basis. But Haver’s table below suggests continued strong pressures. Core Final Demand PPI is up 8.7% a.r. in the last 3 months while Core Goods PPI is up 8.2% a.r.. Services PPI, up 5.3% in 2021 and 7.7% in January 2022 is up 9.5% a.r. in the last 3 months.

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If the Fed is lucky, these cost increases will not fully find their ways into consumer prices, but that would mean that corporate officers and their investors will not be so lucky…

This is the first time since 2008 that PPI inflation substantially exceeds CPI inflation. The pressure on corporate margins is significant, right when demand seems to be waning. Quarterly S&P 500 revenues grew 17.5% on average in 2021, helping offset accelerating costs. Analysts currently expect quarterly revenues to grow 7.8% on average in 2022. PPI inflation reached 9.7% YoY in January and 9.5% annualized in the last 3 months.

Profits don’t grow out of thin air.

It happens that the NY Fed yesterday released its Empire State Manufacturing survey conducted February 2-9.

Manufacturing activity was little changed in New York State for a second consecutive month according to the February survey. After falling to around zero last month, the general business conditions index edged up four points to 3.1 [expectations was 12.0]. Thirty-four percent of respondents reported that conditions had improved over the month, while 30 percent reported that conditions had worsened.

But new orders were a very low 1.4 in February, from -5.0 in January and +27.1 in December while inventories kept rising.

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The prices paid index was little changed at 76.6, while the prices received index rose a steep seventeen points to a record high of 54.1, signaling ongoing substantial
increases in both input prices and selling prices. The index of expected business conditions in six months eased to 28.2 in February from 35.1 in January. It had been as high as 52.0 in October.

Another survey says:

The Conference Board Measure of CEO Confidence™ in collaboration with The Business Council declined for the third consecutive quarter in Q1 2022. The measure now stands at 57, down from 65 in Q4 2021. While still in positive territory, the Measure is now down 25 points from the all-time high of 82 recorded in Q2 2021. (A reading above 50 points reflects more positive than negative responses.)

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(…) only one-third of CEOs now report current economic conditions are better than six months ago—down dramatically from over 60 percent in Q4 2021. Expectations for future conditions also softened, though 50 percent of CEOs still expect the economy to improve over the next six months—roughly double the proportion expecting conditions to worsen.” (…)

Notably, nearly 3 out of 4 do not expect projected interest-rate increases from the Federal Reserve to quickly tame rising prices in the months ahead.

“CEOs are preparing for supply constraints and wage inflation to persist well into this year and potentially beyond,” said Roger W. Ferguson, Jr., Vice Chairman of The Business Council and Trustee of The Conference Board. “While interest-rate hikes should help dampen inflation, few are expecting prices to stabilize rapidly. As a result, a vast majority of CEOs still foresee a need to pass along rising costs to consumers over the next 12 months.” (…)

  • 40% of CEOs reported that conditions in their industries were better compared to six months ago, down from 58%.
  • 22% said conditions in their own industries were worse, up from 18%.
  • 58% of CEOs expected conditions in their own industry to improve over the next six months, down from 61%.
  • 13% expected conditions to worsen, up from 8%.
  • 85% of CEOs expect to increase wages by 3% or more over the next year, up from 79% in Q4.
  • 48% of CEOs expect to increase their capital budgets in the year ahead, down from 57% in Q4.

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Mug Heineken chief warns cost inflation is ‘off the charts’

Heineken NV warned it’s facing the worst inflation in a decade and said consumers may cut back on beer, threatening the industry’s recovery from the pandemic. (…)

Heineken delayed updating its guidance for 2023 until later in the year amid the increased uncertainty about economic growth and inflation. It’s the latest consumer goods company to warn of the impact of rising prices. Earlier this month, Danish rival Carlsberg A/S set a bearish tone for the industry, saying it’s possible that earnings might not grow this year. (…)

Chief Financial Officer Harold van den Broek said the company aims to raise prices for its beer by “courageous” amounts across the world to offset soaring expenses related to aluminum, which has risen 50% from January 2021, barley, which has doubled in cost, and freight from China to the U.S., which has “been going absolutely crazy.” (…)

CEO van den Brink said the brewer isn’t seeing consumers trading down to cheaper brands. (…)

Heineken said it’s continuing to target a 17% operating margin in 2023, though signaled that may become more difficult.

Chinese inflation data also shows a growing corporate squeeze:

  • The producer-price index rose 9.1% YoY in January, down from December’s 10.3%.
  • The Consumer Price Index edged up by 0.9%, compared with 1.5% in December. Core consumer inflation rose 1.2% in January, unchanged from December.

Consumer and producer price rises both moderate

The mid-terms are coming!:

The Fed Missed Inflation. Can Jay Powell Tame It Without Causing a Recession? Chairman engineered an economic rescue but now has tricky task of cooling prices without hampering growth

(…) “We’re pretty far behind the curve. That’s not where we wanted to be,” said Eric Rosengren, who as president of the Boston Fed until last September had a hand in designing those policies. (..)

No Fed chairman since Paul Volcker in the early 1980s has had to grapple with inflation this high. (…) Historically, the Fed hasn’t been able to push down inflation without a recession. (…)

Fed officials warn they can’t provide that same predictability this time. For markets “it could be a bumpy time,” said Esther George, president of the Kansas City Fed. (…)

“Ambiguity has its uses, but mostly in noncooperative games like poker,” Mr. Bernanke told colleagues in 2003, according to transcripts of a Fed policy meeting that year. “Monetary policy is a cooperative game. The whole point is to get financial markets on our side and for them to do some of our work for us.” (…)

If Mr. Powell and his colleagues deliver such a move [+50 points], they could be criticized for panicking. If he opts for the smaller increase, he could be criticized for not taking inflation seriously enough. (…)

Mr. Rosengren said the prospect of a soft landing for the economy has diminished over the past six months because of more persistent supply shocks and workers winning higher wages to offset higher prices.

Rapidly raising rates to address the inflation problem increases the risks of a recession, he said. “If you’re raising rates rapidly, you don’t have time to see how the rate increases you’ve already done have slowed down the economy,” he said. (…)

LIQUIDITY MATTERS!

John Authers:

(…) Rather than attempt to follow every twist and turn of the geopolitical drama, or all the excitement in Washington, it might be best to focus on the most vital commodity market — liquidity.

Mike Howell of Crossborder Capital Ltd. in London is the doyen of liquidity analysts. By his measure, the liquidity created by central banks has stopped growing and is now in a significant decline. It is the second derivative of the change in the speed with which liquidity is flowing that has the greatest impact on markets:

As he shows, provision of liquidity and the creation of wealth through higher asset prices are intimately connected over time. Falling liquidity, while obviously necessary now that the emergency has passed and inflation is rising, could well signal problems ahead:

(…) Over time, Howell shows in this chart that a flatter yield curve tends to be followed quite swiftly by rising credit spreads. While there is no great issue with solvency at present, this suggests that credit may already be causing problems by the end of this year: (…)

The latest BofA Fund Manager Survey reveals that managers have increased their own liquidity in recent months…

…selling a lot of tech stocks:unnamed - 2022-02-16T072219.642

Will the retail mob challenge them?

The rare case of a dual pullback in stock and bond total returns

(…) This sell-everything mentality has created an unusual situation where both stocks and bonds are losing ground simultaneously. (…)

Investors have endured a dual pullback only a handful of times in the past 46 years.

These dual pullbacks were a good sign that whatever macro concerns were driving the selling was mostly overdone. The S&P did suffer some losses in the months ahead, especially in 2008 as the final bout of panic hit markets. But over the next year, there was only a single small loss, which was quickly and dramatically reversed.

The Risk/Reward Table shows that except for 2008, the “risk” side of the equation was relatively limited, while “reward” was especially impressive after a year and beyond.

It’s been mostly a tailwind for the bond market over the past 40+ years, so it’s not a big surprise that the total return on the Bloomberg U.S. Bond Aggregate was mouth-watering. From 9 months and beyond, the Bloomberg Aggregate showed gains every time, well above random returns. (…)

Nato says Russian troop numbers still rising near Ukraine border ‘We have not seen any de-escalation,’ says Stoltenberg despite Moscow insisting it is withdrawing forces
Confused smile He Was Going to Win Olympic Gold. Then He Skied the Wrong Way.

Apparently, Yogi Berra, giving Joe Garagiola directions to his house, once said “When you come to a fork in the road, take it.”

Norway’s Jarl Magnus Riiber, “probably going to go down as the best Nordic combined skier ever”, seems to know:

As he entered the first of four 2.5-kilometer loops of the unfamiliar course, Riiber came to a fork. To the left was the cross-country circuit. To the right was the path to the finish line. Riiber, who hadn’t had a chance to practice on the Olympic track, sped toward the snow-covered lanes separated only by some low cones and a small sign. He picked the lane on the right.

He picked wrong. (…)

It would have gone down as a once-in-a-lifetime error for a star of his caliber except for one tiny detail: Riiber has done this before.

Back in 2016, an 18-year-old Riiber was racing at a World Cup in Lahti, Finland and already showing signs that he could dominate the sport. He’d owned the jumping portion, just as he would in Beijing, and flown out to an early lead in the cross-country race. But once he hit the stadium, the directionally challenged Nordic combined legend took a wrong turn and never had a chance to correct his mistake. (…)

THE DAILY EDGE: 10 NOVEMBER 2021: Faster CPI, Slower China

This a.m: CPI for all items rises 0.9% in October as most indexes increase

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in October on a seasonally adjusted basis after rising 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 6.2 percent before seasonal adjustment.

The monthly all items seasonally adjusted increase was broad-based, with increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles among the larger contributors. The energy index rose 4.8 percent over the month, as the gasoline index increased 6.1 percent and the other major energy component indexes also rose. The food index increased 0.9 percent as the index for food at home rose 1.0 percent.

The index for all items less food and energy rose 0.6 percent in October after increasing 0.2 percent in September. Most component indexes increased over the month. Along with shelter, used cars and trucks, and new vehicles, the indexes for medical care, for household furnishing and operations, and for recreation all increased in October. The indexes for airline fares and for alcoholic beverages were among the few to decline over the month.

The all items index rose 6.2 percent for the 12 months ending October, the largest 12-month increase since the period ending November 1990. The index for all items less food and energy rose 4.6 percent over the last 12 months, the largest 12-month increase since the period ending August 1991.

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U.S. Producer Prices Are Strong Again in October

The Producer Price Index for Final Demand rose 0.6% in October following a 0.5% gain in September. The y/y increase remained at a record high of 8.6%. The series dates back to 2009. A 0.7% rise had been expected by the Action Economics Forecast Survey. The PPI excluding food and energy rose 0.4% last month after a 0.2% gain. The y/y increase remained at the record 6.8%. A 0.5% increase had been expected. The PPI less food, energy and trade services also rose 0.4% (6.2% y/y), double the September rise.

Higher energy prices led last month’s rise in the PPI with a 4.8% (42.4% y/y) increase. Gasoline prices surged 6.7% in October (89.9% y/y) while home heating oil prices rose 13.0% (114.8% y/y). Natural gas prices increased 3.8% last month (28.7% y/y) but the cost of electric power eased 0.3% (+5.6% y/y).

Food prices eased 0.1% during October (+10.5% y/y) and offset some of this energy price strength. (…)

Finished consumer goods prices less good & energy rose 0.3% in October (5.5% y/y). Nondurable consumer goods prices gained 0.3% (4.7% y/y), the smallest monthly increase since April. Durable consumer goods prices edged 0.1% higher last month (6.9% y/y). Prices for private capital equipment strengthened 0.4% (5.6% y/y) and have been strong since the spring.

Services prices rose a diminished 0.2% in October (5.9% y/y) for the second straight month. Trade services prices rose 0.4% (8.5% y/y) and also have been strong since the spring. Prices less trade, transportation & warehousing edged 0.1% lower (+4.2% y/y).

Construction product prices surged 6.6% last month (12.3% y/y) reflecting a 7.5% rise (13.3% y/y) in construction costs for private capital investment.

Intermediate goods prices jumped 2.1% (25.4% y/y) due to a 29.1% surge (160.0% y/y) in unprocessed fuel costs.

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China Factory Inflation Grows at Record Pace on High Energy Prices Producer prices jumped 13.5% in October, fueling worries about continued global inflation

China’s producer-price index rose by a record 13.5% in October from a year earlier, accelerating from a 10.7% increase in September, according to the National Bureau of Statistics. (…)

Consumer inflation in the world’s second-largest economy rose by 1.5% last month from a year earlier, up from 0.7% in September, though it remained below the official target of around 3% for this year. (…)

Higher coal and metal prices could deter local authorities from buying steel and other commodities needed for infrastructure construction, a key driver of growth that China often relies on to stave off slowdowns.

As a result, China’s growth could slow to a 3.6% year-over-year expansion in the fourth quarter, down from 4.9% in the third quarter, according to a forecast from Zhaopeng Xing, chief China strategist at ANZ. (…)

ZeroHedge has better reporting on China’s inflation:

(…) In reality, however, there was just one key variable – thermal coal, which as we said last month indicates that PPI will continue rising far higher, although judging by the recent sharp reversal in the price of Chinese thermal coal (if only for the time being), this may be as high as PPI gets.

Or so Beijing should hope because with the spread between PPI and CPI hitting a new all time record, virtually no Chinese companies that use commodity inputs – which in China is a vast majority – are making any profits.

The gap between upstream and downstream prices “continues to highlight weak consumer demand in the economy and the immense pressure on profit margins downstream firms are facing,” said Michelle Lam, greater China economist at Societe Generale SA in Hong Kong. (…)

  • Overall CPI would have risen almost 2.5% if not for the effects of falling pork prices, according to the NBS.
  • Non-food CPI inflation increased to +2.4% yoy in October from +2.0% yoy in September, primarily on a sequential increase (especially fuel costs). Fuel costs increased by +31.4% yoy in October (vs. +22.8% yoy in September).
  • Core CPI inflation (headline CPI excluding food and energy) edged up to +1.3% yoy in October (vs. +1.2% in September), with inflation in services flat at +1.4% yoy in October. In other words, producers are passing on a growing part of their own surging costs on to consumers, but nowhere near all as the record gap between CPI and PPI shows.
  • Local stocks were certainly not happy, with China’s CSI 300 Index sliding as much as 1.3% amid signs that producers are passing on higher costs to consumers, and that the PBOC may have no choice but to tighten financial conditions at the expense of risk assets. Several food companies have already announced price hikes of up to 15%, including Haixin Foods, Anjoy Foods and Jiajia Food, due to rising costs for raw materials. (…)
China’s Credit Stabilizes as PBOC Encourages Banks to Lend

(…) The PBOC recently told banks to ease some excessive restrictions on lending to the property sector as concerns mounted over the industry’s health with the deepening of China Evergrande Group’s debt crisis. (…)

Growth of China's outstanding credit stock stabilized in October

  • BTW:

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  • BTW #2: Anne Stevenson-Yang, J Capital’s excellent analyst, informs us that
    • Property remains the principal vehicle for investment in China, so the current decline in property prices threatens to drag down returns in every investment.

    • Given the decline in property values, wealthy Chinese are moving money into financial assets, especially stock market-related funds.

    • The
      shift out of property investments suggests that China’s decline in construction may be sustained and that the price declines for commodities like iron ore and coal will continue.

  • Goldman Sachs: “While we expect macro policies to ease somewhat to support growth next year, much of the structural tightening that intensified this year – especially in the property market – is here to stay, in our view. Therefore, we forecast real GDP to grow 4.8% in 2022 and expect average annual growth of only 4.5% during 2022-25, significantly below market consensus. (…) we believe the Chinese property market is in a multi-year slowdown. (…)

  • “The experience of the US-China trade war and the Covid pandemic have likely convinced Chinese policymakers that resilience is more important than speed when it comes to growth. As President Xi aims to secure a third term next year, the leadership seems to be taking an even longer-term view on development than before. With this backdrop, we believe the Chinese economy is settling into a new regime where policymakers accept slower growth in the near term for a more resilient economy in the long run.”

European Gas Prices Slump as Russia Finally Increases Supplies

Benchmark Dutch futures fell more than 10% after flows to Europe via Ukraine and Poland edged higher Wednesday. Gazprom PJSC booked some pipeline capacity on the Ukrainian-Slovakian border for the day, bringing supplies through the route in line with Russia’s long-term transit agreement with its neighbor.

Putin said late last month that Gazprom would refill its European storage facilities after finishing Russia’s domestic stockpiling campaign, which ended Monday. Any extra supply is welcome, as Europe started its heating season with the lowest inventories in more than a decade.

Traders are watching every move by Europe’s top supplier, focusing on how much gas is delivered beyond contracted volumes. Auctions for December pipeline capacity run next Monday, which will cast light on whether extra shipments could materialize. Additional bookings may be unlikely unless Gazprom sees progress in the certification of the contentious Nord Stream 2 pipeline, some analysts said. (…)

Meanwhile, Russia is boosting gas production, with a full-year output forecast at 777 billion cubic meters, up 12% from 2020, Energy Minister Nikolay Shulginov said Wednesday.

For now, Russian gas deliveries remain much lower than normal for the time of the year and the gains this week come after a recent slump. The bearishness is also limited by colder weather forecasts for large parts of Europe, Energi Danmark said in a note on the website.

Gazprom is increasing shipments to Europe, but from a very low base

US equity investor sentiment surges higher as earnings outlook brightens

The Risk Appetite Index from IHS Markit’s Investment Manager Index™ (IMI™) monthly survey, which is based on data from around 100 institutional investors each month, rose from +7% in October to +36% in November, its highest since the survey peak of +54% seen back in April 2021. As such, the survey indicates a substantial improvement from the near-evaporation of risk appetite recorded back in September.

The swelling of risk appetite was accompanied by a marked uplift in investors’ expectations of market returns over the coming month to a survey high, surpassing the prior (April) peak by a wide margin and building further on the improvement seen in October.

By comparison, the survey’s Expected Returns Index had fallen to -12% in September, which preceded the brief market fall, before rising again to signal to a marked turnaround in sentiment which has gathered momentum over the past two months. The index has now risen to +38%.

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The biggest drivers of the market in the near-term are considered to be equity fundamentals and shareholder returns, the former viewed as the most supportive since August and the latter seen as more supportive than at any time over the 14-month survey history.

However, November also saw investors’ expectations of market support from both central bank and fiscal policy lift higher, having sunk in both cases to survey lows in October. Similarly, the macro environment is also seen as more positive for equities than viewed in October, with both the US and global economies set to provide the biggest contributions to returns since July, coinciding in particular with signs of the COVID-19 Delta wave easing.

With the S&P 500 reaching new highs, valuations against historical levels meanwhile remain by far the largest perceived anchor on the market, and is the only factor not to see an improving trend in November.

The political environment is again perceived as a net drag on returns, albeit slightly less so than in October, reflecting concerns over domestic budget spending as well as broader geopolitical issues and China’s tech regulation.

In terms of sector preferences, financials have retained the most-favored spot in November for a third successive month having seen the biggest positive shift in sentiment over the past year, followed by healthcare. However, it was tech stocks that enjoyed the largest upswing in favorability compared to October, with sentiment rising to the highest since February.

Economy hopes meanwhile lifted sentiment towards consumer discretionary, industrial and basic materials, though in some cases inflation and supply line worries continued to constrain appetite. Utilities, real estate and consumer staples are seeing ongoing bearish sentiment.

These improving factors coincide with a strong Q3 earnings season which has led investors to revise up their expectations of Q4 earnings on average.

The Q3 results so far have prompted 32% of investors to ramp up their expectations of Q4 earnings, according to the latest IMI poll, outnumbering the 10% that have revised down their expectations by three-to-one.

The net upward revision of +22% is lower than the reading of +30% seen back in August, but nevertheless is a strongly positive reading.

The overall net upward revision to Q4 earnings estimates tallies with the substantial jump in risk appetite recorded by the November IMI survey and coincides with equity fundamentals being the strongest expected driver for near-term market returns in the latest poll. (…)

Nordea offers mitigating info to the earnings optimism:

Nordea/Macrobond (via The Market Ear)