U.S. Producer Prices Tame in July Rising oil prices, demand from U.S. consumers and businesses have helped push annual index higher

The producer-price index, a measure of the prices businesses receive for their goods and services, was flat in July from a month earlier, the Labor Department said Thursday.

A core measure of prices, which excludes the volatile food and energy categories, was up 0.1% in July from the prior month. (…)

On a monthly basis, prices for processed goods for intermediate demand were unchanged. That gauge is up nearly 7% from a year earlier, well outpacing prices for final demand, but matching the June rate. (…)

Sigh of relief as implied by the WSJ?

Hmmm…A closer look with the help of this Haver Analytics table actually reveals a continuation of the inflationary trends. The PPI for “Trade Services” dropped 0.8% in July reflecting “changes in margins received by wholesalers and retailers” as the BLS puts it. Excluding this, core PPI rose another 0.3% MoM and is up nearly 3.0% annualized in the last 3 months. Core goods prices are now up at a 3.6% annual rate while “Processed Goods”, flat last month, are up 6.8% YoY and 9.1% annualized in the last 3 months, indicating very strong price pressures in the goods production pipeline in spite of a rising dollar.

This next piece is definitely related:

• Parts Shortages Crimp U.S. Manufacturers Factories in the U.S. are running short of parts. Suppliers of everything from engines to electronic components aren’t keeping up with a boom in U.S. manufacturing thanks to strong economic growth.

(…) As a result, some manufacturers are idling production lines and digesting higher costs. (…)

However, deliveries from suppliers have slowed for 22 consecutive months through July, according to the latest survey of U.S. manufacturers by the Institute for Supply Management. More than one-quarter of respondents said it took longer for materials to arrive in July than June. Machinery was the hardest-hit sector. (…)

Terex Corp. said its mobile-crane-making unit incurred a loss in the second quarter as parts shortages hurt efficiency at its plants. (…)

Machinery giant Caterpillar Inc. and power-equipment maker Eaton Corp. are among those struggling to keep up with orders as supply-chain kinks join labor shortages and inflated transport costs as threats to the sector’s recovery. Eaton last week cut financial guidance for its $2.5 billion hydraulics unit as a result.

Caterpillar said it is paying more for smaller or incomplete orders from suppliers that have struggled to meet demand. (…)

Oshkosh Corp. idled production of its mobile cranes because of parts shortages several times in the past quarter. (…) Boeing Co. recently had more than two dozen partly finished 737 airliners parked outside its Renton, Wash., assembly plant and an adjoining airport awaiting engines and other components. (…)

Some companies are stockpiling parts to head off future challenges, potentially exacerbating the supply pressures. (…)

• Trucking’s Tight Capacity Squeezes U.S. Businesses More companies are pointing to rising freight costs as a drag on earnings and growth, as trucking companies raise rates at a historic pace and one says finding trucks is getting ‘ugly’

Empty trucks are so hard to come by right now that Dean Foods Co. DF 0.47% , one of North America’s largest milk suppliers, cut its full-year earnings outlook in part because it simply can’t move its goods for anything close to what it expected to pay this year.

“Industry capacity for truck drivers remains extremely tight. This is driving third-party hauling rates to record levels, up 26% versus prior year,” Chief Executive Ralph Scozzafava said in a Tuesday call with investors. (…)

July is typically a slow month for shipping. But last month rates on the spot market, where shippers buy last-minute truck transportation, rose 29% for the most common type of big rig compared with July 2017, extending an unprecedented stretch of year-over-year gains to 17 straight months. It is the longest sustained period of pricing growth for truckers since the industry was deregulated in 1980, according to online freight marketplace DAT Solutions LLC. (…)

Some, including Kraft HeinzCo. , Sealed Air Corp. and Coca-Cola Co. , are raising prices to offset higher freight expensesand rising costs for raw materials.

“Nobody has a crystal ball, but if I had to place a bet I would say this is structural, not cyclical” change, said Lee Clair, managing partner at Transportation and Logistics Advisors LLC, a supply-chain-strategy consulting firm. (…)

Now, trucking companies swamped with demand are turning down freight and raising contract rates by 10% or more, with further increases expected next year. Many are boosting pay to recruit drivers in a tight labor market and say the price increases are justified after rates remained stagnant for many years.

Covenant Transportation Group Inc., a large trucking company based in Chattanooga, Tenn., said last month it had raised rates as much as 14% this year, and expects to see increases of 7% to 8% in 2019.

Knight Transportation, a division of Knight-Swift Transportation Holdings Inc., the largest U.S. truckload company, said its revenue per loaded mile, a measure of pricing strength, soared 21% in the second quarter from the same quarter a year earlier. The company is getting customers that now are paying high spot-market rates to sign long-term contracts with rate increases to ensure they can get trucks. (…)

This is called stretched manufacturing and distribution capacity, to compound stretched manpower capacity.

And now, who is surprised by these strikes? (Some younger investors may not even know what a labor strike is).

• Labor Unrest Strikes Mining Giants

(…) In Australia, roughly 1,500 employees at alumina refineries and bauxite mines owned byAlcoa Corp. AA -1.62% , the largest U.S. aluminum maker, are striking over pay and working conditions. That follows labor unrest at sites including mines run by Glencore PLC in South Africa and BHP Billiton Ltd. in Chile.

Strikes stoke volatility in global commodity markets, affecting the prices of products from guitar strings to semiconductors. Copper is especially prone to wild swings, given that supply is typically in line with global demand. Loss of production from a megapit such as Escondida in Chile or Grasberg in Indonesia, both hit by long walkouts last year, can swing a tight market into a shortfall.

Rising labor costs also threaten mining giants’ profits, just recovering from a deep downturn. Moody’s Investors Service said if workers strike again at Escondida—they voted in favor of a walkout this month—it could lead to a material fall in the BHP-led venture’s production and margins.

For the aluminum industry, the strikes in Australia are happening at an especially sensitive time.

Producers and buyers were early casualties of the Trump administration’s aggressive trade policy, as the U.S. imposed a 10% tariff on imported aluminum earlier in the year. Alcoa, which cited tariffs in cutting its profit outlook last month, on Monday asked for an exemption from tariffs on aluminum imported from Canada. (…)

Alcoa’s three refineries in Western Australia account for roughly 7% of global alumina supply, so the strike risks driving up prices, ultimately of the products from cars to beer cans that contain aluminum. (…)

Alumina’s price was already high before the strike, having risen about 35% in 2018, said Morgan Stanley analyst Susan Bates, an increase linked to earlier cuts at refineries in Brazil and China.

“Since alumina accounts for 40% of aluminum smelter cash costs, a price spike would be likely to put upward pressure on aluminum’s price,” Ms. Bates said.

Now look carefully at this chart from KKR. Most of these tariffs have yet to hit the PPI and the CPI:

This morning:

CPI for all items rises 0.2% in July as shelter index rises

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in July on a seasonally adjusted basis after rising 0.1 percent in June, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.9 percent before seasonal adjustment. (…)

The index for all items less food and energy rose 0.2 percent in July, the same increase as in May and June. Along with the shelter index, the indexes for used cars and trucks, airline fares, new vehicles, household furnishings and operations, and recreation all increased. The indexes for medical care and for apparel both declined in July.

The index for all items less food and energy rose 2.4 percent for the 12 months ending July; this was the largest 12-month increase since the period ending September 2008. The food index increased 1.4 percent over the last 12 months, and the energy index rose 12.1 percent.

Core CPI is up at a 2.4% annualized rate in the last 3 months and +2.8% a.r. in the last 6 months. Importantly, Goods prices have stopped falling and more importantly, core Services inflation is accelerating, up at a 3.2% annualized rate in the last 3 months and +3.6% a.r. in the last 6 months.

EARNINGS WATCH

Valuations Are Slipping Even as Stocks Hover Near Records Strong corporate earnings are making stocks look less expensive than they did before

(…) The S&P 500 trades at 18.8 times earnings over the past 12 months, a basement valuation that is lower than the market’s February trough, when the index’s valuation was around 19 times earnings, according to FactSet. At the S&P 500’s peak in January, the index traded at nearly 22 times earnings.

Strong corporate earnings are making stocks look less pricey than they did before. (…)

But by other measures, stocks still look expensive: The S&P 500 is currently trading in the 88th percentile of historical valuation, Goldman Sachs said in a recent report, while the median stock is at the 97th percentile. (…)

Here’s a 60-year chart:

Normally, using trailing EPS is reasonably safe. However, it is of little help when a recession arrives because recessions crush earnings. I don’t know if an economic recession is coming soon but I strongly suspect that an earnings recession is looming, especially if the trade war expands.

And then there is the threat of lower multiples if inflation rise further.

So far, la vie est belle, with 79% of 452 companies reporting earnings beats averaging +5.2% with 9 out of 11 sectors beating by more than 5.0%. Trailing EPS are now $148.37 which I estimate is $152.70 pro forma the tax reform over the full 12 months. The pro forma trailing P/E is thus 18.6x while the Rule of 20 P/E is 21.0 (5% overvalued) using 2.4% inflation but it rises to 21.5 (9% overvalued) using 2.9% inflation.

Analysts remain very upbeat looking forward with Q3 EPS growth forecast at +22.5^ and Q4 at +20.5%. Post tax reform effects, EPS growth is still expected in the 9% range during the first half of 2019.

But corporations are increasingly warning negatively: as of Wednesday, 59.3% of pre-announcements were negative, up from 56.5% and 48.7% at the same time during Q3’17 and Q2’18 respectively. During the last 8 days: 1 positive and 16 negatives.

MORE ON SEASONALITY

This chart goes out 50 years:

Source: Market Ethos, Richardson GMP (via The Daily Shot)

ANOTHER CONCERN

Turkey Crisis Rattles Currency Markets, Pushes Dollar Higher The Turkish lira tumbled as much as 12% against the U.S. dollar, which rose to its strongest point in a year, as concerns about the health of Turkey’s financial system rippled through global markets.

The turmoil rattled a range of currencies, including the Russian ruble and Australian dollar, and knocked shares in several big European banks. The moves recalled previous episodes where trouble in countries such as China and Greece has fed wider market anxiety.

By early European trading hours Friday, the lira had pared some of its losses, but still stood 6% lower. (…)

While the ECB’s concern is not too high at this point, the central bank is monitoring how the fall in the lira in particular, and Turkey’s broader macroeconomic environment, could hurt eurozone banks, the person said.

Analysts and investors attributed the relentless pressure on the Turkish currency to growing concerns about a large stock of loans denominated in dollars and other currencies, and discord between Washington and Ankara. (…)

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  Analysis: The Dollar Disrupter

(…) The dollar’s rebound came after a broad decline in 2017, as growth outside the U.S. picked up. That lured investors into riskier bets: the MSCI Emerging Markets stock index gained over 30%.

This year kicked off in similar style. But then U.S. growth vaulted higher and momentum stalled elsewhere, sending the dollar on an unexpected upturn. It gained 5.5% against the euro and 4.2% against the yen in the second quarter; moves in emerging markets were even bigger, with the greenback up 17% against the Brazilian real and 16% against the South African rand. (…)

But even as the U.S. becomes the global disrupter, its assets have proved more alluring for investors. The dollar has kept its role as a magnet in times of doubt.

That is in part because the dollar remains so dominant. In the $5.1-trillion-a-day foreign-exchange market, the U.S. currency is on one side of 88% of all trades, according to the Bank for International Settlements’ 2016 survey. While its weight in foreign-exchange reserves has declined a little, it still accounts for 62.5% of the $10.4 trillion in allocated reserves identified by the International Monetary Fund. The euro, meanwhile, accounts for 20.4%. U.S. capital markets are the biggest and most liquid in the world, making the dollar attractive both to companies looking to raise finance and investors with cash to put to work. (…)

Over time, a stronger dollar can hurt U.S. corporate profits as exports become less competitive and foreign earnings are worth less translated back into dollars. While tax cuts have boosted economic growth, they have also raised the budget deficit, which may lead investors to start thinking about the scale of U.S. borrowing. (…)

Russia Boosts Global Oil Supply The world’s oil supply expanded in July on the back of surging Russian crude production, the International Energy Agency said, in a concrete sign of the unraveling of a nearly two-year-old OPEC-led agreement to curb output.

(…) the IEA said Russian crude and condensate production climbed by 150,000 barrels a day last month, to 11.21 million barrels a day. That “significantly sharper acceleration than expected” put output 265,000 barrels a day higher year-on-year and just 14,000 barrels a day lower than Russia’s October 2016 record high, the agency said.

Total global oil supply rose by 300,000 barrels a day in July, to reach 99.4 million barrels a day, boosted by Russian production, as well as higher output in Kuwait and the United Arab Emirates—two key members of the Organization of the Petroleum Exporting Countries. (…)

However, the agency said that July output just within the OPEC oil-cartel was steady, at 32.18 million barrels a day, as a result of an unexpected drop in Saudi production. Despite expectations, Saudi production would rise by a self-described “measurable” increase of several hundred thousand barrels a day last month, production fell by 110,000 barrels a day, to 10.35 million barrels a day, as exports declined, according to the IEA. (…)

The IEA maintained its global oil demand outlook for 2018, reiterating demand growth of 1.4 million barrels a day, and projecting growth next year of around 1.5 million barrels a day. But “there are risks to the forecast if from escalating trade disputes and rising prices if supply is constrained,” the agency noted.