Year: 2023

Even if Fed Stays on Hold, Jerome Powell Is Keeping His Options Open The Fed chair said it was premature for the central bank to declare a conclusive end to its historic interest-rate increases of the past two years even though he didn’t make an argument for further hikes right now.

Price and wage pressures have eased recently, leading more investors to think the Fed is done raising rates. Powell disappointed those investors in a speech Thursday by explaining why he thinks the Fed is more likely to tighten policy than ease it if any change is warranted.

While Powell didn’t build a case for lifting rates now, he pointed to earlier inflation “head fakes,” past episodes in which price pressures ebbed for a while before surprising Fed officials by picking up again. He said they would monitor economic conditions closely to avoid both the risk of having been “misled by a few good months of data,” as well as the risk of having raised rates too high, Powell said. (…)

In his prepared remarks for a conference at the International Monetary Fund, Powell said the central bank was “not confident” that it had raised rates high enough to lower inflation to its 2% goal in the next two or three years.

But during a question-and-answer session, Powell allowed that inflation-adjusted interest rates were high. “We’re in the place where we have restrictive policy, and probably significantly restrictive policy, and we’re watching the effect carefully on the economy,” he said. (…)

The Fed chair cautioned that continuing to bring down inflation could be harder if those supply-side tailwinds had run their course. “We know that ongoing progress toward our 2% goal is not assured,” he said.

Bank of Canada Governing Council deliberations

This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on October 25, 2023.

Substitute Canada with USA and Governing Council with FOMC and you would probably get the verbatim of the last FOMC meeting. What about data dependency?

Canada’s economic growth had slowed over the past year, averaging about 1%. Members agreed signs were clearer that monetary policy was working to dampen spending. With demand slowing and supply catching up, the economy was approaching balance.

Consumer spending was weaker than expected. Members noted that household credit growth had declined substantially as households adjusted to higher borrowing costs. Responses to the Canadian Survey of Consumer Expectations for the third quarter pointed to more weakness in spending on housing and durable goods, and members noted that weaker spending had begun to spread to services.

Exports were expected to stall as foreign demand softened. And businesses responding to the Business Outlook Survey for the third quarter reported softer investment intentions due to elevated funding costs and weaker sales prospects.

Governing Council members discussed the aggregate spending plans of federal and provincial governments, which are projected to increase at an annual pace of roughly 2.5% in 2024. If all those plans are realized, this would contribute materially to growth over the next year. By adding to demand at a faster pace than the growth of supply, government spending could get in the way of returning inflation to target.

On the labour market, Governing Council agreed that a wide range of indicators pointed to continued easing. But overall, the labour market still looked to be on the tight side:

• The pace of job creation had slowed to below that of labour force growth.
• Businesses reported widespread easing in the intensity of labour shortages.
• Job vacancies had declined gradually but were still above pre-pandemic levels.
• The unemployment rate had risen slightly but was low by historical standards.
• Wages continued to grow in a range of between 4% and 5%.

Members observed that the pace of recent wage growth partially reflected a catch-up in real wages. Some businesses reported plans to continue raising salaries to retain workers. Members discussed the likelihood that chronic labour shortages could persist in sectors such as health care and skilled trades, even as the overall tightness in the labour market continued to recede.

Governing Council reviewed recent data on inflation. While consumer price index inflation had declined from a peak of 8.1% since June 2022, recent inflation data had been volatile: 2.8% in June 2023, 4% in August and 3.8% in September. Nevertheless, members agreed that the effects of higher interest rates were increasingly reflected in the prices of many goods that people buy on credit, such as furniture and appliances.

Progress in reducing inflation is also evident in the prices of many semi-durable goods and services excluding shelter. Along with durable goods, these components grew at 2% or less in September. Inflation in services excluding shelter was below its historical contribution to inflation overall, but there had been some unusual volatility in certain services prices. Food price inflation eased as well but remained elevated at close to 6%. Members agreed that food price inflation should moderate further as lower input costs are passed along to final food prices.

Despite this progress, members revised up their near-term outlook for inflation. Members discussed several factors that had been standing in the way of the disinflationary process: 

• Higher global oil prices had pushed up gasoline prices. This was the main factor behind the rebound in inflation since June.
• Shelter price inflation was running around 6%. This was partly due to rising mortgage interest costs following increases in the policy interest rate. But high shelter price inflation was also evident in rent and other housing-related costs. Higher interest rates would normally exert downward pressure on house prices and other costs that are closely linked to house prices, such as maintenance, taxes and insurance. However, the ongoing structural shortage of housing supply in the economy was sustaining elevated house prices. And the rapid increase in Canada’s population had added to the existing imbalance between demand and supply for housing.
• Near-term inflation expectations and wage growth remained elevated.
• Corporate pricing behaviour was normalizing only gradually.

Together, these factors were contributing to persistence in inflation. Measured on a three-month annualized basis, core inflation had been stuck in a range of 3.5% to 4% for the past year, suggesting little downward momentum in underlying inflation.

As a result, Governing Council members revised up their forecast for inflation in the near term. But with a weaker growth outlook and more excess supply, they continued to expect inflation would return to the 2% target in 2025. (…)

At the October meetings, members agreed that the evidence demonstrated further progress toward rebalancing the economy. Monetary policy continued to gain traction—excess demand was being absorbed, and price pressures were easing for many goods and services.

However, members acknowledged that the translation of weaker demand into lower price growth had been slow. The lack of downward momentum in underlying inflation was a source of considerable concern. They reflected again on the two possible explanations for this persistence: that the transmission of monetary policy actions through to inflation required more time, or that monetary policy was not yet restrictive enough to relieve price pressures.

Members discussed whether the stickiness in core inflation measures reflected the fact that excess demand remained in the system or that inflation could be becoming entrenched.

While the output gap indicated the economy was entering a period of excess supply, considerable uncertainty surrounds this estimate. Latent excess demand could explain why:

• the labour market remained on the tight side
• businesses continued to raise prices more often than normal
• near-term inflation expectations remained elevated

Wage growth, if sustained at the current pace of 4% to 5%, would be inconsistent with restoring price stability. Members agreed they would be watching closely to see if higher labour costs began to be reflected in renewed inflationary pressures.

On corporate pricing behaviour, despite some progress toward normalization, many businesses were still reporting that they would raise prices more frequently than normal. Members expressed concern that businesses would:

• be slower to pass on price decreases as input costs decline
• increase their prices more rapidly in response to future shocks

Finally, members noted that while near-term inflation expectations remained elevated, they had been easing. Long-term inflation expectations remained well anchored. Thus, current household spending and business decisions more likely reflected recent experiences with inflation rather than an acceptance that high inflation was here to stay.

As excess demand continues to be absorbed, persistence in core inflation, elevated inflation expectations and wage growth, and atypical corporate pricing behaviour could be indications of high inflation becoming entrenched. In such a scenario, members acknowledged that further monetary policy tightening would likely be required to restore price stability.

Members also discussed the implications of elevated shelter price inflation for monetary policy. Given that increasing the supply of housing enough to substantially narrow the shortfall will take time, shelter price inflation could continue to contribute more than normal to overall inflation for some time.

Finally, Governing Council also discussed the risk that the economy could slow more than expected. The outlook for GDP had been revised down from the July MPR, in part due to tighter financial conditions globally. If global financial conditions tighten further or past increases in the policy interest rate restrain demand more than expected, the economy could be weaker and inflation lower than projected.

Overall, Governing Council members agreed that monetary policy was working to lower demand and ease price pressures for many goods and services. They also agreed that as the economy moved into excess supply, past monetary policy tightening should continue to translate into lower inflation. However, with a higher near-term forecast for inflation and persistent core inflation, as well as the risk that rising global tensions could lead to higher oil prices or renewed supply chain disruptions, they agreed that overall inflationary risks had increased.

Governing Council discussed whether monetary policy was sufficiently restrictive to return inflation to target.

Some members felt that it was more likely than not that the policy rate would need to increase further to return inflation to target. Others viewed the most likely scenario as one where a 5% policy rate would be sufficient to get inflation back to the 2% target, provided it was maintained at that level for long enough.

However, there was a strong consensus that, with clearer evidence of higher interest rates moderating spending, slowing growth and relieving price pressures, Governing Council should be patient and hold the policy rate at 5%. They agreed to revisit the need for a higher policy rate at future decisions with the benefit of more information.

Given the slower-than-expected progress toward price stability and increased inflationary risks, members agreed to state clearly that they were prepared to raise the policy rate further if needed.

Members noted that they needed to see downward momentum in core inflation to be confident that monetary policy was sufficiently restrictive to restore price stability. They agreed to continue to assess the evolution of underlying inflationary pressures by focusing on the following indicators:

• the balance between demand and supply in the economy
• inflation expectations
• wage growth
• corporate pricing behaviour

Members also reviewed the Bank’s quantitative tightening program and agreed to continue the current policy of normalizing the balance sheet by allowing maturing bonds to roll off.

BTW:

• ECB Vice President Luis de Guindos says any talk of lowering borrowing costs in the coming months is too early, citing continued upside risks to inflation (@economics)
• RBA Warns Inflation More Persistent Than Expected The Reserve Bank of Australia sharply revised up its forecasts for core inflation in the near term and warned that inflation pressures are cooling at a slower pace than anticipated.

About wages:

The Atlanta Fed’s Wage Growth Tracker

The Atlanta Fed’s Wage Growth Tracker was 5.2 percent in October, the same as for September. For people who changed jobs, the Tracker in October was 5.6 percent, also the same as in September. For those not changing jobs, the Tracker was 4.8 percent, down from 5.0 percent in September.

More junk-rated companies downgraded than upgraded in October -JPM

October saw downgrades to 18 junk bond issuers’ ratings accounting for $22.2bn in debt, while just 16 issuers were given upgrades by ratings agencies, the JPMorgan report said.

This is the first time downgrades have surpassed upgrades on U.S. junk-rated borrowers in four months, it added. (…)

Ratings agency Moody’s Investors Service has forecast defaults among low-rated U.S. companies will peak at 5.6% in January 2024, before falling to 4.6% by August 2024.

October’s ratings actions reflect a broader trend as there have been 293 downgrades totaling $393 billion over the last 12 months, compared to 264 upgrades equaling $479 billion, the JPMorgan report said.

The largest number of junk issuer downgrades this year have been in the healthcare and financial sectors.

While high-grade companies’ credit ratings have proven resilient during the Federal Reserve’s interest-rate hikes, businesses with significant leverage and floating-rate debt have struggled to keep pace with rising debt-servicing costs.

China Is Making Too Much Stuff—and Other Countries Are Worried Factories lack customers and are pushing exports harder, raising trade tensions

Makers of electric vehicles, solar panels and other products are cutting prices and trying harder to muscle into overseas markets as they face weakened demand at home, upsetting competitors who see threats to their bottom lines.  

The tensions are most acute in Europe, where European Union regulators in September unveiled an antisubsidy probe, reflecting concern that China is flooding the region with low-cost electric vehicles. (…)

Prices of goods shipped from China have fallen around 20% this year, according to ABN AMRO. While some of that drop reflects easing supply-chain bottlenecks, it is also a sign that Chinese sellers are discounting to preserve or expand market share during a period of weaker global demand, according to economists.

Local governments in China have been subsidizing trips abroad for companies to sell more overseas, including chartering flights for them. They are urging banks to lend to companies that want to expand in countries participating in China’s Belt and Road program.

Beijing has also called on financial institutions to direct credit to the manufacturing sector.

Chinese manufacturers are reaping an extra advantage from a declining currency, with the Chinese yuan at its weakest level against the U.S. dollar in more than 15 years, making their goods less expensive overseas.

In an August report, Goldman Sachs singled out several products that are oversupplied in China, including batteries, excavators and some chemicals.
(…)

JPMorgan estimates that falling producer prices in China will lower global core goods inflation outside the country by 0.7 percentage point over the second half of 2023. (…)

With more than 100 car brands, many unprofitable, and slowing sales growth at home, China’s auto industry has a powerful incentive to look for more-lucrative markets overseas, according to a recent report by Rhodium Group, a research company.

China’s share of global EV exports grew from 4% in 2020 to 21% in 2022, it said. 

While many of those exports are foreign brands that produce in China, especially Tesla, Chinese brands, with their lower sticker prices, are becoming a bigger part of the picture. Their share of total EU EV sales grew from 0.5% in 2019 to over 8% so far in 2023, according to Schmidt Automotive Research.
(…)

China needs to find more markets for its conventional gasoline-powered autos, as domestic consumers shift toward EVs, said Andrew Batson, a China-focused analyst at Gavekal. China’s exports of gas cars have risen sixfold over the past three years, according to Batson. (…)

“Their incentive to keep that capacity active by pushing vehicles into export markets at low prices is only getting stronger,” he said. (…)

In Europe, solar module prices fell by 50% within four weeks starting late last year even though market fundamentals were largely unchanged during that period, said Gunter Erfurt, chief executive officer of Meyer Burger Technology, a Switzerland-based manufacturer of solar cells and modules.

To Erfurt, it was a sign China was discounting at what he called “unprecedented speed” to grab market share. (…)

European solar producers sent a letter to EU authorities in September urging them to buy up their inventories to avert a new wave of bankruptcies related to intensifying Chinese competition and slowing demand in Europe. (…)

China’s steel export prices have plunged about 60% from a year earlier, while its steel exports volume went up 53% in October compared with 2022, according to Frederic Neumann, chief Asia economist at HSBC. (…)

Some related charts from Ed Yardeni for your appreciation of that case:

More Executives Vanish in China, Casting Chill Over Business Climate An executive at a video-streaming platform and another at a pharmaceutical company joined the growing list of figures who have vanished or been detained this year.

“THE HARD PART IS OVER”

(…) in a new note out yesterday, Goldman’s economists lead by Jan Hatzius declared that “The Hard Part Is Over.” As the team sees it, there is more disinflation in store in 2024, the Fed is done hiking rates, and the odds of an imminent recession are only 15%.

In the note, the team lays out three reasons why “the last mile of disinflation” will not be particularly hard.

The first is that there’s more improvement in store simply core goods. If you measure supply chain stress by supplier delivery times, there’s been quite a bit of normalization that will show up in prices on a lag.

Secondly, there’s still a ways to go for rent growth to fall in their view. This is a widely held perspective, given the softness we’re seeing in private sector measures of rents across the country.

And then finally, the labor market is showing clear signs of softening, or coming into balance, based on a number of metrics, including the rate of job openings, and the deceleration of nominal wages.

What’s interesting to note here too is that while a lot of the focus is obviously on the Fed and the US, Goldman sees the same story playing out virtually everywhere right now, as normalization occurs across a range of measures in a range of countries. (…) (Bloomberg’s Joe Weisenthal)

ING:

(…) With business attitudes becoming more cautious on the economic outlook we are seeing a reduction in price intention surveys. The chart below shows the relationship between the National Federation of Independent Businesses’ (NFIB) survey on the proportion of members expecting to raise prices in coming months and the annual rate of core inflation. It suggests that conditions are normalising, with core inflation set to return to historical trends.

NFIB price intentions surveys suggest corporate pricing power is normalising

Source: Macrobond, ING

While concerns about the outlook for demand are a key factor limiting the desire for companies to raise prices further, a more benign cost backdrop has also helped the situation. The annual rate of producer price inflation has slowed from 11.7% to 2.2%, having dropped to just 0.3% year-on-year in June while import prices are falling outright in year-on-year terms.

There are also signs of labour market slack emerging, with unemployment starting to tick higher and average hourly earnings growth slowing to 4.1% from near 6% just 18 months ago.

Perhaps more importantly, non-farm productivity surged in the third quarter with unit labour costs falling at a 0.8% annualised rate. With cost pressures seemingly abating from all angles, this should argue for core services ex-housing, a component that the Fed has been keeping a careful eye on, to soften quite substantially over coming months.

Fed’s “supercore” inflation should slow more rapidly

Source: Macrobond, ING

Another area of recent encouragement is energy prices. The fear had been that the conflict in the Middle East would have consequences for energy markets but, so far, we have seen energy prices soften. Gasoline prices in the US have fallen 50 cents/gallon between mid-September and early November, leaving prices at the lowest level since early March. Gasoline has a 3.6% weighting in the CPI basket.

Our commodity strategists remain wary, warning of the risk that an escalation in the conflict could lead to oil and gas supply disruptions from some key producers in the region, most notably Iran. For now though, energy prices will depress inflation rates and could mean at least one or two month-on-month outright declines in headline prices with lower energy prices limiting any upside potential from airline fares (0.5% weight in the CPI basket).

On top of this, we expect to see new and used vehicle prices (combined 6.9% weighting in the CPI basket) being vulnerable to further price falls in an environment where car loan borrowing costs are soaring. New vehicle prices have risen more than 20% since 2020 amid supply problems and strong demand while used vehicle prices rose more than 50%, according to both the CPI measure and Manheim car auction prices. Prices for used cars have fallen this year but still stand 35% above those of 2020. Experian data suggests the average new car loan payment is now around $730 per month while for second-hand cars it is now $530 per month.

With car insurance costs having risen rapidly as well (up 18.9% YoY with a 2.7% weighting in the CPI basket), the cost of buying and owning a vehicle is increasingly prohibitive for many households and we suspect we will see incentives increasingly capping the upside for vehicle prices. It is also important to remember that the surge in insurance costs is a lagged response to the higher cost of vehicles – and therefore insured value – and that too should slow rapidly (but not fall) over coming months.

Gasoline prices and oil prices surprise to the downside

Source: Macrobond, ING

The big disinflationary influence should come from housing over the next couple of quarters. The chart below shows the relationship between Zillow rents and the CPI housing components. This is important because owners’ equivalent rent is the single biggest individual component of the basket of goods and services used to construct the CPI index, accounting for 25.6% of the headline index and 32.2% of the core index.

Meanwhile, primary rents account for 7.6% of the headline index and 9.6% of the core. If the relationship holds and the CPI housing components slow to 3% YoY inflation, the one-third weighting that housing has in the headline rate and 41.8% weighting in the core will subtract around 1.3 percentage points of headline inflation and 1.7ppt off core annual inflation rates.

Rents point to major housing cost disinflation

Source: Macrobond, ING

There are some components on which there is less certainty, such as medical care, but we are increasingly confident that inflationary pressures will continue to subside and this means that the Federal Reserve will not need to raise interest rates any further. Next week’s October CPI report may not show huge progress with headline CPI expected to be flat on the month and core prices rising 0.3% month-on-month, but we expect headline inflation to slow to 3.3% in the December report with the annual rate of core inflation coming down to 3.7%.

Sharper declines are likely in the first half of 2024. Chair Jerome Powell in a speech to the Economic Club of New York acknowledged that “given the fast pace of the tightening, there may still be meaningful tightening in the pipeline”. This will only intensify the disinflationary pressures that are building in an economy that is showing signs of cooling. We forecast headline inflation to be in a 2-2.5% range from April onwards with core CPI testing 2% in the second quarter.

With growth concerns likely to increase over the same period, this should give the Fed the flexibility to respond with interest rate cuts. We wouldn’t necessarily describe it as stimulus, but rather to move monetary policy to a more neutral footing, with the Fed funds rate expected to end 2024 at 4% versus the consensus forecast and market pricing of 4.5%.

ING CPI forecasts (YoY%)

Source: Macrobond, ING

Wells Fargo:

That said, we believe it would be premature to claim that the economic storm has passed, because the battle against inflation has not yet been decisively won. The FOMC will want to be confident that inflation is returning to 2% on a sustained basis, so it likely will maintain a restrictive policy stance through the early months of 2024.

In our view, the FOMC probably is done hiking interest rates, but it likely will be some time before the Committee begins to ease policy. Therefore, the real fed funds rate will creep higher in the coming months as the FOMC maintains its target range for the federal funds rate at its current level of 5.25%-5.50%, while inflation continues to slowly fall toward 2%. This rise in the real fed funds rate will lead to a passive tightening of monetary policy that will exert increasing headwinds on the economy, thereby clouding the economic outlook.

There are already some cracks that are beginning to appear in the economy. The rise in mortgage rates has weighed on the housing market as the number of housing starts looks likely to be down roughly 10% in 2023 compared to last year. Household delinquencies on auto loans and credit cards are moving higher, and growth in business fixed investment spending has downshifted due to rising interest rates.

These strains likely will intensify in coming months as monetary restraint remains in place. Our base case is that real GDP will contract modestly starting in mid-2024. As economic resiliency gives way to weakness, we look for the FOMC to cut its target range for the federal funds rate by 225 bps by early 2025, which is more than both Fed policymakers and market participants currently project. (…)

In our view, the U.S. economic outlook over the next year or so is far from sunny. A full-blown economic storm may not develop, but storm clouds likely will dominate the horizon for the foreseeable future.

Yesterday:

Rent Growth Finally Reaccelerates After Nearly Two-Year Slowdown Annual rent growth ticked up in October for the first time since the pandemic peak in early 2022

The nearly two-year-long slowdown in rent growth may finally have come to an end in October. After slowing in every month since a record-high 16.1% in February 2022, the annual change in typical U.S. asking rent increased in October, according to the Zillow Observed Rent Index (ZORI). ZORI increased in October by 3.23% from a year ago, slightly faster than September’s 3.19% annual change, and now sits at $2,011.

It remains to be seen whether this is the beginning of a recovery in annual rent growth back toward longer-term averages, or more of a stabilization. Indeed, despite the uptick in annual appreciation, typical U.S. asking rent fell slightly in October from September, ticking down by less than one-tenth of a percent, in line with usual monthly changes in pre-pandemic Octobers. (…)

October’s uptick in annual rent growth may be an indication that the affordability benefits of renting – relative to buying – a home are stoking demand for rental housing. In much of the country, monthly rent payments are cheaper than the mortgage payment associated with the purchase of a home thanks, in large part, to the substantial increase in mortgage rates over the past year.

For several years prior to the pandemic, the opposite was true. The affordability benefits that renting now provides has made it an attractive – if not necessary – option for many households seeking their next home. With a return to pre-pandemic home purchase affordability remaining unlikely, this rental market advantage should persist in the months ahead, buoying demand for rentals as a result.

From the Oct. 23 Daily Edge:

The chart below plots the Zillow Rent Index with CPI-Rent, both indexed at Jan. 2017=100 (Zillow data starts in 2015).

The series diverge starting in 2021 when Zillow rent (“market rent” per Powell and Yardeni) takes off reflecting the pandemic effect on new leases, while the BLS more gradual method takes time to reflect how all leases, including renewals which typically account for 90%+ of all leases, adjust to the “market”.

True, Zillow data show that new leases have flatlined since spring …

…but

• they are still rising MoM and are up 2.2% annualized this year (this is the seasonally adjusted data) and
• importantly, Zillow’s “market rent” remains 9.2% above CPI-Rent, suggesting that the BLS data needs to rise further, for a while, before it truly reflects the “reality”.

Anecdotally on single family rentals:

• On their recent earnings call, both Invitation Homes and American Homes For Rent talked about the resiliency they are seeing on both the new and renewal sides of the business. AMH is still sending out renewal rent increases in the 6% range while occupancy is in the low 96s in October.

(CalculatedRisk)

• This is from Tricon Residential which operates in the U.S. Sunbelt where supply is increasing fast (but so is demand):

CONSUMER WATCH

(…) This article presents findings from McKinsey’s ConsumerWise team and our latest Consumer Pulse Survey, which outline when consumers will shop for the holidays, how much they will spend, and what matters most to them during this time. (…)

The survey was in the field from October 17 to October 19, 2023, and collected responses from more than 1,000 consumers in the United States (sampled and weighted to match the general US population, ages 18 to 74). These insights build on the work we have undertaken since March 2020, when we began to regularly conduct consumer surveys and combine our research and analysis with third-party data on US spending to glean insights into how consumer sentiment has shifted since the beginning of the COVID-19 pandemic. (…)

While most consumers started their holiday shopping in October or earlier, 40 percent of consumers this year say they intend to start holiday shopping in November, compared with 35 percent in 2022. Additionally, of the consumers who started their holiday shopping in mid-October, only about a quarter of them completed more than half of their holiday shopping, leaving plenty of room for retailers to reach these shoppers through the end of the year. November and December, therefore, are still critical holiday shopping months.

Consumers say they are shopping earlier and that their holiday shopping will last longer this year, in both cases citing price as their primary motivation for doing so. Shoppers who started browsing for products earlier did so in anticipation of price increases; other shoppers, expecting sales to come closer to the holidays, may have delayed their purchases. In addition to concerns about availability and lead times, consumers say they want to make their purchases over a couple of months rather than all at once.

Seventy-nine percent of consumers say they are changing their shopping behaviors to trade down (swap their purchases for cheaper alternatives or forgo purchases altogether)—an increase of five percentage points compared with July 2022. This can be observed across generations and income levels, although younger shoppers are more likely to trade down (despite ranking better prices and promotions as slightly less important than other factors). In general, this means that value and promotions will be increasingly important to retailers.

(…) most consumers rank better prices and promotions as their top consideration for holiday shopping this year (66 percent), higher than how they ranked this consideration last year (59 percent), and significantly above their next highest considerations, which are product availability and convenience. (…)

(…) the percentage of consumers who intend to splurge on either themselves or others this holiday season declined four percentage points year over year, from 39 percent in 2022 to 35 percent in 2023.

This decline is mostly fueled by Gen Z belt-tightening: in this cohort, there was a 12-percentage-point decrease in consumers who intend to splurge—although they intend to splurge at a higher rate than other generations. Despite Gen Z’s practical approach to holiday shopping this year, they still indicate that they are more excited to shop this year compared with last year, and that they expect to spend more on gifts for others and themselves than they did last year. Meanwhile, Gen Xers and boomers actually express a greater intent to splurge. (…)

• Record U.S. oil production helps tame prices

In the first week of November, U.S. crude oil production hit 13.2 million barrels per day, a new record. U.S. production is a far bigger factor in global markets now, as is Chinese demand, and both are currently developing in a way that would favor lower prices. (Axios)

Data: FactSet, Energy Information Administration; Chart: Axios Visuals

China’s Consumer Deflation Returns as Recovery Remains Fragile Consumer prices fell 0.2% year-on-year in October, data shows

Consumer prices fell 0.2% last month after hovering near zero in the previous two months, according to data from the National Bureau of Statistics Thursday, lower than the median forecast in a Bloomberg survey of economists. Producer prices fell for a 13th straight month, dropping 2.6%. (…)

Recent consumer price declines have been driven by large drops in the price of pork, which is the country’s most-consumed meat and so has a heavy weighting in China’s consumer price index. Pork producers increased supply, betting on surging demand after the end of the country’s coronavirus restrictions at the end of last year. But the rebound fell short of expectations. (…)

Food prices fell 4% from a year ago. Core CPI — which strips out volatile food and energy costs — rose 0.6%, weaker than the 0.8% increase a month earlier. (…)

China’s headline and core inflation rates

Source: CEIC, ING

FYI:

• Hollywood actors and studios reached a tentative deal to end a 118-day strike. The contract—worth over $1 billion—includes unprecedented restrictions on the use of AI and the first-ever performance-based bonuses, the actors’ union said.
• AI Will Cut Cost of Animated Films by 90%, Jeff Katzenberg Says