Year: 2023

Producer Prices Rose 6% in January

That increase in the producer-price index, which generally reflects supply conditions in the economy, was slower than December’s 6.5% gain, the Labor Department said Thursday. And it was down markedly from the 11.7% rise in March 2022, the recent peak.

The PPI increased 0.7% in January from the prior month, compared with a revised 0.2% drop in December, and significantly faster than the 0.2% average monthly rise in the year before the pandemic. (…)

The January report showed goods prices rose from a month earlier, largely reflecting energy products. Good prices had decreased in December. Services prices rose at the same monthly rate as in December.

The so-called core price index—which excludes the often-volatile categories of food, energy and supplier margins—climbed 0.6% in January from a month earlier, after gaining a revised 0.2% in December. On a 12-month basis, core PPI rose 4.5%, a cooling from a revised 4.7% gain in December.

Other data:

• PPI-Core Goods rose 0.6% (7.3% a.r.) after +0.1% in December and +1.6% a.r. in the second half of 2022.
• Core processed goods declined 0.2%, the 6th consecutive decline.
• PPI-Services rose 0.4%, roughly in line with the previous months.

BTW:

• Based on the recent CPI and PPI data, Goldman Sachs now estimates that the core PCE price index rose 0.55% in January (+4.50% YoY). That would be another shocker. Core PCE inflation was +0.3% in December and +0.2% on average in Oct-Nov.. GS adds a 3rd 25bp rate hike in June for a peak funds rate of 5.25-5.5%.

• “We now have oil crossing $100/bbl in late 4Q23.” (GS)
• James Bullard said he would have favored a half-point rate increase at the last meeting and that he would support moving as quickly as possible to raise rates to just below 5.5%. “I don’t see much merit in delaying our approach to that level.”
• Loretta Mester also saw a compelling
  case for a 50-bp hike then. The Cleveland chief predicts the Fed will bump
  its benchmark above 5% “and hold it there for some
  time.”

Note that both Bullard and Mester are known hawks that are non-voters this year.

Jobless Claims Remain Nearly Steady Worker filings for unemployment benefits remained historically low last week, a sign of continued tightness in the labor market.

Initial jobless claims, a proxy for layoffs, decreased by 1,000 to a seasonally adjusted 194,000 last week, the Labor Department said Thursday. Weekly claims have remained below the 2019 prepandemic average of about 220,000 since the start of the year.

The four week moving average of weekly claims, which smooths out volatility, rose slightly to 189,500. (…)

Philadelphia Fed manufacturing gauge plunges unexpectedly

The Philadelphia Federal Reserve’s monthly manufacturing index plunged to -24.3 this month from -8.9 in January, belying expectations among economists for a third straight monthly improvement. The median estimate in a Reuters survey of economists was for -7.4, and the reading was more than twice as weak as the lowest estimate in the poll.

Meanwhile, the survey’s two measures of prices, those paid by producers and those they charge their customers – both closely watched inflation indicators – showed margins were slimming. The prices paid index edged up to 26.5 from 24.5 to mark its first increase since April 2022, while the prices received index fell by 50% to 14.9, the lowest reading since February 2021.

In a special question, firms said they expect to impose 4.5% price increases for their own products in the year ahead, down from 4.8% when asked the same question in November and also lower than the 7.0% price increases they’d realized over the last year.

For U.S. consumers overall, producers in the survey estimated prices would increase 4.0% over the next 12 months, down from 5.0% in the November survey, and their expectations for longer-run consumer inflation over a 10-year horizon dropped to 3.0% from 4.0%.

Wage increases were also expected to be lower at 4.8% in the year ahead, down from 5.0% in the November survey.

• The [NY] Empire manufacturing index increased by 27.1pt to -5.8 in February, above consensus expectations for a smaller increase. The underlying composition was mixed, as the new orders (+23.3pt to -7.8) and shipments (+22.5pt to +0.1) components increased while the employment component declined into contractionary territory (-9.4pt to -6.6). Both the prices paid (+12.0pt to +45.0) and prices received (+9.6t to +28.4) components increased. The six months-ahead business conditions index increased 6.7pt to +14.7.

NY Business Leaders Survey

Activity continued to decline in the region’s service sector, though at a slower pace than last month, according to firms responding to the Federal Reserve Bank of New York’s February 2023 Business Leaders Survey.

The survey’s headline business activity index climbed nine points to -12.8. The business climate index came in at -34.9, suggesting the business climate remains much worse than normal. There was a small rise in employment, and wage growth steepened. The pace of input price increases and selling price increases picked up somewhat. Looking ahead, firms expect conditions to improve modestly over the next six months.

Business activity declined in the region’s service sector for a fifth consecutive month, according to the February survey. The headline business activity index rose nine points but remained negative at -12.8. Twenty-seven percent of respondents reported that conditions improved over the month and forty percent said that conditions worsened. The business climate index moved up seven points to -34.9, suggesting that the business climate remains much worse than normal.

The employment index inched up to 5.8, suggesting a small increase in employment levels. The wages index advanced ten points to 56.7, indicating that wage growth remained widespread. The prices paid index edged up three points to 69.0, and the prices received index rose four points to 33.7, pointing to slightly more rapid price increases than last month. Capital spending grew modestly.

Conditions are expected to improve somewhat over the next six months. The index for future business activity climbed to 8.2, its first positive reading since September 2022, while the index for the future business climate moved up twenty-three points to -4.1. Employment is expected to grow in the months ahead, and wage and price increases are expected to remain widespread.

• Wages Up 5-6 Percent in the Past Year; Gains Expected to Moderate over the Next Year

(…) Looking at the past twelve months, the median reported change for existing workers was 5 percent among service firms and 6 percent among manufacturers; the average changes were slightly higher. These are considerably steeper increases than seen both prior to the pandemic and in the midst of the pandemic, in April 2021, when we last asked this question. Looking ahead to the next twelve months, the average expected change was projected to slow to just over 3 percent, for both service and manufacturing firms. These increases are roughly in line with what we saw in earlier surveys.

Businesses were also asked how wages and salaries for new hires were seen changing from 2022 to 2023. Here, both service and manufacturing firms estimated an average (and median) increase of about 5 percent. For service firms this is a considerably steeper rise than when we asked these questions during the pandemic (April 2021) and moderately steeper than pre-pandemic (February 2018). In those earlier surveys, this question was asked with respect to the past twelve months, as opposed to the current versus prior calendar year. (…)

Finally, businesses were asked how many job openings they currently have and (in order to scale these numbers to the size of the business) how many people they currently employ.

In both the service-sector and manufacturing surveys, the median respondent reported that job openings represented just over 4 percent of their firm’s total employment. This is down somewhat from about 5 percent in last February’s survey but up considerably from earlier surveys—notably, we have been asking this question at the beginning of the year for more than a decade; prior to 2022, this proportion had never exceeded 3 percent for manufacturers or 2.5 percent for service firms.

• Housing starts decreased by 4.5% to 1,309k in January, below consensus expectations for a 1.9% decrease, from a downwardly revised December level (-2.0pp to -3.4%). The composition was weak, as both single family starts (-4.3%) and the more volatile multi-family starts (-4.9%) decreased. Building permits increased by 0.1%, below consensus expectations for a 1.0% increase. Single family permits continued to decline (-1.8%), while multi-family starts increased (+2.5%).

Americans Have Nearly $1 Trillion in Credit Card Debt The overall balance increased in the final quarter of 2022, breaking a record set in 2019.

The $61 billion increase from the prior quarter was the biggest seen in data going back to 1999, and propelled Americans’ total credit card debt past the previous high of $927 billion, which was set in the fourth quarter of 2019, according to the New York Fed’s Household Debt and Credit Report.

Credit card borrowers aren’t just swiping plastic more than ever — they’re missing payments too, with delinquency rates surpassing pre-pandemic norms. A little over 4% of credit card debt has transitioned to serious delinquency, which means failing to pay for 90 days or more. (…)

Altogether, credit card balances ballooned by $130 billion from December 2021 to December 2022 — the largest annual growth on record. As the Fed continues to hike interest rates, credit card borrowing costs are expected to hit a 40-year high this year.

“It’s triple trouble for credit card borrowers. Balances are up, rates are up and more people are carrying credit card debt,” said Ted Rossman, a senior Bankrate analyst, adding that 46% of credit card holders are carrying debt, up from 39% a year ago.

BofA Says Says Hard Landing to Hit Stocks in Second Half A resilient economy thus far means interest rates will stay higher for longer, the strategists wrote.

Short covering extreme

Nobody has missed the short covering frenzy, but GS puts some numbers to it: “…the short covering in US Tech stocks from Jan 31st to Feb 15th is the second largest in magnitude over any 12-day period in the past decade and ranks in the 99.5th percentile.” (The Market Ear)

GS

 Tesla is recalling 362,758 vehicles equipped with its controversial “Full Self-Driving beta” (FSD) software, which federal safety investigators found can occasionally disregard traffic laws. (Axios)

Let’s hope they don’t self-drive to the service centers all at the same time.

US retail sales surge on stark weather contrast US retail sales jumped 3% month-on-month as warm weather encouraged people to go out and spend after harsh conditions depressed activity in December. Household incomes remain under pressure and with weather patterns normalising a correction is likely in February

This is the fourth biggest MoM rise in retail sales over the past 20 years. Importantly, the “control” group which excludes volatile categories and better correlates with broader consumer spending was also much stronger than anticipated, rising 1.7% MoM versus the 1% consensus.

We knew autos would be strong (+5.9% MoM) given unit volume figures jumped 18%, but there were huge gains elsewhere with clothing up 2.5% MoM, general merchandise up 3.2% (within which department stores saw a 17.5% MoM jump) and eating & drinking out, which surged 7.2%. The one real surprise was the flat gasoline station sales despite prices having risen by more than 4%. (…)

Remember that December experienced very cold temperatures with heavy snowfall disrupting travel in many parts of the nation. This also depressed spending with November and December both posting 1.1% MoM declines. Therefore we should expect a rebound in January anyway, but then very warm temperatures providing an additional stimulus that tempted more people to leave their homes and spend.

However, we have to be a little cautious that with weather patterns returning to more seasonal norms in February we could get a significant correction next month – especially with household finances remaining under pressure from high inflation and slowing wage growth. Consequently, today’s numbers back the case for a March and probably a May hike, but it shouldn’t push the case for Fed tightening beyond that.

The WSJ Justin Lahart details possible reasons for the strength:

There are several likely factors behind the strength in sales. The first is the job market: With the Labor Department reporting that the economy added a seasonally adjusted 517,000 jobs last month, and that the unemployment rate fell to its lowest level in more than 50 years, more people are drawing paychecks. Despite all of the recent layoff headlines, they aren’t worrying much about getting fired, either, with the Federal Reserve Bank of New York’s monthly survey of consumers still showing that people continue to put low probabilities on the possibility of losing their job.

Another factor: Social Security checks were 8.7% bigger last month, as last year’s jump in inflation led the Social Security Administration to put through its largest cost-of-living adjustment in four decades. That means that roughly 70 million people suddenly had more money coming in the door.

Then there is the pandemic. Unlike last year,  the U.S. wasn’t beset by a big Covid-19 wave in January. To the contrary, there were fewer recorded cases last month than in December. As a result, people continued to re-engage in activities such as in-person shopping, heading into the office, and travel. Month-to-month retail-sales growth isn’t benchmarked to last year’s pandemic January, but the drop in cases and contrast in mood certainly could have had a psychological effect on spending. The category that saw the biggest gains in Wednesday’s report was food services and drinking places, where sales rose by 7.2% from December. That is notable because it is the only services category within the report, and Americans spend more on services than they do on goods. If restaurants were busier, maybe nail salons and hotels and dentists were, too.

But:

• Some economists believe the January jobs numbers are a statistical mirage that will dispel itself when February and March data are released.
• Bigger social security checks are merely adjusting for past inflation.
• Lahart omits the weather factor which was obvious in January:
• Department store sales jumped 17.5% in January after -6.5% in December. Last 3 months: -3.3% or -12.5% a.r. (+0.7% YoY).
• Restaurants and bars rose 7.2% MoM in January but that came after 0% in December and declining real sales in 6 of the past 8 months. Nonetheless, this particular revenge spending is impressive being up 17.1% YoY in the past 3 months while prices rose 8.3%. Real sales at grocery stores are down 4.2% in the last 3 months.

Nearly a third of the monthly increase in January retail sales came from restaurants and bars. Control sales, which feed into GDP, rose 2.8% MoM (+8.1% YoY) in January. Excluding restaurants and bars, control sales were up 1.7% (+4.4%).

Americans continue to slow their spending on goods. Labor income was up 8.5% YoY in January but total retail sales were up 6.4% and 4.4% excluding restaurants and bars.

Combining data from the latest retail sales and CPI reports, Goldman Sachs estimates that real core retail sales increased 1.2% MoM in January and only +0.4% on a 3-month annualized basis.

• Latest Atlanta Fed GDPNow Q1: 2.42% (was 2.16%)

• Business Inflation Expectations Remain Relatively Unchanged at 2.9 Percent

• Capital One Financial yesterday said that net charge-offs in its credit card division jumped to 3.81% of loans in January from 2.03% in the prior year period, approaching the pre-pandemic baseline of 4.31% in January 2020. 
• Discover Financial Services predicted that its net charge-offs will range from 3.5% to 3.9% across 2023 vs 1.82% and 1.84%, respectively, in 2022 and 2021. 

China’s new home prices rise in Jan for first time in a year

New home prices in January were up 0.1% month-on-month, versus a 0.2% slide in December, according to Reuters calculations based on National Bureau of Statistics (NBS) data released on Thursday.

More major cities among the 70 surveyed by NBS reported increases in new home prices last month, with prices rising in 36 cities, up from 15 in December. (…)

Prices were down 1.5% year-on-year in January, with the rate of decline unchanged from December. (…)

TECHNICALS WATCH

From CMG Wealth:

S&P 500 Large Cap Index – 13/34–Week EMA Trend

• S&P 500 Index Daily MACD Indicator: Sell Signal – Short-term Bearish for U.S. Large Cap Equities

YIELDS

Data: FactSet; Chart: Axios Visuals

(…) Treasury bills are rarely cast as a route to riches, but right now their payouts are nearly as high as a similar marker in the equity space: profits generated by S&P 500 companies. While the comparison isn’t quite apples-to-apples, it’s a model sometimes employed to get a sense of relative value across asset classes.

Specifically, six-month Treasury bills currently yield a hair below 5%, the highest since 2007. Meanwhile, the S&P 500 earnings yield clocks in at about 5.08%. The gap between them is the slimmest advantage that stocks have held since 2001. (…)

Given what short-term debt is yielding right now, the risk-reward of owning them versus the earnings yield of stocks looks better than seen at any time since the great financial crisis, according to JPMorgan Chase & Co.’s Marko Kolanovic. In other words, the spread between the two-year and the equities earnings yield is at the narrowest since 2007. (…)

• Stocks have been remarkably resilient in the face of rising bond yields and higher Fed rate hike expectations.

Source: @themarketear

• CBO Increases Deficit Forecast, Projects Debt Limit Deadline “Between July and September”

CBO is projecting much larger deficits. CBO is projecting a deficit of $1.41 trillion (5.4% of GDP) for FY23, and $1.58trn (5.8%) and $1.75trn (6.1%) for FY24 and FY25 (…), substantially larger than CBO’s prior projection from May 2022, which showed an average deficit of just under 4% of GDP for 2023-2025. (…)

Higher interest rates and lower asset prices (and lower capital gains taxes) were the main factors behind the upward revision to the current year deficit forecast, along with reduced near-term growth assumptions. (…)

CBO projects that the Treasury will exhaust its resources under the debt limit between July and September. (…)

China Hits Back at US with Sanctions on Lockheed, Raytheon

Lockheed Martin Corporation and a subsidiary of Raytheon Technologies Corp were added to a list of “unreliable entities” due to their participation in arms sales to Taiwan, China’s Ministry of Commerce said Thursday. The companies were fined twice the contract value of their arms sales to Taiwan since September 2020 when the list first came into effect and would be required to pay within 15 days, according to the statement.

China considers the democratically self-ruled Taiwan as part of its territory and has long complained about the US supplying weapons to the island. (…)

As with previous sanctions announced against the firms and other US defense companies, these measures are likely to be largely symbolic given both have little direct exposure to China. (…)

This action “shows that China’s retaliation remains very targeted and refrained, responding to US’ arms sales towards Taiwan, over which China has lodged its protest many times in the past,” said Feng Chucheng, a Beijing-based partner at independent consultancy Plenum. “China is not weaponizing its sanctions, which is consistent with China’s longstanding policies.” (…)