Year: 2023

U.S. Retail Sales Fall for First Time Since March as Holiday Season Approaches Declining spending adds to signs the economy is cooling after hot summer

U.S. retail sales fell 0.1% in October from a month earlier, the Commerce Department said Wednesday. That is the first decline since March and comes after a 0.9% increase in September and robust gains earlier in the summer. (…)

Americans spent less at auto dealerships as higher interest rates could deter some from making big-ticket purchases. Declining prices at the pump resulted in less spending at gas stations. But even when excluding those categories, sales advanced just 0.1%, after averaging a 0.6% gain in the prior six months. (…)

Sales also declined in October at department, hardware and furniture stores and rose more slowly at restaurants and bars and online.

One of the nation’s largest retailers, Target, said Wednesday that consumers continue to pull back on discretionary items that make up much of its annual revenue.
(…)

Target’s comparable sales, those from stores and digital channels operating at least 12 months, fell 4.9% in the three months ended Oct. 28 from the prior year. (…)

Comparable food sales fell in the quarter due to slightly lower prices, while sales by units rose, said Hennington.

Home Depot said Tuesday that same-store sales fell 3.1% last quarter. “We saw continued customer engagement with smaller projects, and experienced pressure in certain big-ticket, discretionary categories,” Chief Executive Ted Decker said. (…)

• How Consumers Are Spending Is a Reason for Cheer Retail spending data is a lot better than the headline figures suggest

(…) Indeed, the composition of retail spending in October was more favorable than what the headline figure on Wednesday’s report showed. Sales excluding gasoline stations, car dealers, building-materials stores and food services—the so-called control group that economists use to track the underlying pace of consumer spending—rose 0.2% in October from a month earlier.

Don’t forget what is going on with prices, either. Tuesday’s benign inflation report from the Labor Department showed that consumer prices were unchanged in October from September. Overall prices for goods—what gets sold in stores—fell by 0.4%, while goods prices stripping out food and energy items slipped 0.1%. (…)

As an added bonus, gasoline prices have continued to decline: As of Monday, the average price for a gallon of regular was $3.35, according to the Energy Information Administration, which compared with an October average of $3.61. (…)

Retail inflation was +0.4% YoY in October (0.35*CPI Durables + 0.658 CPI ND) against nominal sales up 2.5%. On a MoM basis, retail inflation was -0.6% against nominal sales -0.1%. Real sales are still positive per these measures.

My measure of CPI-Essentials (food, energy, shelter, weighted) remains high at +4.6% YoY in October, down from 5.4% in September but above June’s 4.1%. But October was flat MoM after averaging +0.7% in August/September.

CPI-ESSENTIALS & CORE CPI

Flat nominal retail sales were in line with aggregate payrolls (0.0% MoM) in October, indicating that Americans did not dissave or borrow much last month.

The consumer income math:                          

jobs: (jobs + hrs) 0.8 – 1.5% (1.4% last 3 ms, 1.1% last 2, -1.2% in Oct)

wages:                3.0 – 4.0% (3.2% last 3 and 2 ms, 2.5% in Oct)

PCE inflation:     3.0 – 4.0% (3.8% last 3 ms, 4.4% last 2, 4.3% in Sept.)

= real labor inc.  0.8 – 1.5%

Even the higher end 1.5% growth rate (black dash) is historically very weak, 0.5% is terrible.

US Producer Prices Decline by Most Since April 2020 on Gasoline Prices paid to producers sank 0.5% in October, core unchanged

(…) Services costs, meanwhile, were flat after rising six straight months. (…)

Global Fight Against Inflation Turns a Corner Falling inflation across industrialized countries opens the door for central banks to start cutting interest rates next year.

Declines in consumer price growth, to below 5% in the U.K. last month and around 3% in the U.S. and eurozone, are fueling expectations that central banks could take their feet off the brakes and pivot to cutting interest rates next year.

That would provide welcome relief to a global economy that is struggling outside the U.S., increasing the prospects of a soft landing from a historic series of interest-rate increases without large increases in unemployment. Europe, in particular, is on the brink of recession.

Yields on government debt in Europe and the U.S. have slumped as investors start to price in earlier interest-rate cuts.

For months this year, economists puzzled over why growth and inflation hadn’t slowed more in response to interest-rate hikes. Now, there is growing evidence that higher borrowing costs are biting hard with a delay. (…)

Even countries where inflation has proved the most stubborn, such as the U.K., have started to show progress. Consumer prices rose 4.6% in October compared with the year-ago month, a drop from the 6.7% rate of inflation recorded in September and the slowest increase since October 2021, the statistics agency said Wednesday. Economists had expected to see a decline to 4.8%. (…)

The eurozone also reported a decline in inflation to 2.9% in October from 4.3% in September. Consumer prices were lower than a year earlier in Belgium and the Netherlands. (…)

Investors are also more optimistic. They are pricing in interest-rate cuts by the Federal Reserve and European Central Bank starting next spring, and by the Bank of England next summer, according to data from Refinitiv.

Markets had priced a 30% probability of another rate increase by the Fed, from its current level of 5.25% to 5.5%, until publication of U.S. inflation data on Tuesday. That probability has now fallen to 5%, according to Deutsche Bank analysts. The prospect of a Fed rate cut by May soared from 23% on Monday to 86% by Tuesday‘s close.

Central bankers are more cautious after being surprised last year by the persistence of inflation. The Bank of England last month said it is too soon to think about cutting interest rates, having forecast that inflation would reach its 2% target in late 2025. Central bankers also point to the still-rapid rise in wages and the risk of higher energy prices if the conflict between Israel and Hamas spreads to other parts of the Middle East. (…)

Fitch says US regional bank challenges to persist in 2024

“Regional banks lacking in scale will be disproportionately pressured to reduce cost bases and optimize loan composition,” Fitch said on Wednesday, adding this would “diminish their ratings headroom, leaving larger players relatively well-positioned to continue to gain market share.”

Fitch said that a delay in meaningful loosening of monetary policy would likely translate into “sustained competition for deposits” and “stubbornly weak loan growth.” (…)

Fitch’s caution follows Moody’s last week saying that the banking sector is not yet out of the woods, with reinflation a risk if banks fail to sufficiently predict rate moves.

VALUATION WATCH

From John Authers’ column:

Alliance Bernstein research suggests that the Seven are wildly overvalued compared to history, even with the 10-year yield at its Tuesday low of 4.44%. On this basis, even the other 493 collectively look a little expensive:

Further, it’s possible to question just how great those seven companies are, for all their visibility in contemporary life. The following chart from Richard Bernstein Associates (a completely separate company from Alliance Bernstein) shows that only one makes it into a list of stocks whose earnings per share are growing at more than 25%:

Rich Bernstein argues cogently that there is simply no need for the market to be so tightly concentrated in a few names, as there are plenty of other stocks registering growth:

Narrow markets are economically justified when growth itself is scarce, like during a profits recession, because investors gravitate toward the fewer companies that can produce substantial growth. The extraordinarily narrow leadership of the Magnificent Seven could be justified if growth was extraordinarily scarce. Importantly, growth is not scarce and is actually accelerating.

Biden, Xi Dial Back Rancor, Stress Cooperation in Summit to Stabilize Ties The two leaders neared modest agreements on restoring military contacts and combating fentanyl trafficking during a summit aimed at steadying relations between the world’s two leading powers.

• Xi Says China Seeks to Be Friends With US, Won’t Fight ‘Hot War’

Cooling Inflation Likely Ends Fed Rate Hikes

Consumer prices overall were flat last month and rose 3.2% from a year earlier, a slower pace than in September, the Labor Department said Tuesday. Overall inflation hit a recent peak of 9.1% in June 2022.

Increases in so-called core prices, which exclude volatile food and energy items, also showed underlying price pressures are abating. Core inflation for the five months ended in October was at an annual rate of 2.8%, down from 5.1% during the first five months of the year.

The easing reflected lower prices for cars and airfares and milder growth in the cost of housing and other services. (…)

“The hard part of the inflation fight now looks over,” said David Mericle, chief U.S. economist at Goldman Sachs. (…)

With the October report, core prices have increased for five straight months more slowly than in the previous two years. That string of lower readings is moving closer to what Fed officials have long said would be necessary to convince them they no longer needed to raise rates. (…)

The 12-month inflation rate is on track this year to have posted its largest annual slowdown during peacetime. (…)

Indeed, the October inflation report will cheer officials who had recently played down fears that robust consumer spending might sustain an interval of stubbornly high inflation. Those officials warned against overreacting to strong growth and have instead said the central bank policy decisions should be guided by how inflation behaves. “The primacy of inflation has to carry the day right now,” Goolsbee said.

Analysts said the latest data also reduces the prospect that the Fed will have to resume rate increases early next year. Rather than focus on whether to raise rates, the debate at officials’ next meeting could instead center on whether and how to modify the guidance in their postmeeting statement to reflect recent progress on inflation as well as the dimming prospect of further rate increases. (…)

Tuesday’s inflation report was greeted with relief by several private-sector forecasters who had braced for a larger increase in core prices last month because of a calculation in healthcare costs that is incorporated every October. “This was a report we and others had been dreading for a few months,” Mericle said.

Not only was the latest data friendlier than anticipated, but several sources of cooling prices, including cars and housing, could continue to slow the rate of price increases in the months ahead, Mericle added.

Ed Yardeni:

October’s headline and core CPI inflation rates were 3.2% and 4.0% y/y. Those are still above the Fed’s 2.0% target, but have declined significantly from last summer. These two rates excluding shelter plunged to 1.5% and 2.0% (chart)! We know that rent inflation is heading lower. So the Fed is likely to get to 2.0% for the overall inflation rate next year rather than in 2026. That’s well ahead of schedule, confirming that inflation is turning out to be transitory rather than persistent after all.

David Kelly:

“I’m willing to say we’re going to win this thing,” JPMorgan Asset Management chief global strategist David Kelly declared on Bloomberg television, referencing this morning’s cooler than expected reading of October CPI.  “It looks very, very likely that we’re going to win this [and] get inflation down to 2% by the end of next year.” Following today’s reveal of a 4% annual uptick in core prices, the slowest such growth rate since fall 2021, interest rate futures now point to roughly 100 basis points of easing from the current 5.33% funds rate by the end of next year, compared to a 75-basis point guesstimate as of yesterday, spurring outsized gains in the major indices and a broad-based drop in yields.

ING

The biggest component, owners’ equivalent rent, cooled to 0.4% MoM from 0.6% MoM, but we are hopeful of much more to come.

CPI ex food and energy MoM, 3M annualised & YoY%

The so called “supercore” measure of inflation – services excluding energy and housing costs – which the Fed keeps a close eye on due to wages and labour market tightness having a large influence, came in at a pretty benign 0.2% MoM rate, pulling the annual rate down to 3.75%.

The Federal Reserve has got to be pretty happy with this and unsurprisingly it has reinforced market expectations that the policy rate has peaked. Just 1.5bp of tightening is now priced by the January 2024 FOMC meeting with more than 90bp of rate cuts now anticipated by the end of next year.

Supercore inflation is making progress

Housing rents should slow a lot further based on observed rents. If the relationship holds between observed rents and the CPI housing components, the one-third weighting housing has in the headline inflation basket and 41.8% weighting for core will subtract around 1.3 percentage points of headline inflation and 1.7pp off core annual inflation rates.

Housing slowdown will increasingly depress core inflation

Source: Macrobond, ING

Wells Fargo

Services inflation continues to ease as well, although progress remains slower than in the goods sector. Core services rose 0.3% in October, bringing the one-year change down to 5.5% from 6.7% this time last year. After a surprise 0.6% leap in September, owners’ equivalent rent growth slowed in October (+0.4%), while the monthly change in rent of primary residences was little changed at 0.5%. We expect to see shelter inflation to continue to moderate in the months ahead, although the steady rate of primary rent inflation cautions that the slowdown might not be as sharp as private sector measures have implied.

With the con of throwing yet another measure of “core” inflation into the mix, core services less primary shelter and health insurance, i.e., the CPI “super core” with the additional exclusion of health insurance, rose 0.2% in October after a 0.6% rise the prior month. Declines in both airfare (-0.9%) and hotel prices (-2.9%), two of the most volatile components of services, take some of the shine off the services slowdown, as they will be hard to repeat on a consistent basis. Through the large swings in travel-related services, the trend in CPI super core less health insurance is little improved over the past year, underscoring that despite the improvement for goods and housing, the fight against inflation is far from over.

Today’s CPI report further reinforces our view that the last rate hike of this tightening cycle is behind us. We will not receive the October data for the Fed’s preferred measure of inflation, the PCE deflator, until November 30. That said, today’s CPI data signal that inflation took another step forward on its long road back to 2%.

The FOMC’s job is not finished. Inflation is not yet back to 2%, and the Committee likely will need to feel confident that 2% inflation can be sustained before it begins to loosen its restrictive stance of monetary policy. Furthermore, the Committee will remain diligently on the lookout for any shocks that could disrupt the disinflationary trends that are currently in place.

That said, as 2023 draws to a close and 2024 comes into view, we suspect the debate next year will focus squarely on when rate cuts and the end of quantitative tightening will occur.

Sorry to have bored you with all these stats and comments. In truth, I have been involved in financial markets for 50 years and I have never seen the CPI reports so meticulously and minutely dissected as in the past few months.

And here I am, again, with rent data. At least I am discussing 33% of the CPI and 42% of Core CPI.

This first chart shows CPI-Rent and Zillow-Rent indexed at Jan 2015 = 100. If the past relationship resumes, there is a 10.1% gap that needs to close one way or the other. Note that Zillow-Rent has not declined (yet) and actually keeps rising while the BLS measure is gradually catching up.

The second chart plots the YoY change in the two series, a chart used by most everybody to “prove” that CPI-Rent needs to fall much more. But Zillow-Rent has turned up YoY, now at 3.2%.

Lastly, this chart shows MoM changes, to highlight that Zillow-Rent, seasonally adjusted, has reversed course since June while CPI-Rent growth has stabilized in the 6-6.5% range.

Recall that Zillow-Rent only measures new leases, less than 10% of all leases, while the BLS is focused on renewals.

The WSJ Nick Timiraos today:

Mid-America Apartment Communities, which has ownership in more than 100,000 apartment homes in 16 states and Washington, D.C., last month said it has been lowering rents to attract new tenants. A pandemic-era building boom is leading more apartments to hit the market when their developers are being squeezed by higher debt-financing costs than they anticipated.

While rents for existing tenants rose 5% in July through September, rents for new tenants fell 2.2% from a year earlier. One year ago, rents for new tenants were up 13.7% while renewals rose 14%.

“We knew in a high-supply environment that lease-up pressures exist, but I think it’s just been a little bit more intense because of what’s going on with the interest-rate environment,” Mid-America Chief Executive Eric Bolton said on an earnings call last month.

From the horse’s mouth (i.e. MAA’s press release for the quarterly results):

Eric Bolton, Chairman and Chief Executive Officer, said, “Third quarter results were ahead of our expectations supported by the continued solid demand for apartment housing.  Stable employment conditions along with continued positive migration trends to our markets and historically low resident move-outs are combining to drive solid demand. 

The delivery of new apartment supply is currently impacting rent growth performance associated with new move-in residents, and we expect this pressure to persist for another few quarters.  The volume of new apartment starts has begun to decline, and we expect that leasing conditions will be supportive of higher rent growth in late 2024 as markets absorb the current development pipeline. (…)”

• During the third quarter of 2023, MAA’s Same Store Portfolio produced growth in revenues of 4.1%, as compared to the same period in the prior year, with Average Effective Rent per Unit up 4.5% while capturing strong Average Physical Occupancy of 95.7%.

• As of September 30, 2023, resident turnover remained low at 45.2% on a trailing 12 month basis driven by historically low levels of move-outs associated with buying single family-homes.

• MAA completed the redevelopment of 2,258 apartment homes during the third quarter of 2023, capturing average rental rate increases of approximately 7% above non-renovated units.

Same Store Portfolio lease pricing for both new and renewing leases effective during the third quarter of 2023, on a blended basis, increased 1.6% as compared to the prior lease, driven by a 5.0% increase for renewing leases and a 2.2% decrease for leases to new move-in residents.

Same Store Portfolio lease pricing for both new and renewing leases effective during the nine months ended September 30, 2023, on a blended basis, increased 2.9% as compared to the prior lease, driven by a 6.4% increase for renewing leases and a 0.8% decrease for leases to new move-in residents.

Yesterday, MAA presented at a REIT conference and showed this table. Renewal growth is indeed slowing but rather slowly:

Finally, note that Jay Powell’s so-called supercore CPI (core service ex-rent) is still rising at an annualized rate of 4.9% over the last three months.

China’s Retail Spending Picks Up, as Housing Slump Deepens Consumption is strengthening, but economists called for policy makers to do more to support the momentum.

Retail sales rose 7.6% compared with the same period last year, when stringent Covid lockdowns kept a tight lid on spending activities, according to data released Wednesday by China’s National Bureau of Statistics. October’s sales accelerated from September’s 5.5% year-over-year growth and topped the 7% expected by economists. (…)

There have been other indications in recent days that spending is still weak. Chinese e-commerce platforms recorded just 2% growth over the previous year on Singles Day, the annual shopping festival that culminates on Nov. 11, with companies offering discounts on everything from handbags and furniture to electronics. The growth was the slowest since Alibaba first launched the festival in 2009. (…)

Wednesday’s data showed only deepening trouble for the country’s beleaguered property sector. China’s home sales fell in the first 10 months of the year, despite sustained efforts from Beijing and local governments across the country to reduce both the threshold and costs to purchase homes.

Home sales by value dropped 3.7% from a year earlier in the first 10 months of the year, Wednesday’s data showed, compared with a 3.2% fall in the January-to-September period. September and October are traditionally considered the golden season for home sales, as developers often offer discounts and other incentives. (…)

Other data released Wednesday offered mixed signs for the economy. Industrial production rose 4.6% from a year earlier, up from 4.5% in September. Fixed-asset investment increased 2.9% over the January-to-October period, down from the 3.1% rise recorded in the first three quarters of the year.

One surprise in the fixed-asset investment numbers was a decline in infrastructure spending, said Michelle Lam, a China economist at Société Générale. The growth for China’s infrastructure investment slowed to 5.9% in the year through October, down from 9% in the January-February period. The drop came even though the government has issued special bonds to boost infrastructure investments, but financially strained local governments “are not really putting the money into use,” she said.

Japan’s Economy Shrinks for First Time in Three Quarters The economy contracted 0.5% in the three months to September from the previous quarter

The Japanese economy contracted 0.5% in the three months to September from the previous quarter after 1.1% growth in the April-June quarter. The economy shrank 2.1% on an annualized basis, which reflects what would happen if the third-quarter pace continued for a full year. (…)

Private consumption was flat from the previous quarter. Price increases made consumers hesitant to spend, offsetting a post-pandemic recovery in services sectors, including travel and dining. (…)

In the third quarter, capital expenditures fell 0.6% amid uncertainty over the global economic outlook. External demand, or exports minus imports, subtracted 0.1 percentage point from Japan’s gross domestic product. (…)