Month: July 2023

Weekly Unemployment Claims Down 12K, Lower Than Expected

In the week ending July 8, the advance figure for seasonally adjusted initial claims was 237,000, a decrease of 12,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 248,000 to 249,000. The 4-week moving average was 246,750, a decrease of 6,750 from the previous week’s revised average. The previous week’s average was revised up by 250 from 253,250 to 253,500.

The dashed line below is where claims were pre-pandemic:

Job openings are slowly declining but remain well above 2019 levels:

Producer Price Index: June Headline Cools to 0.1%, Lowest Since August 2020

The Producer Price Index for final demand increased 0.1 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices declined 0.4 percent in May and edged up 0.1 percent in April. (See table A.) On an unadjusted basis, the index for final demand advanced 0.1 percent for the 12 months ended in June.

In June, the increase in final demand prices can be traced to a 0.2-percent rise in the index for final demand services. Prices for final demand goods were unchanged.

The index for final demand less foods, energy, and trade services moved up 0.1 percent in June after no change in May. For the 12 months ended in June, prices for final demand less foods, energy, and trade services advanced 2.6 percent.

The YoY chart looks really good with PPI-Goods deflating 4.1% and PPI-Services slowing to 2.2%.

But the base effect is masking the reality that producer prices actually remain 16–22% above 2019 levels, not really deflating:

Matt Klein (The Overshoot) makes the surprising observation that

Despite accounting for a small share of the overall CPI, movements in the price index for “full service meals and snacks” tend to track the broader price index remarkably well. (…) Dining out is a discretionary purchase that is sensitive to economic conditions, while the input costs are a mix of local rents, taxes, and wages, as well as equipment and groceries.

CPI-Food-away-from-home has perfectly matched total CPI between 1953 and 2008. That’s 55 years!

After the GFC, restaurant prices rose consistently faster than total CPI, partly because of food and energy costs but mainly because of rising wages (black).

Looked at on a YoY basis, the recent decline in total CPI (now +3.1%) has not been matched by restaurant prices (+7.7%). There were similar dislocations in 2015, in 2019 and in 2020 and they were all closed by total CPI eventually reaching up to CPI-Food-away-from-home.

On a MoM basis, restaurant prices are still rising in the 5% range:

However surprising and upsetting, a 99.9% correlation over 55 years cannot be simply dismissed, can it?

Maybe we can stop watching used car prices, airline fares and rent…

BTW:

Wage Growth Tracker Was 5.6 Percent in June

The Atlanta Fed’s Wage Growth Tracker was 5.6 percent in June, down from the 6.0 percent reading in May. For people who changed jobs, the Tracker in June was 6.1 percent, down from 6.8 percent in May. For those not changing jobs, the Tracker was 5.5 percent, compared to the 5.8 percent reading in May.

Recession Watch: realistic optimism

(…) Recent data suggest that, on balance, the global economy remains resilient to higher rates, while the direction of travel seems consistent with a steady slowdown in the macroeconomic cycle, albeit without encountering a global recession that many, including Fathom, expected — at least not this year. (…)

The resilience in investment growth has a parallel with that of consumption, where excess savings accumulated during the pandemic have helped cushion consumers from the higher cost of living that has subsequently ensued. In 2020 and 2021, US corporates boosted their coffers bringing forward borrowing intentions, as highlighted by a large spike in corporate bond issuance. The current issuance levels are likely weaker than the trend, though not by much and the UK in Q1 2023 posted the strongest quarter in corporate issuance since the pandemic. This suggests, again, that the economy remains resilient and it is still going through a process of unwinding some of the pandemic dynamics.

Healthy levels of investment and issuance, often overlooked, are also important indicators of market liquidity as signals of credit expansion and willingness to take risks. Investors tend to overly focus on shifts in central bank balance sheets and rate decisions, while forgetting about changes in these private sources of liquidity. If central bank actions were all that mattered liquidity would be a countercyclical indicator. However, liquidity as gauged by the Fathom liquidity indicator (FLiq) is, like investment, strongly procyclical and currently signalling a rebound. (…)

It’s never a good time to have a recession but this time would be particularly bad. Federal interest payments are up 70% from 2019 eating 1% more of the U.S. GDP pie.

(CBO)

Individuals have been smart fixing their mortgage rate at the lows:

This shows the surge in the percent of loans under 3%, and also under 4%, starting in early 2020 as mortgage rates declined sharply during the pandemic. Currently 23.3% of loans are under 3%, 61.3% are under 4%, and 81.2% are under 5%. (CalculatedRisk)

Inflation Eased to 3% in June, Slowest Pace in More Than Two Years Price pressures cooled, but inflation remains strong enough to keep the Fed on course to continue raising interest rates.

(…) Overall consumer prices increased a seasonally adjusted 0.2% in June from the prior month, compared with May’s 0.1% gain. Core consumer prices climbed 0.2%, just slightly above their pace in February 2021 at the start of the inflation surge. A more narrow measure of inflation that excludes goods, housing and energy was essentially flat in June from the prior month, according to Wall Street Journal calculations. (…)

Facts:

• CPI +0.18% MoM for June  (+3.0% YoY) after +0.12% (+4.1%)
• Core CPI +0.16% MoM for June (+4.8% YoY) after +0.44% (+5.3%)
• Core Goods -0.1% MoM (+1.3% YoY) after +0.6% in April and May.
• Core Services +0.3% moM after +0.4% in April and May.
• CPI “Essentials” (food, energy, rent) +0.33% MoM in June (+4.1% YoY) after 0% in May

John Authers: Getting So Much Better, But Not Enough to Stop a Rate Hike

(…) Breaking down year-on-year inflation into its component elements shows that energy now has a negative impact, after fuel costs drove the spike in 2021. That’s not surprising. More impressively, core goods inflation, running hot at the beginning of last year, has dwindled almost to nothing. And core services, the source of the greatest current anxiety, is also ticking down. This is close to exactly what the Fed would have wanted to see:

(…) In short, this looks much less like a “head fake” (as colleague Jonathan Levin puts it) toward lower inflation than then previous alarms of the last two years. (…)

What does the Fed itself think about all of this? On Wednesday, it released its latest Beige Book, filled with impressionistic reports from its research teams across the country. It’s a long and detailed read, but computer techniques are getting ever better at scanning big blocks of text to produce some quantified numbers. This chart of the word counts in each Beige Book  this decade comes from Oxford Economics:

Concern about inflation is abating, as are worries about wages, while talk of recession is (thankfully) limited. The chart does suggest that the Fed’s employees are picking up persistent concerns about the availability of credit. But in general, this analysis is exactly in line with the current perception of the Fed’s stance: That it doesn’t believe it needs to raise rates much more, is genuinely hopeful that a recession can be avoided, and the possibility of a credit incident poses the greatest risk to that outlook.

Meanwhile, the bond market, which only last week saw an epic jolt to bring the two-year yield above 5% for the first time in more than decade, seems implicitly to be betting on a downturn. (…)

Real consumer demand has stalled since January but the recent uptick in real aggregate payrolls suggest stronger demand in H2.

• “Consumer spending continued to stabilize in June. Bank of America aggregated total credit and debit card spending per household declined by 0.2% year-over-year (YoY) , in line with the YoY rate in May.” (@MikeZaccardi)

Credit card use is biased towards goods.

Core CPI monthly growth fell back to its pre-pandemic range, along with core services. But we have seen monthly head fakes before:

• Quarterly:

CPI services is intimately correlated with wages, still rising 4.5-5.0%.

GS: “Today’s report is consistent with our view that Fed tightening is in its final innings. We continue to expect a final 25bp hike at the July FOMC meeting to 5.25%-5.5%, followed by unchanged policy for the remainder of the year.”

Ed Yardeni:

Investors have turned from fearful to fearless in recent months as the economy has proven to be resilient to the Fed’s tightening of monetary policy while inflation has continued to moderate. We can see their fearlessness in the S&P 500 VIX, which is highly correlated with the percentage of bears in the Investors Intelligence weekly survey of stock market sentiment. Both are down to pre-pandemic lows.

Now that everyone is so bullish, we have to conclude that the technicals are looking increasingly dicey from a contrarian perspective. Meanwhile, the fundamentals continue to be bullish as they confirm a disinflationary soft-landing scenario. We would welcome a mini-correction down to the 50-day moving average of the S&P 500. If instead, the index jumps above its bull-market channel, we may have to contend with a melt-up situation. For now, we are sticking with our 4600 yearend target for this year.

Bank of Canada Lifts Interest Rates, Warns Path to Stable Inflation at Risk Central bank raises its main rate to 5%, saying it would take longer than expected to reach 2% inflation

(…) The back-to-back rate rises represent a sharp pivot for Canada’s central bank, which in January declared a pause on further tightening on the belief that a series of aggressive, rapid-fire increases in borrowing costs would damp inflation and employment through the year.

Bank of Canada Gov. Tiff Macklem said the central bank is prepared to raise interest rates further should inflation fail to moderate as forecast. (…)

Macklem added that ahead of Wednesday’s decision, senior officials discussed holding rates steady and waiting for further data. In the end, Macklem said, officials agreed interest rates needed to go higher and “the cost of delaying action was larger than the benefit of waiting.”

The central bank said in a statement explaining the rate decision, and an accompanying economic forecast, that downward pressure on inflation is at risk of stalling. This decision comes as households continue to spend on goods and services at a solid pace buoyed by a strong labor market, population growth fueled by immigration and accumulated savings during the Covid-19 pandemic. Canada recorded the fastest economic growth among the Group of Seven economies in the first quarter, at a 3.1% annual rate, or above the central bank’s forecast for 2.3% expansion. (…)

It envisages inflation cooling from its current 3.4% level to 2% in mid-2025, or six months later than previously expected. The central bank said it expects inflation to hover around 3% for the next 12 months. (…)

“Underlying price pressures appear to be more persistent than anticipated,” the bank said, adding a recent survey of executives suggesting businesses still intend to raise their prices more frequently than normal. (…)

Canada’s unemployment rate has climbed, to 5.4% in June from 5.0% in April. Macklem said the jobless rate “remains historically low,” and that the current pace of annual wage growth, between 4% and 5%, needs to moderate further to help hit the 2% inflation target.

The central bank said it expects economic activity to slow, although recent data covering retail sales and other indicators “suggest more persistent excess demand in the economy.” It forecasts annualized economic growth of 1.5% in the second quarter, or above its earlier 1% estimate, and then growth to average 1% through the second half of this year and first half of 2024, as higher interest rates reduce the amount of after-tax income available to households.

The central bank also expects growth from exports to weaken as higher rates elsewhere in the world, especially the U.S., kick in and weaken global demand. (…)

Xi Jinping Chokes Off Crucial Engine of China’s Economy Foreign direct investment in China fell to $20 billion in the first quarter from $100 billion a year earlier, hurting an already struggling economy.

Desperate for capital and with their economies struggling, China’s cities are wooing Western businesses with previously unavailable goodies. Beijing has labeled 2023 the “Year of Investing in China” and local officials have embarked on promotional tours overseas to drum up interest from investors.

That effort is running headlong into President Xi Jinping’s national-security agenda, with its focus on fending off perceived foreign threats. That has made any Chinese investment a potential minefield for foreign firms.

A Xi-led campaign this year has hit Western management consultants, auditors and other firms with a wave of raids, investigations and detentions. Meanwhile, an expanded anti-espionage law has added to foreign executives’ worry that conducting routine business activities in China, such as market research, could be construed as spying.

The perception that doing business in China has become much riskier is choking the flow of capital into an economy already struggling with weak private investment and consumption, as well as soaring youth unemployment. (…)

The tug of war is leaving financially distressed cities and townships across China in the lurch. Mired in debt and struggling to create jobs after three years of Covid-19 restrictions, many are in dire need of capital. (…)

A trade official in Chengdu, the capital of southwestern Sichuan province, recently embarked on an investment-promotion trip to Europe. He returned empty-handed. “In my 20 years of trying to get investments from Europe, this was the first time we didn’t get to sign even one memorandum of understanding,” the official said.

A senior official in a county of southern Guangdong province, which earlier this year set a goal of attracting nearly $300 billion in investment in the next five years, told a visiting American trade group recently that the county would reward any U.S. corporate “decision maker” investing there 10% of the value of the promised deal, according to people briefed on the matter. (…)

Recent surveys by business groups in China have shown American, German and other European companies pausing expansion or reducing investment in China. (…)

What’s mandarin for “You can’t have your cake and eat it, too”?

• China’s $400 Billion Pension Sends New Warning on Debt Risks

The National Council for Social Security Fund, which oversees about $417 billion according to the latest available figures, has advised asset managers that handle its money to sell some bonds including those from riskier LGFVs and private developers after a review, people familiar with the matter said, asking not to be identified discussing private information. Several of them mentioned that bonds from LGFVs in Tianjin, a debt-saddled northern port city, were singled out.

The recent Sino-Ocean Group Holding Ltd.’s debt rout raised the pension fund’s concerns as one of its biggest asset managers holds a large position in the state-backed developer’s debt, the people said. That triggered the request for a health check of their exposure to riskier LGFVs and builders, if relevant bond prices are below 95% of face value, the people added.

The move underscores the difficult balancing act facing Chinese authorities as they try to defuse risks in the credit markets without destabilizing the financial system. While offloading weaker bonds may help the state pension protect the value of its investments, it risks heightening market concerns about the health of LGFVs and developers at a time when Beijing is trying to restore confidence in the world’s second-largest economy. (…)