Inflation Rose in August as Gasoline Prices Jumped Mild price pressures excluding energy keep Fed on track to pause rate increases next week

The consumer-price index, a closely watched inflation gauge, rose 0.6% in August from the prior month, the Labor Department reported Wednesday. More than half of the increase was due to higher gasoline prices.

So-called core prices, which exclude volatile food and energy items, rose by a relatively mild 0.3% last month after even lower readings in June and July. The August increase reflected higher costs for items such as airfares and vehicle insurance. (…)

On an annual basis, prices overall were up 3.7% in August versus 3.2% in July. Annual core inflation edged lower to 4.3% in August from 4.7% the prior month. (…)

The core CPI over the three months through August rose at a 2.4% annual rate, down from a 5% annual rate for the preceding three-month period. (…)

Food prices rose a mild 0.2% in August on a monthly basis, the same pace as in July. (…)

This Bloomberg chart illustrates the components of inflation. All trends are down on a YoY basis:

But the monthly dynamics show stickiness in the heavyweights: on a MoM basis, core CPI was almost double June and July growth rates although +3.6% annualized is encouraging.

CPI-Rent must be shaking the almost universal view that declining rentflation will surely drag core inflation down to the promised landing: its +0.51% rise in August beats its +0.46% average monthly gain since March. Last 6 months annualized: +5.6%; last 3 months: +5.6%; last 2 months: +5.5%; last month: +6.2%.

This 33% weight on the CPI is still up 7.8% YoY. To get to +3.0% by December, CPI-Rent needs to decline 1.3% sequentially from August or -0.31% per month.

Since 1950, that’s more than 870 months, CPI-Rent declined in only 8 months (7 of which right after the GFC) with an average monthly “drop” of -0.05%, the largest having been -0.14% in August 1992.

Lastly, core Services (black), closely correlated with wages, reaccelerated to +0.4% in August after +0.25% in June and +0.35% in July. Last 6 months annualized: +4.5%. Last 3 months: +4.1%.

Meanwhile, my “CPI-Essentials” measure was +5.2% YoY in August, a sharp increase from its June low of +4.1% as the renewed energy cost bite added to the rent squeeze. CPI-Food-at-Home rose only 0.2% in August, like in June, but that is still higher than the -0.1% monthly average between March and June.

In all, the Fed’s job is not done yet and consumers’ discretionary income keeps getting squeezed.

Retail sales are out this morning.

Fuel Prices Are Soaring: Who Is Feeling the Pinch? Production cuts made by OPEC and its allies have pushed crude oil to 10-month highs, pressuring construction companies, transportation businesses and farmers.

(…) A growing global thirst for fuel, fading fears of a U.S. recession and last week’s extension of Saudi and Russian cuts have propelled Brent crude above $90 a barrel. Higher gasoline prices accounted for more than half of August’s 0.6% increase in U.S. goods and services prices from July, according to Labor Department data released Wednesday. The prices of heavy fuels, which are more easily made from more-dense Russian and Middle Eastern crudes than U.S. shale oil, have risen even more than those of crude and gasoline.

Jet fuel has risen the most, its price soaring more than 50% on the Gulf Coast since early May. Chinese demand has ballooned as Beijing has relaxed pandemic-era travel restrictions, pushing its August jet fuel consumption back toward its prepandemic level from below 60% a year earlier, according to the analytics company Kayrros. (…)

Jet fuel prices might have further to run. Chinese international flight-fuel use is still 40% below its prepandemic level, according to Kayrros. Meanwhile, Asian refiners are still working to reverse Covid-era adjustments that reduced their jet fuel output, said Mukesh Sahdev, an analyst at the consulting firm Rystad Energy.

A tight jet fuel market is buoying diesel and marine fuel prices, said Sahdev, since all three fuels derive from the same fraction of the oil barrel. Making a gallon more of one means a gallon less of another. (…)

The price of diesel at the pump has risen 48 cents a gallon since July, according to AAA, compared with 9 cents a gallon for gasoline. (…)

Dwindling inventories could keep crude oil prices high in the coming months. The cuts by OPEC+ and growth in global consumption will cause demand to outstrip supply through the end of the year, according to Rystad, reversing a surplus in the first quarter. (…)

• Costlier Fuel, Labor Cut Into Corporate Profit

UAW, Automakers Remain ‘Far Apart’ in Contract Talks The union’s president said the United Auto Workers are preparing walkouts at select factories when contracts expire late Thursday.

Canada needs 3.45 million more homes by 2030 to cut housing costs as population grows, CMHC predicts

This is the second report from Canada Mortgage and Housing Corp. that quantifies the number of new homes the country needs to build to ensure that households are not spending more than 40 per cent of their disposable income on shelter. (…)

If the country continues to admit record levels of about 500,000 new permanent residents per year until the end of the decade, CMHC predicts an additional 4 million new housing units will be needed instead of 3.45 million. (…)

The typical home price across the country topped $700,000 as of July. And even though home prices have declined since the Bank of Canada started hiking interest rates in March 2022, values are still 40 per cent higher than 2019, prior to the start of the pandemic. As well, the nation’s apartment vacancy rate is just below 2 per cent and the average asking rental price for a one-bedroom unit is above $2,000 per month.

The housing agency uses the years 2003 and 2004 for its benchmark on affordability because it was a time when the economy was stable and housing costs were relatively low. During that period, the average household spent about 35 per cent of its disposable income on shelter. That has since increased to nearly 50 per cent nationally and nearly 60 per cent in Ontario and in B.C., according to CMHC’s previous report. (…)

The typical home price in the Toronto region was $1,161,200 in July, according to the latest data from the Canadian Real Estate Association. In the Vancouver region, it was $1,210,700 and in the Montreal area it was $520,000. (…)

For the country to get to 5.2-million new units by 2030, the rate of building would need to more than double from current levels. New home construction has already slowed due to the rise in material and labour costs.

Speaking of affordability:

Home builders tell us 32% of net sales this year have been to first-time buyers. How are first-timer affording new homes?

• 1) Price cuts
• 2) Rate buydowns
• 3) Smaller floorplans
• 4) Lower-cost finishes
• 5) Help from Mom+Dad
• 6) Moving farther from cities
• 7) Spending “excess” savings (@EricFinnigan)

Ray Dalio Says He Doesn’t Want to Hold Bonds, Cash ‘Is Good’

(…) “Temporarily right now, cash I think is good.”

When asked how to unwind the world’s huge borrowings, he said when debt becomes a big share of the economy, the situation “tends to compound and accelerate” as interest payments also grow. “We’re at that turning point of acceleration.”

While the size of the deficit is going to require the US to sell a lot of bonds to investors around the world, it’s difficult to keep interest rates at a level that’s attractive for creditors to hold, but not too high to harm the issuer, Dalio said. When investors choose to sell, pushing up yields, the central bank will need to decide whether to print money and buy bonds, which will drive up inflation pressures, he added.

“We’re seeing that dynamic happen now,” Dalio said. “I personally believe that the bonds, longer term, are not a good investment.” (…)

Worried About the American Consumer? Don’t Be. Households are still reaping the benefits of a surge in home equity and aren’t in the mood to save.

Following my yesterday post (The Wealth Defect), Bloomberg’s columnist Conor Sen argues similarly:

(…) If there’s one reason to remain optimistic on household spending, it’s that the “excess savings” framework doesn’t capture the full picture of household balance sheets. Adjusted for income, household net worth remains near a record high. That’s driven, importantly, by the surge in home values and home equity levels during the pandemic. (…)

Unlike stocks, which are held primarily by the wealthy, home equity is a middle-class phenomenon with two-thirds of American households owning their homes. And while home price expectations grew pessimistic last year in response to rising interest rates and worries about a housing market decline, they have been on the rise again this year, according to the New York Fed’s Survey of Consumer Expectations. Households have a lot of housing wealth and feel confident that their homes will continue to appreciate in the future. (…)

Households, in the aggregate, are just about as wealthy as they’ve ever been. As a result, they’re comfortable spending more and saving less than in the 2010s. Even modest declines in home values from here would leave housing wealth well above 2019 levels — for home equity as a percentage of disposable personal income to return just to 2019 levels, home prices nationwide would have to drop by nearly 20%.

Housing wealth would cover the 66% of households who own their homes and tend to be wealthier, but lower-income consumer spending has remained strong as well. Goldman Sachs Group Inc. said in a note this week that retailer same-store sales have risen by 5.6% year-over-year for companies whose stores tend to be in lower-income communities, likely due to lower-income workers getting the biggest raises in this tight labor market. (…)

Via The Transcript:

• The pandemic benefits are running out. People put those in their savings. Savings accounts are coming down quite meaningfully. Credit is at an all-time high right now. You’re beginning to see credit defaults tick up a little bit. And so I would say the consumer is fragile. I would say the economy is moving in the right direction, but it’s fragile here in the U.S.” – PayPal (PYPL ) CEO Dan Schulman
• “I would say I am very surprised by the consumer resilience. We continue to see very strong spend across the board. The consumer has been outperforming expectations. Obviously, our business is a good indicator of what the consumer is doing. We have more data than probably many others. So what we are seeing is a resilient consumer all throughout. We told you that in the second quarter conference call. And as we look at data running up until the end of August, we continued to see the same trends. So resilient consumer, that’s good.” – Mastercard (MA ) Co-President Ling Hai

UAW Bends on Wage Demands as Talks Progress The union has proposed a mid-30% wage hike, down from an initial demand of at least 40%.

(…) In the past two weeks, companies have countered earlier union proposals with offers of pay increases ranging from 9% to 14.5% over the life of the four-year contract, with some companies adding in at least $16,000 in bonuses and inflation-protection payments. (…)

Under the current contract negotiated in 2019, full-time unionized factory workers start off at around $18 an hour, and can earn up to $32 an hour. (…)

Aside from pay, the union has also called for a shortened 32-hour week, the re-establishment of medical benefits for retirees, and the return of cost-of-living adjustments.

Detroit automotive executives have expressed optimism about the pace of negotiations and their ability to reach a deal without a strike.

“We are on a good path and remain committed to reaching a tentative agreement without a work stoppage that would negatively impact our employees and our customers,” a Stellantis executive said in a release to employees on the company’s website Monday. (…)

• UPS Chief Says Year One of Pricey New Labor Deal Will Hurt Most Company faces initial cost jolt as pandemic-driven boom cools

United Parcel Service Inc. will pay out the biggest portion of its new, five-year labor pact over the next 12 months while trying to win back customers it lost during the contentious contract talks, making for a challenging upcoming year, its chief executive said.

The company will offer some customer-service improvements and lean into automation, UPS Chief Executive Officer Carol Tomé said Monday in an interview. That could help it boost sales and save money as it covers the large, initial pay rise Teamsters secured in a labor deal that took effect in August. (…)

“We put more cost in our business this year than we had anticipated, in an environment where the volume has receded,” Tomé said. “That puts some pressure on the margin, which is reflected, I think, in the share price.” (…)

UPS has to cover 46% of the Teamster agreement’s total cost increase in the first year. But on average, UPS’s labor costs will only rise 3.3% a year over the life of the deal. Tomé said the overall expense was within the company’s budget, though she didn’t expect the arrangement to be so front-loaded. (…)

The company, and rival FedEx, both said they’d increase prices by 5.9% in 2024. (…)

Country Garden Rebounds as Yuan Bond-Extension Votes Tallied The distressed Chinese property developer wins approval from creditors to extend some repayments.

(…) Yet, the firm, now China’s sixth-biggest developer as sales have slumped, had still faced nearly $2 billion of bond payments across different currencies due through the rest of the year.

Any payment failures could impact China’s housing market even more than a landmark default in late 2021 by China Evergrande Group, as the builder has four times as many projects. (…)

• China Builders’ Bond-Extension Efforts Face Increased Opposition Sino-Ocean affiliate loses vote to extend yuan note by a year

Sino-Ocean Capital Holding Ltd. said Monday night that holders of a 1 billion yuan ($137 million) note voted against extending the bond by another year. The affiliate of Chinese state-backed developer Sino-Ocean Group Holding Ltd. instead won a 90-day grace period involving any event of default involving the bond. (…)

Offshore-bond defaults hit a record in 2022, and the figure is on pace to be topped this year with delinquencies exceeding $40 billion, according to data compiled by Bloomberg. (…)

• China’s Housing Rebound Fades Fast in Big Cities After Stimulus

A spurt of home sales in China’s biggest cities is losing momentum less than two weeks after authorities loosened mortgage restrictions, raising doubts over whether the steps are enough to revive the market before a crucial busy season.

While a dearth of official statistics makes it difficult to gain a comprehensive view, checks by industry watchers suggest that the rebound is fading in tier-1 cities.

Even in Beijing, which reacted the most to the stimulus, sales of existing homes plunged 35% to about 1,700 units last weekend from 2,600 in the weekend immediately after the easing, according to estimates by Centaline Group analyst Zhang Dawei based on his channel checks. New homes sold by developers in the capital city showed a similar trend. Centaline is one of China’s top property agencies.

In Shenzhen, new-home sales edged up 3.8% last week from a week earlier, while they continued to slide in Shanghai and Guangzhou, according to China Index Holdings. Across China, transactions continued to drop, falling more than 20% by area, the agency said. (…)

[But] Even after the initial sales spike tapered off, homebuyer visits were still about 20% to 30% higher than periods before the supportive measures, he added.

In another encouraging sign, some homeowners in the biggest cities have raised asking prices, suggesting residents expect demand to pick up, Centaline data showed. (…)

Listings of existing residences climbed 2.7% in Beijing, 2.3% in Shenzhen and 0.6% in Guangzhou last week, accelerating from the week before the easing, data monitored by China International Capital Corp. showed. (…)

@KobeissiLetter

MARGINS WATCH

Further piquing your interest:

Yesterday, I posted about interest expense using these 2 charts:

John Authers today explains the underperformance of U.S. small caps partly because of rising financing costs:

But a deeper driving factor could be the bizarre state of financing in the US. Smaller companies tend to use floating-rate debt (they often don’t have a choice about this), and so higher rates are already hurting them. Bigger companies used the exceptionally long period during 2020 and 2021, when rates were effectively zero, to lock in low rates well into the future.

Andrew Lapthorne, chief quantitative strategist at Societe Generale, says that smaller companies’ gross interest costs are rising faster “in large part because smaller companies have more debt, and a lot more of it is in floating rate instruments.”

The picture becomes even stronger if we look at net debt interest rates (meaning that interest received can be deducted), as large companies’ interest costs drop below -2.5%. So at least some of the startlingly poor small-cap performance can be attributed to unequal availability of credit:

(…) Corporate treasurers at larger companies have done a good job of pushing the maturities of their debt beyond next year. In 2025, however, much more debt will need to be renegotiated, creating what might be called a corporate version of a “fiscal cliff.” Meanwhile, the problems for smaller companies could soon become acute. If bond yields are still close to 5% by the end of next year, as begins to looks possible, monetary policy might finally bite in a big way.

This chart from Ed Yardeni (lines are mine) shows that larger caps’ margins have given back most of the pandemic boost to margins and are back to their trend line. Unlike smaller caps’ margins which remain well above their pre-pandemic levels and trend lines.

S&P 600 margins have been tending down for 6 years before Covid in spite of well above average revenue growth…

…which has more than offset their relative margins erosion on profits, but not on share prices…

…as investors have been increasingly discounting small caps’ profits.

I could not find relative debt levels, which could explain the slide in small caps’ relative P/Es but, going back to Andrew Lapthorne’s chart above, the faster increase in small companies’ interest expense since 2014 suggests an increasing relative leverage.

Ed Yardeni provides trends in shares o/s which indicate that small companies have been much more aggressive (beware the scales) than S&P 500 companies in their share buybacks.

  

S&P 600 companies have grown their EPS twice as fast as their dollar earnings since 2013. Given the trends in their interest costs and their relative P/Es, one can suspect that much of these buybacks was done with debt.

NFIB members are much, much smaller than S&P 600 companies but the latest survey highlights some of the difficulties small businesses are facing:

• Sales and earnings are weak since 2018:

  

• Employment plans are declining while debt cost has almost doubled:

  

Amateurs Pile Into 24-Hour Options: ‘It’s Just Gambling’ Rookie speculators are trying to strike it big on short-term investments that often act like lottery tickets.