Rise in Consumer Prices Slowed to 7.7% Underlying price increases excluding energy and food slowed from a four-decade high

The Labor Department on Thursday said that its consumer-price index increased 7.7% in October from the same month a year ago, down from 8.2% in September and June’s 9.1% rate, which was the highest in four decades.

The so-called core CPI—which excludes volatile energy and food prices—climbed 6.3% in October from a year earlier, down from 6.6% in September, which was the biggest increase since August 1982. (…)

Investors are hoping that easing inflation means the Fed might not have to raise interest rates as high as previously feared. (…)

“This morning’s CPI data were a welcome relief, but there is still a long way to go,” said Dallas Fed President Lorie Logan in a speech Thursday in Houston. (…)

Thursday’s report offered investors a glimmer of hope that rates wouldn’t have to rise significantly above 5%.

On a monthly basis, the CPI rose 0.4% in October from September, the same pace as the previous month. The CPI measures what consumers pay for goods and services.

Core CPI rose 0.3% in October, down sharply from 0.6% in both September and August. (…)

“Early on, goods prices were driving that increase, but more recently it’s services prices, and that likely reflects the very tight labor market,” said Brett Ryan, senior economist at Deutsche Bank. (…)

• “The October CPI report renews some hope that a soft-ish landing might be achievable,” Evercore ISI’s Krishna Guha wrote in a note. (Axios)

(Haver Analytics)

Some key numbers:

• Core Goods (27% of Core CPI) declined 0.4%, to be expected and to be continued given lesser demand, high inventories and easing supply chains. They are up 5.1% YoY. Goods producers and retailers are now in deflation.
• Core Services (73%) rose 0.5% after +0.6% and +0.8% in August and September respectively. That’s 7.7% annualized and largely reflects shelter costs and rising wages.
• Medical care services (12% of Core Services) “suddenly” declined 0.6%. Health Insurance dropped a very large 4.0% MoM (+20.6% YoY). This is because of a statistical quirk in the CPI methodology which bases the price of health insurance mainly on health-insurer profits, which are reported with a lag of about 10 months. Thus, data in the October 2022 CPI reflect what happened in 2021. Note that this only affects the CPI. The PCE, the Fed’s preferred inflation gauge “draws from the producer-price index, said Oscar Munoz, macro strategist at TD Securities, which includes expenditures by governments, such as through Medicare and Medicaid. Moreover, health services have a much bigger weight in the PCE price index than in CPI. The healthcare category of the PCE price index rose about 2.5% in August from the same month in 2021.” (WSJ)
• The lagged nature of the CPI’s health-insurance index means that it may not reflect current underlying price pressures in medical-care services. Those are likely building, thanks largely to labor costs. Medicare’s recently negotiated 4.3% reimbursement rate for inpatient hospital services for fiscal 2023 was the biggest increase in around 15 years. A large share of how Medicare calculates those rates is based on employment cost index data for hospital wages, said Mr. Sharif. That measure rose at an annual rate of 5.6% in the second quarter, up from 2.3% in the last quarter of 2020. The increase is likely to spill over into negotiations now under way between private insurers and hospital groups, he said. “It feels like we’re likely to see higher medical services inflation in 2023 than we have in the last few years,” said Mr. Sharif. “The magnitude of how much higher it is, we just don’t know yet—and that is going to determine how much of the health insurance drag is going to get offset.” (WSJ) So much for data dependency!
• Energy prices rebounded by 1.8% MoM after 3 months of declines and are +17.6% YoY. Food prices rose another 0.6% (+11% YoY). My “CPI-Essentials” series is up 0.84% MoM (+9.0% YoY) in October, substantially higher than disposable income growth (+3.2%). No “soft-ish landing” yet for consumers.

• United Airlines Advances 5% Pay Raise for Pilots United will accelerate an increase promised during the pandemic; pilots last week voted to reject a tentative contract.

(…) The move comes at a time when relations between United and its pilots have frayed. United’s pilots last week voted by a big margin to reject a tentative deal that would have included raises of more than 14.5% over 18 months. (…)

FYI, the next FOMC meeting is Dec. 14. The next CPI report is Dec. 13.

bloom.bg/3UuS0Hs

@bespokeinvest

Bank of Canada Open to ‘More Normal’ Rate Hikes Amid Softer Data “We indicated that we expect interest rates do have further to go,” Macklem told reporters, “and I think that could be another bigger-than-normal step or it could be reverting to more normal 25-basis-point steps, we’ll see.”

(…) In a speech before the press conference, Macklem said Canada’s unsustainably tight labor market needs to soften in order to rein in soaring inflation with the economy still in excess demand. He reiterated that the central bank is working to balance the risks of over- versus under-tightening financial conditions.

“We need to rebalance the labor market,” Macklem said. “This will be a difficult adjustment. We want to do this in the best way possible for Canadian workers and businesses.”

Speaking to the Public Policy Forum, Macklem flagged elevated job vacancies and broadening wage growth as evidence of the labor market overheating. He said, however, that wage pressures “now look to be plateauing” and that the central bank is seeing “initial signs” of employment pulling back from unsustainable levels. (…)

Macklem said in his speech that while increasing labor supply is valuable, it’s “not a substitute for using monetary policy to moderate demand and bring demand and supply into balance.” (…)

China Eases Some Covid-19 Rules Even as Cases Pass 10,000 China eased pandemic controls, as the country’s leaders seek to lessen the pain of a stringent zero-Covid policy that has exacted a heavy economic toll and stoked rising public resentment.

The newly appointed Politburo Standing Committee of the nation’s top leaders, in one of its first major decisions, set out new rules to “optimize and adjust” the policy to minimize its impact on economic growth and people’s lives, as well as further open the country’s borders to foreign visitors, according to a release Friday by the National Health Commission.

Temporary bans on routes operated by airlines found to have brought passengers infected with Covid-19 into the country have been dropped, the health agency said. Travelers from other countries must now quarantine for eight days—five in a hotel or government center and three days of home health monitoring—down from a total of 10 days, it said. Passengers will also have to take only one test before boarding a flight.

At home, the scope of close contacts subject to isolation and mass testing has also been narrowed, a move that may alleviate one of the biggest sources of resentment among the many millions of residents who have been subject to stay at home orders simply for being in proximity to someone who had been close to a positive case. Quarantine for close contacts was cut to eight days from 10.

The designation of areas at risk—the basis for restrictions on people’s movements—has also changed, the health commission said, with high-risk areas limited to residential blocks rather than entire districts. (…)

The controls were eased even as China confronted its worst outbreak in more than six months, with infections spread across the entire country—many of them “considerable” in scale, in the words of the Politburo Standing Committee. New cases topped 10,000 on Thursday, a number not seen since Shanghai was placed under stringent lockdown for two months from the end of March.

It wasn’t immediately clear how the changes would affect continuing efforts to curb the spread of the coronavirus, and whether those facing lockdown in some parts of the country could expect restrictions to ease. About four million people were told to stay home in parts of Guangzhou, the southern economic hub, as authorities tightened controls to halt a growing outbreak this week. (…)

The easing of restrictions on Friday have raised expectations that China could further loosen its zero-Covid policy in the coming months. “We are now more convinced that a meaningful reopening will likely take place after the National People’s Congress next March,” Citigroup analysts said in a note. (…)

At the Politburo Standing Committee meeting on Thursday, Mr. Xi said that more effort needed to be placed on developing vaccines and inoculating vulnerable populations.

China has attempted to soften its Covid policies before, only to implement harsher measures as case numbers grew. Before Shanghai was locked down for nearly two months this spring, officials said they didn’t need to implement such sweeping restrictions.

@Sino_Market

U.K. Economy Shrank in Third Quarter, Sliding Toward Recession High energy costs, rising interest rates and a labor shortage weighed on British output in the three months through September.

COSTLY COINS!!!

JPM

Scratch my back… Bankman-Fried invested in venture capital backers of his FTX exchange

Presidents Biden and Xi will meet in Bali Monday, where they’ll discuss a variety of topics, including the war in Ukraine.

Amazon Unveils Smaller Delivery Drone That Can Fly in Rain The new drone will go into service in 2024. It has a longer range, can fly in a wider range of temperatures and has new safety features.

• Amazon’s New Warehouse Robot Could One Day Replace Humans “It’s a major leap in technology challenge, and technology development.”

Amazon.com Inc. has developed a robot capable of identifying and handling individual items, a milestone in the e-commerce giant’s efforts to reduce its reliance on the human order pickers who currently play a key role in getting products from warehouse shelves to customers’ doorsteps.

The robotic arm, tipped by a set of retractable suction devices, is called Sparrow. In demonstrations on Thursday, the machine autonomously grabbed items of different sizes and textures from a plastic tote and placed them in other receptacles. Amazon said the bot is capable of handling millions of different products. (…)

It wasn’t immediately clear how quickly or widely Sparrow would be deployed. (…)

Fed Sees Risk of Big Declines in Still-Lofty US House Prices

The Federal Reserve suggested on Friday that lofty home prices could be susceptible to steep declines after big run-ups in recent years on the back of ultra-low interest rates.

“With valuations at high levels, house prices could be particularly sensitive to shocks,” the Fed said in its semiannual Financial Stability Report released Friday.

Though housing price increases have slowed recently as the Fed has raised interest rates, valuations remain stretched when compared with such metrics as rents, the central bank said. It also cited “strained” liquidity conditions in the Treasury and some other crucial financial markets; elevated leverage at hedge funds; and high commercial real estate prices when compared with market fundamentals. (…)

“Today’s environment of rapid synchronous global monetary policy tightening, elevated inflation and high uncertainty associated with the pandemic and the war raises the risk that a shock could lead to the amplification of vulnerabilities, for instance due to strained liquidity in core financial markets or hidden leverage,” Fed Vice Chair Lael Brainard said in a statement accompanying the report. (…)

• New Home Cancellations increased Sharply in Q3 “Significant shift in market conditions”

(…) In general, cancellation rates doubled or tripled in the most recent quarter compared to 2021.

Toll Brothers reported a cancellation rate of 13.0%, well above their historical rate of 7%. During the housing bust, Toll Brothers cancellation rates peaked close to 40%!

For D.R. Horton, the 32% cancellation rate was well above their normal rate in the 16% to 20% range. During the housing bust, Horton’s cancellation rate was close to 50% for a couple of quarters in 2007 and 2008. (…)

Speaking of cancellations, this chart explains why manufacturing activity will keep declining:

@MichaelAArouet

Facebook Parent Meta to Lay Off 11,000 Employees Meta Platforms said it would cut 13% of staff, embarking on its first broad restructuring to cope with a slumping digital-ad market and falling stock price.

(…) Twitter cut roughly half of its staff last week. Snap Inc. said in August it would cut roughly 20% of staff, or more than 1,000 employees (…). Business software company Salesforce Inc. also started laying off employees this week. (…)

• Tech Layoffs Reflect Worsening Outlook

(…) “The job cuts are only the start and the tip of the spear. Larger and more thoughtful companies are starting to understand that capital is fleeing investment in the stock market into ‘safer’ assets like bonds or treasuries as interest rates rise,” said Wesley Chan, an investor and former tech leader at Google who developed early Google projects including Google Analytics, Google Voice and Google Ventures. He is a co-founder of early stage investor FPV Ventures.

“The downturn has kind of started but it hasn’t hit bottom and will get bad, very quickly, likely sometime mid next year,” Mr. Chan said. He expects a decline in demand for marginal or luxury areas like crypto, grocery and food delivery services, “neobanks,” and high-end travel and beauty. (…)

• Rivian’s Losses Mount as It Continues to Burn Through Cash [BTW, RIVN reached $180 in Nov. 21. Closed yesterday at $28]
• Beyond Meat Reports Weak Sales and Mounting Losses [BTW, BYND reached $220 in Jan. 21. Closed yesterday at $12]
• Carvana’s Earnings Crash Spurs Bond Selloff [BTW, CVNA reached $370 in Aug. 21. Closed yesterday at $7.60]
• Redfin Shuts Home-Flipping Business, Lays Off 13% of Staff [BTW, RDFN reached $98 in Feb. 21. Closed yesterday at $3.25]
• [BTW, ARKK reached $160 in Aug. 21. Closed yesterday at $32.50]
• [BTW, ARKF (Fintech fund) reached $65 in Feb. 21. Closed yesterday at $14]

“Long ago, Ben Graham taught me that price is what you pay, value is what you get.” (Warren Buffett)

China Property Crisis Imperils $1.6 Trillion of Local State Debt

China’s deepening property crisis is piling pressure on a $1.6 trillion corner of the country’s onshore bond market, as cities and local administrations step in as white knights to bail out troubled developers in a state-backed bid to aid the sector.

After replacing builders as the biggest buyers of land earlier this year, the nation’s so-called local government financing vehicles, or LGFVs, have now become the main purchasers of half-finished projects of defaulters including China Evergrande Group. Their increasing involvement in real estate has analysts raising red flags.

Moody’s Investors Service says that could weigh on the credit profile of these state funding agencies. While no LGFV has defaulted in the current cycle, Bloomberg Economics isn’t ruling out one ahead. Though China’s loosened monetary policy has largely pushed onshore borrowing costs to the lowest in years including for most LGFVs, average credit spreads on some of the worst-performing LGFV local bonds have almost doubled since mid-January to nearly 10 percentage points. (…)

A potential default could cause another convulsion in a market, where LGFVs’ 11.6 trillion yuan ($1.6 trillion) of notes account for about a third of China’s local corporate bonds. (…)

David Qu and Chang Shu at Bloomberg Economics estimate total LGFV debt, including bank borrowings, to be as much as 60 trillion yuan, or about half of China’s GDP. Defaults would have major consequences, they said. (…)

Also unraveling:

@Sino_Market

Asian Property Debt Woes Worsen as Indonesia Shows More Distress The bonds of Indonesian property companies are slumping, adding to signs of property debt distress that’s been deepening in China, South Korea and Vietnam.

(…) The mounting strains come as property firms in more countries grapple with slower sales and higher borrowing costs. (…)

Rising interest rates around the world are exposing risks that have accumulated in property markets, juiced by cheap funding during the pandemic. South Korea rolled out fresh measures to help its struggling real estate market on Thursday in the form of additional guarantees to project financing. (…)

FTX on brink of collapse after Binance abandons rescue Sam Bankman-Fried’s crypto exchange dashes to fill $8bn hole as Sequoia writes down equity on ‘solvency risk’

• Binance Walks Away From FTX Deal Crypto exchange Binance said it would walk away from an initial offer to acquire its competitor FTX after a review of the company’s finances.

• Crypto Has Reinvented Bank Runs FTX’s crisis is a reminder of what is right about traditional finance

(…) The exact problems that faced FTX remain unclear. Were they primarily related to the treatment of customer assets or related more to the firm’s own assets? Further complicating matters, the line between a bank and a brokerage isn’t always clear in crypto, where one firm can effectively be your bank, broker, exchange, lender, market maker and so on. That creates many opportunities for things to go wrong.

If crypto is to survive the winter, it might need to universally adopt and prove it is using some of the conventions of traditional finance, or “tradfi,” such as ironclad segmentation of customer money and clearer lines between those different services. (…)

But how about first demonstrating actual, real world, usefulness…

• Crypto’s FTX Moment Shows Danger of Centralized Finance With No Central Bank After Binance agreed to takeover rival FTX, the danger is obvious: There’s no one big enough to rescue Binance

It also shows finance’s “me-too” effect, its impact on valuations and on naive investors. ZeroHedge revels on this:

• Here Are All The Other Funds That Are Losing Billions In FTX

In a tweet late on Wednesday, venture capital giant Sequoia Capital said had written down the entire value of its stake in FTX, a little over $210 million. (…)

A smaller venture fund, Multicoin, told investors Wednesday that about 10% of its assets under management were affected. (…)

We start at the top, where we find the “who is who” of clueless momentum chasers, who over the years somehow got confused with credible, diligent investors: we are talking of course about Tiger Global, which is down 55% this year (and is about to be down a whole lot more) and of course the fund that we once dubbed the bubble era’s “short of the century“, SoftBank. (…)

There are more funds, of course: Third Point and Altimeter Capital Management are among hedge funds that recently participated in funding rounds for Sam Bankman-Fried’s once-high-flying crypto exchange. Brevan Howard Asset Management’s Alan Howard, the family office of Paul Tudor Jones and Millennium Management founder Izzy Englander also chipped in as angel investors, alongside celebrities including Gisele Bundchen and Tom Brady.

There were many others: FTX also attracted capital from the Ontario Teachers’ Pension Plan, Sequoia Capital, Lightspeed Venture Partners, Iconiq Capital, Insight Partners, Thoma Bravo and Masayoshi Son’s SoftBank.

Tiger Global and Ontario Teachers’ first invested in FTX in December 2019 in a funding round that valued the company at $8 billion, according to PitchBook data. Both topped up their wagers in October 2021, giving FTX a $25 billion valuation, and did so again in January, the data show. Some of the other firms and individuals backed FTX in July 2021, paying cash to participate in a $1 billion funding round that valued the crypto exchange at $18 billion. (…)

Remarkably, as ever more clueless pedigreed investors piled up to fund this fraud of epic proportions, the valuation went super parabolic, and after two early rounds in 2019 and 2020, FTX got its first real outside funding in July 2021 when it pocketed $900MM at a valuation of $18 billion in its Series B round; this was followed by two more rounds, the most notable of which was Series C when ts valuation exploded to a staggering $32 billion. It was around this time that Scam Bankrupt-Fraud started naming sports stadiums, and imagined a world in which FTX would buy Goldman.

The chart below is the definitive proof that even (or rather especially) the smartest investor do no homework before allocating huge amounts of capital. (…)

More to come, including margin calls and another contagion…

Naturally, the SEC will now step in…

Russia orders troops fall back in Kherson Russia’s defense minister and a top general told troops to fall back from Kherson city to the eastern bank of the Dnipro River. Ceding control of the regional capital would mark a major retreat.

Lastly:

Trump Is the Republican Party’s Biggest Loser The WSJ Editorial Board: He has now flopped in 2018, 2020, 2021 and 2022.

• With No Red Wave, Trump Is Out at Sea By Karl Rove