Year: 2023

Annual Inflation Cooled Slightly in January as Pace of Moderation Levels Off Americans paid more for shelter, gasoline and food last month

Still-elevated inflation cooled slightly at the start of 2023 to 6.4% in January from a year earlier, with energy, housing, food and other items keeping some pressure on prices.

The increase in the consumer-price index, a closely watched measure of inflation, edged down from 6.5% in December, the Labor Department said Tuesday. That marked the seventh straight month of easing inflation since peaking at 9.1% in June, the highest reading since 1981.

But the cooling trend is moderating. On a monthly basis, CPI rose 0.5% in January from December, compared with a previous 0.1% increase. (…)

Core CPI, which excludes volatile energy and food prices, rose 5.6% from a year earlier, down from 5.7% in December. (…)

Grocery prices rose 11.3% in January from a year earlier. (…) Restaurant prices, which some economists watch as a signal of labor-cost pressures, increased 8.2% in January, from a year earlier, around the same as the average gain in the second half of 2022. (…)

The latest data “illustrates that inflation is still declining only gradually,” said Andrew Hunter, senior U.S. economist at Capital Economics. “We still expect that downward trend to accelerate soon, as easing goods shortages feed through and housing inflation starts to turn down.”

Composition of US inflation (YoY%)

Source: Macrobond, ING

Gimme Shelter (The Rolling Stones)

           Ooh, a storm is threatening
          My very life today
          If I don’t get some shelter
         Ooh yeah I’m gonna fade away

The media narrative is all about shelter. To wit, from Bloomberg at 9:43 am yesterday:

“It could’ve been worse,” said Stephen Stanley, chief US economist at Santander US Capital Markets LLC, noting declines in used-car prices and airfares. However, “as long as shelter costs are going up as rapidly as they have been, it’s going to be tough to get inflation down anywhere close to where the Fed would like to see it.” (…)

The details of the report showed shelter was “by far” the largest contributor to the monthly advance, accounting for almost half of the rise. Used car prices — a key driver of disinflation in recent months — fell for a seventh month. Energy prices rose for the first time in three months.

Shelter costs, which are the biggest services component and make up about a third of the overall CPI index, rose 0.7% last month. Owners’ equivalent rent and rent of primary residence increased by the same amount, while hotel stays also climbed.

The facts:

• CPI-Used car prices did decline 1.9% MoM, against Manheim’s +2.5% jump (SA). On a non-seasonally adjusted basis, the BLS data was -1.6% vs +1.5% for Manheim which says January data indicate “that the month saw sellers with more pricing power than what is typically seen for this time of year.” Which one is wrong?

• Shelter inflation is unrelenting: +0.6%, +0.8%, +0.7% in the last 3 months respectively for +8.7% a.r. during that period, up from +8.5% and +7.1% in the 2 previous 3-month periods.

• The Apartment List rent index has been declining MoM in each of the past 5 months. A Cleveland Fed analysis found that “new-tenant rents lead official CPI rents by about 4 quarters”.

• The “obvious coming decline” in CPI-Shelter has become the official FOMC narrative, widely echoed by just about everybody. I would humbly submit a few observations:
• Apartment List’s NRI tends to decline in the last 4 months of a year and rise in subsequent months. Coincidences or seasonality?
• The MoM decline in the NRI peaked in November and was only -0.3% in January, a slowing pattern also seen in 2018, 2019, 2020 and 2022. An increase in February or March would be rather inconvenient.
• Since 1953 (828 months), CPI-Shelter has only declined 22 times (2.7% of the times) MoM. Since 1983 (480 months), it has only declined 9 times (1.9%) MoM. Rents are very resilient.
• Since 1953, CPI-Shelter has never declined YoY, except in 2010 post GFC (April 2010 was the worst month at -0.6%!).
• In fact, CPI-Shelter is intimately correlated with rental vacancy rates, a very basic supply/demand reality. This next chart, which plots the 6-month change in CPI-Shelter with the vacancy rate (inverted), suggests that much, if not all, of the current CPI-Shelter inflation is actually explained by the lowest vacancy rate since 1984.

• While it is true that apartment construction rose rapidly in the last 2 years, far outpacing household growth like in the mid-1980s when rental vacancy rates jumped…

• … the very limited increase in single-family housing supply after the GFC has significantly restrained total housing availability…

• …at a time when it is much, much cheaper to rent than to own. Rental demand should thus remain strong for some time:

Fannie Mae estimates that the U.S. is short nearly 4 million housing units while building 1.3M units annually (down from 1.8M one year ago).

The recent sharp jump in mortgage rates totally killed single-family starts (-38% or 500k units/yr in the last 2 years) AND reduced the number of existing homes for sale by 43% or 600k units compared to pre-pandemic levels (per realtor.com) since most existing owners can’t afford to lose their existing low rate mortgage.

In effect, the Fed’s own policies are simultaneously boosting rental demand and exacerbating the housing shortage, a no-fail recipe for higher rents which, ironically, the same Fed wants to see slowing before easing.

• Fed Officials Float Even Higher Rates After Brisk Inflation Data

(…) Richmond Fed President Thomas Barkin, speaking in a Bloomberg TV interview, said that “if inflation persists at levels well above our target, maybe we’ll have to do more.”

Speaking at Prairie View A&M University in Texas, Dallas Fed President Lorie Logan said: “We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions.” (…)

Philadelphia Fed President Patrick Harker, speaking later in the day, said he believes policymakers will need to raise interest rates above 5% and possibly higher to counter inflation that is easing only slowly. (…)

New York Fed President John Williams said Tuesday afternoon that having the federal funds rate in a range of 5% to 5.5% by the end of the year — as listed in Fed officials’ estimates in December — is the appropriate framing.

“I do think with the strength in the labor market, clearly there’s risks that inflation stays higher for longer than expected or that we might need to raise rates higher than that,” he told reporters, following a speech at the New York Bankers Association. (…)

While all Fed officials participate in meetings of the Fed’s policy committee, Logan and Harker are voting members this year and Barkin is not. Williams, as New York Fed president, is a permanent voting member, along with the Fed’s seven governors. (…)

The other bad news for the Fed in the CPI report is that CPI-Services ex-shelter jumped 0.8% MoM (+7.2% YoY) in January after 3 very subdued months. While wage increases have slowed below 4.5% a.r. in recent months (+5.1% YoY in January), energy costs jumped 2.0% MoM (+8.4% YoY).

Today we get January Retail Sales. Americans are still fighting high inflation on “essentials”, up 0.8% MoM (8.4% YoY):

Oil Demand to Hit New Record This Year as China Reopens, IEA Says The energy watchdog raised its forecasts for oil demand this year to a record level, as China fueled a surge in air travel and Russian production remained surprisingly resilient to Western sanctions.

Strong dollar fuels wave of emerging market currency devaluations

SURVEY OF CONSUMER EXPECTATIONS

• Median inflation expectations remained unchanged at 5.0 percent at the one-year horizon, decreased by 0.3 percentage point to 2.7 percent at the three-year horizon, and rose 0.1 point to 2.5 percent at the five-year horizon, according to the January Survey of Consumer Expectations.
• Median expected growth in household income dropped by 1.3 percentage point to 3.3 percent, the largest one-month drop in the series’ history. The series, however, remains well above its pre-pandemic levels.

At a Glance: Findings from the December SCE Household Spending Survey

• The median reported year-over-year increase in monthly household spending declined to 7.7 percent in December, down from its series high of 9.0 percent in August 2022. The decrease was broad-based across age, education, and income groups.
• The share of households that reported making a large purchase over the past four months decreased from 61.7 percent in August to 56.4 percent in December. While the share of those making large purchases on home appliances, electronics, and furniture rose in December, the share spending on vehicles, home repairs, homes, and vacations fell.
• The median expected monthly overall spending growth over the next twelve months declined to 4.0 percent from 4.4 percent in August, its lowest reading since April 2021. The decrease was most pronounced for those with household incomes over $100,000.
• The median expected year-ahead change in everyday essential spending (that is, daily living expenses) dropped from 5.6 percent in August to 5.2 percent in December, its lowest reading since April 2021, but above its pre-COVID levels. The median expected change in non-essential spending also declined from 1.8 percent in August to 1.7 percent in December.

• The average reported likelihood of making a large purchase over the next four months increased for home appliances and electronics, but decreased for furniture, home repairs, vacations, vehicles, and homes.

SLOOS WOOS!

The Senior Loan Officer Opinion Survey (SLOOS) indicated that bank lending standards tightened further in 2022Q4. We have previously found that the SLOOS is an early indicator of investment growth, so the recent tightening to levels unseen outside of recessions could signal weaker growth later this year.

(Goldman Sachs)

Oil Declines on US Requirement to Sell More Crude From the SPR The US is looking to sell 26 million barrels from the Strategic Petroleum Reserve in accordance with a budget mandate enacted in 2015.

Retail investor risk appetite improves with AI stocks leading Some of Wall Street’s most speculative names, including meme stocks and shares of artificial intelligence companies, are leading the equity market rally this year, helped by renewed interest from retail investors.

Retail investors had a poor year in 2022, with the average portfolio ending the year down around 35% from all-time highs, Vanda Research previously estimated.

However, retail investors have shown renewed interest in the early part of 2023. Aggregate inflows into the U.S. stock market, though concentrated in a few names, has reached levels last seen in 2020-21, according to Vanda Research. (…)

“Investor enthusiasm is also attracting short-sellers that are skeptical about some of the resulting valuations,” said Evan Niu, an analyst at Ortex, which tracks real-time short interest data. (…)

Yesterday, David Rosenberg pointed out that YtD:

The heaviest shorted stocks are up +21%, tripling the overall market.
• Short sellers have covered $51 billion of their bearish bets, equivalent to 6% of the total volume of short activity.
• Cyclicals have beaten defensives by +1,700 basis points.
• Companies with no profits are up +27%.
• Bitcoin and ARK at one point were both up more than +40%.
• The bonds for the worst balance sheet companies in the high yield index returned +9% (annualize that and it’s more than a double!).

Regulators Turn Up Heat on Crypto’s Biggest Players Officials have cut off access to products and services that are vital to the digital-currency business, while banking regulators are pushing lenders to cut ties with crypto customers, limiting their ability to plug into the financial system.

On Monday, New York regulators shut down new issuance of the world’s third-largest stablecoin, BUSD, prompting investors to flee the coin and raising worries about the future of crypto exchange giant Binance, which gives the coin the “B” in its name.

Binance’s partner in issuing the coin, Paxos Trust Co., is facing a potential Securities and Exchange Commission lawsuit. A few days earlier, the SEC fined the parent of another big crypto exchange, Kraken, and forced it to stop offering a popular type of crypto-yield product to U.S. investors. Banking regulators are quietly pushing banks to cut ties with crypto customers, limiting their ability to plug into the real-world financial system. (…)

Over a 24-hour period from Sunday to Monday, there were $2.7 billion worth of outflows from Binance, according to blockchain data provider Nansen. On Monday morning, some $144 million worth of BUSD were redeemed for dollars, according to Nansen. Paxos said Monday it “categorically disagrees” with the SEC’s assertion that BUSD must comply with federal securities laws.

Binance’s in-house token, BNB, tumbled 8% on Monday, according to CoinMarketCap.com. The coin is often seen as a gauge of investors’ perceptions of Binance.

The scope of such actions suggests that the SEC and other regulators want to rein in pillars of the crypto market such as stablecoins—digital coins that maintain a price of $1—and staking, a common way for investors to earn interest on their crypto. (…)

Last week, Binance said it would suspend U.S. dollar bank transfers. The move came after the exchange said its banking partner, Signature Bank SBNY 0.57%increase; green up pointing triangle, would no longer support crypto transactions below $100,000. (…)

The [Kraken] case suggests that the SEC might force other companies to stop offering access to staking, a practice in which investors lock up their digital assets such as ether or solana in return for an interest rate-like yield. The loaned assets allow the borrowers to facilitate transactions on the assets’ underlying blockchain network.

“This really should put everyone on notice in this marketplace,” SEC Chair Gary Gensler said on CNBC last week. (…)