US Consumer Prices Pick Up in Bumpy Path Down for Inflation Core and overall CPI accelerated in November from prior month

(…) Shelter prices, which make up about a third of the overall CPI index, rose 0.4%, offsetting a decline in gasoline prices. Economists see a sustained moderation in the shelter category as key to bringing core inflation down to the Fed’s target.

Excluding housing and energy, services prices climbed 0.4% from October, picking up from the prior month, according to Bloomberg calculations. (…)

Unlike services, a sustained decline in the price of goods has been providing some relief to consumers in recent months. So-called core goods prices, which exclude food and energy commodities, fell for a sixth month, matching the longest streak since 2003.

“This report paired some serious deflation in core goods with strength in core services,” Omair Sharif, founder of Inflation Insights LLC, said in a note. “As such, I don’t think this is a great number for Fed officials, or market participants, hoping to change the conversation to rate cuts.” (…)

So many ways to skin the inflation cat.

I think this chart from Goldman Sachs pretty well sums up what’s going on: the 6m annual rate of change of core CPI is almost back to its pre-pandemic level.

But only because core goods prices (21% of CPI) have been deflating as supply channels unclogged and China exports its own goods deflation.

One might even argue that all this Fed-tightening since spring 2022 has yet to actually impact demand.

Inflation on services, both rent and “other core services” has stabilized at twice pre-pandemic trends. CPI-Rent keeps rising at 0.5% MoM (last 4 months) despite everybody’s year-long forecast that rentflation would “soon” melt down.

Core services ex-rent picked up to +0.44% in November after a heart-warming +0.22% last month. Last 3 months: +5.2% annualized.

Bloomberg’s John Authers:

For years, services ran at about 2% per year, while goods inflation was zero. They spiked together in 2021 and 2022, but now goods is back to zero (so there’s certainly an argument that this element of inflation was transitory), while services is still at roughly double its pre-pandemic norm. Annual core services inflation was unchanged in November compared to the previous month. (…)

Today’s Authers’ column will surely feed the rent bulls:

If we look at indexes of rents based only on the leases taken out in the last month (rather than on all leases currently in effect regardless of when they started), then the one kept by real estate group Zillow has a mixed message. Rents have been falling for the last two months, it says, but that followed a string of gains, which are also yet to show up fully in the data:

But if you closely look at the chart, you notice the obvious seasonality of the data.

It so happens that Zillow also provides a seasonally-adjusted series which shows that rents have actually been rising continuously, including the 0.3% MoM advances in each of the past 2 months.

This is for new rentals where supply is rising, as opposed to renewals, 90%+ of all leases, which the BLS data measure.

The Fed would be mistaken to even hint at “mission accomplished”.

A few charts from the Atlanta Fed:

  

  

Country Garden Surprises Creditors With Full Yuan Bond Repayment

Country Garden Holdings Co.’s representatives told some holders of its 800 million yuan ($111 million) bond with a put option due Wednesday that it has remitted funds to fully repay the note’s principal outstanding and interest, people familiar with the matter said.

With the unexpected decision for full repayment, the distressed Chinese developer will avoid what would otherwise be its first default on a local yuan bond. (…)

But challenges facing the company, which is one of the world’s most indebted developers, have by no means ended. It posted a 77% in sales in November despite a slew of policy measures to revive homebuyers’ confidence. (…)

• Chinese Leaders Vow to Step Up Support for Flagging Economy Pledges on government spending and monetary support come as data points to slowing growth

(…) Still, Chinese leaders offered few specifics Tuesday on how they intend to reignite consumer and business confidence and reinvigorate growth.

Chinese leader Xi Jinping presided over the two-day meeting, where leaders urged officials to increase fiscal stimulus and help expand domestic demand, according to Chinese state media. They also acknowledged economic challenges, including “excess capacity in certain industries and weak sentiment in the society,” according to a readout of the meeting. (…)

At the meeting, Chinese leaders vowed to expand consumption and raise income for both urban and rural residents but offered little sign that they may pivot to giving cash handouts to households, despite repeated calls from policy advisers and economists to do so. (…)

Still, the meeting didn’t spell out a plan to help cash-strapped developers finish tens of millions of uncompleted apartments, a crucial step that economists believe will help restore household’s confidence in the government. (…)

• China Official Vows to Prevent Deluge of Defaults by Developers

A top Chinese housing official pledged to avoid a cascade of debt defaults by property developers, among the strongest commitments yet to cushion an escalating real estate liquidity crisis.

China will “forcefully prevent developers from defaulting on their debts all at once,” Dong Jianguo, Vice Minister of Housing and Urban-Rural Development, said at a conference on Wednesday, state broadcaster China Central Television reported.

Regulators will satisfy the reasonable financing needs of builders and help them to solve short-term cash problems, the vice minister said. (…)

The escalation in rhetoric is unusual because Chinese authorities have largely avoided directly commenting on developer defaults in official statements. (…)

The vice housing minister also differentiated between financially sound and insolvent developers on eligibility to receive government support. Builders that violate regulations and lose operating capabilities should be liquidated under the rule of law, Dong added.

SENTIMENT WATCH

The Rising Tide That Lifted Some Dead Cats (John Authers)

The rally that began in late October, spurred largely by the perception of a volte-face by the Federal Reserve, has lifted almost any asset you could name. (…)

The following dashboard graphs everything with 100 set for Oct. 27, the Friday when the S&P 500 hit bottom. The pattern is strikingly similar across assets, but it’s startling to see how those most out-of-favor have fared best. Commercial real estate, led by offices and retail malls, has rebounded almost 30% in six weeks, while US regional banks have gained more than 20%. Lower rates should directly help real estate, by making their rental yields more competitive, while any reduction in long-term yields should raise the price of the bonds burning a hole in regional banks’ balance sheets and offer them a chance to recover, so gains on news of falling rates make sense. The scale of the gains is impressive, however:

Perhaps most startlingly, if you really wanted to make money out of the market turn, you should have put it in meme stocks. The great hit of early 2021, meme stocks included companies with well-known brands that had fallen out of favor, such as GameStop and the AMC cinema group.

The meme stock phenomenon has fizzled so badly since then that the exchange-traded fund that traced the specially created Roundhill Meme index recently announced that it would be shutting its doors. And yet, somehow, that index has rebounded by a third since the market bottomed. The most heavily shorted stocks, as identified by Goldman Sachs, have also enjoyed a 20% rebound, although their prior fall had been even worse.

One area where the shift in rates sentiment seems to have made the greatest difference is in the emerging markets. The MSCI index for EM excluding China has enjoyed a rebound of more than 10%. With lower US rates and a weaker dollar, their prospects loom that much rosier.

It’s possible to label this as a broadening of a market that had grown alarmingly concentrated. It’s equally easy, however, to cast it as a “dead cat bounce,” the charming Wall Street term derived from the fact that even a dead cat will bounce if you drop it far enough.

The market can still continue to widen — which it will if “soft landing” data continues to come in — even as it weeds out some of the rebounds that owe more to liquidity-driven speculation than anything else.

Economy’s Soft Landing Comes Into View as Job Growth Slows A gradual cooling of the still-solid labor market extended into November, renewing optimism for a soft landing. Jobs rose by 199,000, the second straight month gains were below the 2023 average.

• When excluding the effects of auto-worker strikes in recent months, November’s job gain was roughly 169,000, slightly cooler than 180,000 in October. Most recent hiring occurred in two big sectors: healthcare and the government.
• A half-million more Americans entered the labor force in November and many who were looking found jobs, according to a survey of households.
• The jobs report keeps the Federal Reserve on pace to hold rates steady at next week’s meeting and challenges the view that the central bank will quickly shift toward cutting rates next year. Low unemployment, moderating job gains and easing inflation are consistent with a so-called soft landing, where inflation cools without a recession.
• “But also things are pointing toward a labor market that’s getting into better and better balance over time,” meaning the number of available workers is growing while employers’ hiring needs are easing, lessening labor shortages and wage pressures.

A Muddled Message From the November Jobs Report

The final employment report of 2023 came in a bit stronger than expected, although not enough to change the picture of a slowly softening jobs market. Nonfarm payrolls increased by 199K in November, just 16K above the Bloomberg consensus forecast for a 183K gain.

Revisions to job growth in the prior two months were relatively modest, with a net downward adjustment of 35K. The end of the United Auto Workers and Screen Actors Guild strikes flattered the November payroll numbers after weighing on them over the previous few months. Motor vehicle and parts manufacturing employment jumped by 30K in the month, while motion picture and sound recording industries added 17K net new jobs.

Looking through the strike-induced noise, employment growth was carried by a handful of industries in November. Health care employment posted another strong gain of 77K, while government employment growth continued its hot streak with 49K new jobs added in the month. Job growth was also solid in social assistance (+16K) and bars and restaurants (+38K). Holiday hiring was underwhelming with a 38K decline in retail employment and a smaller 5K dip in transportation and warehousing. Employment in construction, professional and business services and financial services were all roughly flat in the month.

The separately reported household survey showed a more robust pace of hiring in November. Household employment jumped 747K, which outpaced a 532K gain in the labor force. This sizable labor force increase pushed the participation rate back up to 62.8%.

While household employment growth, even adjusting for its differing scope from the establishment survey, is recently running above nonfarm payroll growth, it comes after a period in which household employment lagged the payroll survey. We give more weight to the larger and less volatile payroll survey, which shows hiring continues to decelerate on trend. Nevertheless, the picture from the household survey continues to be one of a tight jobs market with November’s sizable increase in household employment helping to reduce the unemployment rate to a four-month low of 3.7%.

Average hourly earnings (AHE) further demonstrates that the labor market is cooling gradually. AHE rose 0.4% in November, which was a tick stronger than expected. However, the year-over-year rate of AHE was unchanged at 4.0% compared to 5.0% this time last year. Further moderation in the year-over-year rate is in train with the three-month annualized pace of AHE running at 3.4% —a rate that, if sustained, would be consistent with the Fed’s inflation target once accounting for the recent trend in productivity growth. (…)

When paired with an inflation outlook that has become more benign, we believe the U.S. economy is entering 2024 with risks that are balanced for the labor market and inflation. Over the past couple years, the risks clearly have been tilted towards a labor market that is too tight and inflation that runs well above the Federal Reserve’s target.

With balanced risks, the odds of another rate hike appear remote, and the debate has shifted to assessing the timing of the first rate cut. We believe continued softening in the labor market and more progress on the inflation front will prompt the FOMC to initiate the first rate cut next summer.

• The Facts Changed.  Not So Sure the Narrative Did

(…) There were “whisper numbers” that anticipated Nonfarm Payrolls to come in even lighter than the published consensus, and there was plenty of talk about the rising unemployment rate triggering the “Sahm Rule.” Umm, no.

• November Nonfarm Payrolls were expected to increase to 185,000 from 150k in October.  They came in at 199k.  (ADP, which missed estimates and fell on Wednesday,  once again failed to be a useful indicator)
• The November Unemployment Rate was expected to be unchanged at 3.9%.  It fell to 3.7%, even as the labor force participation rate grew by 0.1% to 62.8%.
• Average Hourly Earnings were expected to rise from 0.2% to 0.3%.  They rose to 0.4%

This doesn’t seem consistent with the fixed income market’s recent moves toward pricing in more imminent rate cuts.  Bearing in mind the Federal Reserve’s dual mandate for stable prices and maximum sustainable employment:

1. An unemployment rate of 3.7% seems pretty close to maximum employment.
2. If monthly wages are rising at 0.4% per month, that doesn’t fit either the “stable prices” or “sustainable” metric of 2% inflation.

Was there anything in today’s employment report that would induce the Fed to ease monetary policy in the near future?  Not to my eye. (…)

Interactive Broker’s Steve Sosnick is right to write that the facts have suddenly changed. The clear decline in every key component of consumer income since June reversed in November.

Stronger employment growth along with rising hours and accelerating wage gains propelled aggregate weekly payrolls up 0.75% after 0.0% in October. Averaging the last 2 months, the 4.6% annualized rate is only slightly weaker than the previous 3-month average of +5.0%.

On a YoY basis, labor income is up 5.4% in November, up from 4.9% in October, suggesting steady, if not accelerating consumer spending given CPI and PCE inflation of 3.2% and 3.0% respectively in October.

Whatever happened in October seems to have reversed in November. Growth in consumer credit slowed to +0.1% MoM in October (+3.1% YoY from +5.2% in June) but more recent banking data show revolving credit card loans up 0.6% in November, +10.1% YoY.

In a December 6 interview with CNBC, Walmart CEO Doug McMillon (who gets daily sales data every morning) said “I expected more softness by this time of the year than we’re actually experiencing” and “the volume of our nonfood sales are starting to come back”, this after having previously acknowledged weak demand in October, like several other retailers.

“In general merchandise, the category that includes electronics, toys and other nonfood items, prices have dropped by about 5% compared with a year ago, he said.”

In November, 532,000 Americans entered the labor force; all of them presumably found a job given the 747,000 jump in the household survey employment level that led to the sharp drop in the unemployment rate.

The other surprise is the sharp decline in energy prices owing to the unexpected jump in U.S. production. Gasoline prices are back to their October 2022 lows, freeing significant disposable dollars and reducing cost pressures economy-wide but particularly for service providers.

(Financial Times)

My old friend Hubert Marleau calculates that “the $10 drop in oil prices has reduced global oil energy bills as a percentage of world GDP to 2.5%, down 0.80% from the end of September.” This is a huge stimulus for most world economies, potentially boosting consumer demand right when inventories are coming back into balance. The world-wide manufacturing recession may be ending soon.

On November 6, I posted Really Slowing? Today it should be Slowing, Really?

• Central banks prepare to rebuff investors over path of interest rates US Fed, ECB and BoE meet this week as strong labour data suggests policy pivot unlikely

China’s Consumer Price Drop Worsens, Fueling Deflation Fears CPI fell 0.5% on-year in November, steepest decline since 2020

• The consumer price index fell 0.5% YoY, the biggest drop since November 2020 and weaker than the 0.2% drop projected by economists in a Bloomberg survey.
• The so-called core CPI rose 0.6% on year in November, repeating the previous month’s performance.
• Producer prices declined 3%, compared with a forecast of a 2.8% fall. Factory-gate costs have been mired in deflation territory for 14 consecutive months.
• The value of new home sales among China’s 100 biggest developers fell 29.6% on-year in November.

Canada financial regulator maintains big banks’ domestic stability buffer at 3.5%

Canada’s financial regulator on Friday said it was maintaining the amount of capital the country’s biggest lenders must hold, saying its previous actions had made the big six banks resilient.

The Office of the Superintendent of Financial Institutions said (OSFI) maintained the domestic stability buffer (DSB) at 3.5%, and said it would continue to closely monitor financial system developments and could raise the DSB to a level no higher t

“Over the last year, OSFI has increased the DSB by 100 basis points. … We believe this action has bolstered the banking system’s capacity to absorb losses if current vulnerabilities materialize into actual losses,” Superintendent Peter Routledge said.

The banks are expected to have a common equity tier 1 ratio (CET 1 ratio), which compares a bank’s capital against its risk-weighted assets to measure its resilience in a market downturn, of at least 11.5%.

That ratio for Canada’s top banks averaged 13.4% at the end of fiscal 2023. (…)

EARNINGS WATCH

Morgan Stanley’s Wilson Sees Big Drop in Near-Term Profit Views Consensus earnings estimates falling for the fourth quarter

The strategist highlights a “steep downward revision” to consensus fourth-quarter estimates, and adds that he is less optimistic than other strategists about the magnitude of margin expansion next year. “We see earnings risk persisting in the near term before a broader recovery takes hold as next year evolves,” he wrote in a note. (…)

Estimates for fourth-quarter S&P 500 profits have fallen 5% since the previous reporting season began, Wilson said. Typically, consensus estimates for the current year’s earnings-per-share decline by nearly 5% through the course of the year and, if that precedent holds, US corporate EPS should fall to around Wilson’s estimate of $229 by the end of 2024, he added.

Data compiled by Bloomberg Intelligence show the same trend of falling estimates for the fourth quarter, with Wall Street now expecting year-over-year earnings growth of 1.5% in the period. Meanwhile, consensus estimates are for S&P 500 EPS to climb 11% to $246 next year, a more bullish outcome than predicted by Wilson. (…)

LSGE/IBES estimates are for earnings to rise 5.0% YoY in Q4, down from +11.0% estimated on October 1 and from +7.2% in Q3’23 which turned out substantially better than the +1.3% estimate on July 1.

• Powell under pressure to set out plan for US interest rate cuts 

Source: Variant Perception