INFLATION WATCH
U.S. Consumer Price Inflation Picks Up in January; Core Prices Stabilize
The Consumer Price Index rose 0.3% (1.4% y/y) during January following a 0.2% December increase, revised from 0.4%. The gain matched expectations in the Action Economics Forecast Survey. The CPI excluding food & energy held steady last month (1.4% y/y) as it did in December, revised down from 0.1%. A 0.2% January gain had been expected.
A 3.5% increase (-3.6% y/y) in energy product prices provided the lift to last month’s CPI gain, following December’s 2.6% rise, revised from 4.0%. Gasoline prices surged 7.4% (-8.6% y/y) after strengthening 5.2%. Fuel oil prices strengthened 5.4% (-16.5% y/y) following a 10.2% jump. The cost of electricity eased 0.2% (+1.5% y/y) while natural gas prices fell 0.4% (+4.3% y/y) for the second consecutive month.
Food prices edged 0.1% higher (3.8% y/y) last month, after rising 0.3% in December, revised from 0.4%. Food-at-home prices slipped 0.1% (+3.7% y/y). (…)
Goods prices excluding food & energy edged up 0.1% in January (1.7% y/y) for a second consecutive month. Apparel prices surged 2.2% (-2.5% y/y) after gaining 0.9% in December, revised from 1.4%. Sporting goods prices rose 0.7% (2.8% y/y), about the same as during each of the prior three months. Recreation product prices improved 0.1% (-0.2% y/y). Declining were prices for education & communication goods which fell 0.6% (-1.9% y/y) following two moderate increases.
New vehicle prices declined 0.5% (1.4% y/y). Used car & truck prices fell 0.9% (+10.0% y/y), the third consecutive monthly decline. Medical care product costs slipped 0.1% (-2.3% y/y), the fifth decline in the last six months. Household furnishings prices weakened 0.5% last month (+2.4% y/y) after holding steady in December. Household appliance prices weakened 1.1% (+5.7% y/y) after holding steady in December.
Services prices held steady for a second straight month (1.3% y/y). December was revised from a 0.1% rise. Shelter costs rose 0.1% for the sixth straight month and by a greatly lessened 1.6% y/y. The owners’ equivalent rent of primary residences also rose 0.1% and gained 2.0% y/y. Education & communication services prices held steady (2.0% y/y). Falling by 1.0% (+0.3% y/y) were recreation services prices which followed a 0.5% drop. The cost of public transportation fell 1.7% (-13.9% y/y). Medical care services prices improved 0.5% (2.9% y/y) following three straight months of decline.
The Atlanta Fed’s sticky-price consumer price index (CPI)—a weighted basket of items that change price relatively slowly—increased 1.1 percent (on an annualized basis) in January, following a 1.0 percent increase in December. On a year-over-year basis, the series is up 1.7 percent.
On a core basis (excluding food and energy), the sticky-price index increased 0.9 percent (annualized) in January, and its 12-month percent change was 1.5 percent.
The flexible cut of the CPI—a weighted basket of items that change price relatively frequently—increased 11.4 percent (annualized) in January, and is up 1.8 percent on a year-over-year basis.
- Underlying Inflation Gauge (UIG)
- The UIG “full data set” measure for January is currently estimated at 1.5%, unchanged from the previous month.
- The “prices-only” measure for January is currently estimated at 2.1%, unchanged from the previous month.
- The twelve-month change in the January CPI was +1.4%, unchanged from the previous month.
For January 2021, trend CPI inflation is estimated to be in the 1.5% to 2.1% range, which is unchanged from the December 2020 range.
At the risk of completely boring you, here’s the Cleveland Fed’s Median Price CPI table:
Unsurpisingly
- Treasury Yields Fall After Lackluster Inflation Data Data indicates investors will have to wait longer for increase in consumer prices that many have been expecting
Yields, which fall when bond prices rise, dropped after the Labor Department said core consumer prices, excluding the often volatile food and energy categories, remained unchanged in January compared with the previous month. Core prices were also flat in December after a downward revision to the earlier estimate. (…)
The post-report rally was notable because it came hours before a $41 billion Treasury auction of 10-year notes. The looming influx of new bonds into the market would typically put upward pressure on yields, which were climbing before the inflation report. The auction later met solid demand from investors, leaving yields still lower on the session. (…)
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Fed’s Powell Signals Easy Money Policies to Remain in Place for a While Fed chairman also says monetary policy alone won’t be enough to restore the labor market to full strength
(…) The Fed is unlikely to “even think about withdrawing policy support” by raising rates or reducing its bond purchases for the foreseeable future, Mr. Powell said at a virtual appearance before the Economic Club of New York.
The Fed chief also repeated his call for more fiscal assistance for the economy, saying that monetary policy alone won’t be enough to restore the labor market to full strength. “It will require a society-wide commitment, with contributions from across government and the private sector,” Mr. Powell said. (…)
But it is fiscal policy that “is the essential tool for this situation,” Mr. Powell said Wednesday. (…)
Mr. Powell—also a Republican—said Wednesday that now isn’t the time to address the path of the federal debt and that he worries less about inflation than about the economic pain inflicted by the pandemic. (…)
“Inflation dynamics will evolve, but it’s hard to make the case why they would evolve very suddenly.”
Mr. Powell also said that providing too much support to an economy buffeted by risks and uncertainties is preferable to doing too little. (…)
The unemployment rate understates the impact of the pandemic on workers, particularly the most vulnerable, Mr. Powell said. Counting people who have left the labor force and those whose employment status is misclassified would increase the jobless rate to near 10% in January, he said.
“Published unemployment rates during Covid have dramatically understated the deterioration in the labor market,” Mr. Powell said. (…)
While the number of workers earning at least $85,000 a year rose 1% between February and December, the number of workers earning less than $30,000 was down 14%, economists at the New York Fed said in a report published Tuesday.
Another way to look at the same data:
Recession has Nearly Ended for High-Wage Workers,
but Job Losses Persist for Low-Wage Workers
The Atlanta Fed Wage Growth Tracker reveals that workers in the bottom wage quartile are seeing accelerating wage growth. If and when lower wage employment resumes, the aggregate wage bill will swell.
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Fed’s Daly Sees Central Bank Maintaining Bond-Buying Pace Through 2021 San Francisco Fed President Mary Daly also says that another round of government aid shouldn’t overheat the economy.
(…) Ms. Daly [a voting member of the FOMC] said the things now debated by Congress “are not things that are going to overheat our economy. These are things going to distressed people, distressed sectors, distressed businesses.”
The pandemic “is not over. And for us to say [more aid] is too much, I don’t know what metric and yardstick people are using; it’s certainly not looking out in their communities” and taking stock of the pain many Americans are feeling, Ms. Daly said. (…)
Like many of her colleagues, Ms. Daly said she wouldn’t be surprised to see inflation pressures accelerate as the economy recovers, but she doesn’t expect that to endure. And that will pose a test for policy makers.
“The head fake I want to avoid is thinking that a few quarters of very rapid growth can be extrapolated to future quarters of very rapid growth. If that happens, fantastic,” Ms. Daly said.
“The greatest risk is that we get nervous, and we pull back accommodation too quickly on the fears of rapidly rising inflation or on the overconfidence that inflation’s hit our target, and then we have more work to do to get it back up,” Ms. Daly said.
- Markets Don’t Think Biden’s $1.9 Trillion Covid Relief Is Too Much Investors are predicting the sort of inflation they like, slightly higher in the next few years but moderating back down after that
(…) markets show no sign of concern, either in the average expectation of inflation implied by the bond market or the likelihood of very high inflation in the options market, both of which are merely back to where they stood in 2018. (…)
The Summers/Blanchard case is based on the theory that a hot economy feeds through into price rises. There is a link between the two, as prices tend to rise faster as the output gap—however measured—narrows. But the link is very far from perfect, and depends on another unknown: how far unemployment can fall before wage pressures build. Policy makers across the developed world repeatedly reduced their guesses for the sustainable level of unemployment over the past decade, and there’s no particular reason to think that the pre-pandemic figure—3.5%—is the minimum, or even that it is the right way to measure joblessness.
According to the CBO, the economy had been running hot for two years before the pandemic, yet the Federal Reserve’s preferred inflation gauge was still below its 2% target. (…)
In a more diverse job market, inflation expectations play a bigger role, both for workers asking for a raise and CEOs deciding on prices. With inflation having been so low for so long, the evidence from Japan is that it is hard to shift expectations up again, and a one-off jump might not do it. (…)
Bloomberg’s Ben Holland summarizes the big debate:
With No Inflation in Sight, Why the Inflation Debate?
Case for Inflation: Money Supply
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Case Against: Money Velocity
Case for Inflation: Households are Flush
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Case Against: Households are Cautious
Case for Inflation: Loose Central Banks
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Case Against: Loose Labor Markets
Case for Inflation: Supply Shocks
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Case Against: Spare Capacity
For one, ING is clear:
US inflation: The only way is up!
(…) With Covid containment measures having eased somewhat and demand returning, prices have recovered over the subsequent eight months. If price levels stay unchanged for the next four months the comparison with the depressed price levels of that heavily stressed March-May period means headline inflation is going to rise to 2.8% YoY. This is the bear minimum annual inflation will get to.
Given rising commodity and energy prices and rising freight costs that are still to work through to consumer prices this takes us closer to 3%. Then with the vaccine roll out process gaining traction, potentially paving the way for a fuller economic re-opening at some point in 2Q21, many businesses may take the opportunity to raise their prices.
This is most likely to happen in sectors that have experienced supply constraints such as the leisure and hospitality industry. Faced with less competition (bars and restaurants having gone out of business, hotels having closed and aircraft mothballed) at a time when customers are desperate to experience things they haven’t been able to do for 12 months, pricing power is going to be strong.
Throw in rising housing rents – which on their own account for 7.9% of the inflation basket – and we could see inflation push above 3.5% and possibly head close to 4% by May.
Source: Macrobond, ING
December’s $900bn fiscal support package followed by the proposed $1.9tn package, followed by a potential $3tn Build Back Better infrastructure and Green energy plan is a lot of money going into an economy at a time when the Federal Reserve continues to buy $120bn of financial assets each month. (…)
Remember, household cash and savings deposits have risen $2.4tn since 3Q 2019 and credit card balances are at 4 year lows so it isn’t just government that has cash ammunition to spend.
How sustained inflation will be is likely going to be determined by the response of the labour market. The US is largely a service sector economy meaning that the main inflation driver over the medium to longer term is the price of the workforce. If the economy sees rapid jobs growth and wages start to rise, this is when inflation can become a much bigger, ingrained issue.
We suspect the robust growth environment and a higher and more sustained set of inflation readings will lead to a change of thinking with Quantitative Easing likely to be tapered before year-end and the first Fed rate hike coming in 2023. Given this backdrop we expect the 10Y Treasury yield to push up to 1.5% by mid-year with a 1.75% handle our base case for 2H21.
Let me throw in this interesting chart from tracktherecovery.com showing that the high income segment is not currently spending much, unable to buy a lot of the services it normally craves on. But this is the segment with most of the excess savings. Meanwhile, low income people are splurging.
Consumers are spending the latest stimulus cheque – daily credit & debit card transactions
Money velocity may be rising, judging by money moving from savings to checking accounts:
Certainly related:
More U.S. Buyers Than Ever Seeking $1 Million-Plus Homes More than 1 in 10 home searches on Redfin were for set for seven-digit properties
(…) Last January, about 8.5% of all saved searches were for homes at or above that price threshold.
(…) fierce competition over a shortage of homes for sale has caused prices to soar across the U.S., and has pushed the median home price past $500,000 for the first time in numerous cities. In December, the U.S. median sale price was up 13% from a year prior, by Redfin’s measure.
In January, 36% of home searches were filtered for properties asking $500,000 or less, down from 39% a year ago. It’s a sign that lower-income buyers are not as active in the market. (…)
“In the past, anything over $1.5 million would stay on the market for several weeks, but that’s not the case anymore,” said Seattle-based Redfin agent Bliss Ong. “Even in the $2 million range, homes are selling within the first week.”
Meanwhile:
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Manhattan Landlords Offer Record Perks to Fill Empty Apartments “You’ve got to keep sweetening the pot. The purpose of it is to temper the decline.”
Oil Demand Recovery Expected to Outstrip Production The global supply and demand of crude oil are on course to continue rebalancing this year after the turmoil brought by the pandemic in 2020, the International Energy Agency said.
(…) The agency significantly increased its forecast for producing nations outside of the pact between the Organization of the Petroleum Exporting Countries and allies such as Russia, raising its projections for non-OPEC supply growth by 290,000 barrels a day to an increase of 830,000 barrels a day this year.
At the same time, the IEA trimmed its forecast for global oil demand by 200,000 barrels a day to 96.4 million barrels—around 3% less than in 2019—but said part of that was because of a change to historic data. (…)
At the beginning of February, Saudi Arabia—one of the world’s largest producers—unilaterally cut an additional one million barrels of crude a day, a move that surprised the world when it was announced a month earlier.
Along with resilient demand in developing-world powerhouses, such as China and India, as well as hopes of a large U.S. stimulus bill and volatile trading in broader financial markets, Riyadh’s move has fueled a recovery in oil prices.
The so-far successful efforts of OPEC-plus to hold back supply, the rollout of coronavirus vaccination programs, and the prospect of weaker travel restrictions remain the basis for cautious forecasts of an oil-market recovery, the IEA said. (…)
If balances continue to tighten and non-OPEC producers increase production, that could fray the cohesion of OPEC-plus cuts, the IEA said. That might have consequences for the oil-price rally.
TECHNICALS WATCH
Speculative volume skyrockets as smart money sells
Last month, there was a remarkable jump in the most speculative corners of the market, including leveraged vehicles like options and margin trading, and lottery ticket shares in the form of penny stocks.
The roaming horde of speculators found that niche in December, with more than 1 trillion shares traded. It picked up even more in January. (…)
At the same time, the smart money is selling. At least, if we can consider activity during the last hour of trading to be the work of more informed investors, the theory behind the Smart Money Index. As calculated by Bloomberg, this measure is hanging near its lows despite indexes being at new highs.
(…) never before have we seen so many days when the S&P 500 was in the upper 90% of its 1-year range while the Smart Money Index is in the bottom 10% of its own 1-year range. (…)
There has been no shortage of signs of extreme, even record, speculation in recent weeks. The biggest counter-point to that has been widespread and impressive buying interest. That started to show some cracks in the past few weeks, but recent days have started to make up for it. It’s a challenging dichotomy but risks in the short- to medium-term appear high, and the persistent last-hour selling adds to those concerns.
Speculative demand is increasingly being met by speculative supply:
These lesser-scrutinized blank-check IPOs, often backed (or just pumped) by a celebrity, are hitting the market at a furious pace. According to Dealogic, SPAC IPOs have raised $38.3 billion so far this year. We are well on our way to surpassing $300 billion in new SPAC listings this year—a four-fold increase on 2020, the so-called “year of the SPAC.” (Bloomberg)
The shorts (dumb or smart?) are essentially gone, like in 2000:
That said, the dependable 13/34–Week EMA Trend, while extended, is not flashing anything close to red:
And NDR’s demand/supply volume chart shows rising demand and declining supply…
JPMorgan Says Commodities May Have Just Begun a New Supercycle
(…) Everyone from Goldman Sachs Group Inc. to Bank of America Corp. to Ospraie Management LLC are calling for a commodities bull market as government stimulus kicks in and vaccines are deployed around the world to fight the coronavirus. (…)
“We believe that the new commodity upswing, and in particular oil up cycle, has started,” the JPMorgan analysts said in their note. “The tide on yields and inflation is turning.” (…)
Hedge funds similarly haven’t been this bullish on commodities since the mid-2000s, when China was stockpiling everything from copper to cotton while crop failures and export bans around the world boosted food prices, eventually toppling governments during the Arab Spring. The backdrop is now starting to look similar, with a broad gauge of commodity prices hitting its highest in six years. (…)
Warnings:
- Goldman Sachs predicts commodity ‘renaissance’ (Dec. 6, 2012)
- Investing in stocks of companies related to commodity prices can be a good idea. (Sept. 2013)
- Time to Buy Commodities | Barron’s (Aug. 8, 2015)
- Commodity cycle turning up, says ANZ economist (Jan. 23, 2018)
Biden, China’s Xi Hold Talks Over Rights, Trade, Climate The U.S. president raised issues that divide the two countries but also held open the possibility of working together on common concerns.
(…) The call, Wednesday night in Washington, came after Mr. Biden in recent days spoke with a host of allies in Europe and Asia, signaling that he seeks to deal with China as the leader of the world’s democracies rather than solely an American president. The U.S. needs to “join together with others to hold China accountable for its abuses and to shape China’s choices going forward,” said a senior administration official.
A White House statement said Mr. Biden raised his “fundamental concerns about Beijing’s coercive and unfair economic practices,” as well as human rights issues and “preserving a free and open Indo-Pacific” region. But it said the leaders discussed cooperation on fighting Covid-19, climate change and other issues. (…)
The Chinese leader reiterated Beijing’s view that “cooperation is the only correct choice for both sides,” according to a readout from Chinese state media. He said that the U.S. and China should work together on issues such as efforts to combat the Covid-19 pandemic, spur a global economic recovery and maintain regional stability.
“China and the U.S. will have different views on certain issues and the key is to respect each other, treat each other equally, and to manage and deal with the issues in a constructive manner,” Mr. Xi was quoted as saying. (…)
Heavy tariffs will remain in place for now while the Biden team conducts a review of trade policy internally and with allies, the senior administration official said. At that point, the administration would decide which ones to roll back.
Currently the U.S. has levies on $370 billon of Chinese imports—three quarters of everything China sells to the U.S. (…)
The official also said the U.S. plans to work with allies on a joint plan to deny critical technologies to Beijing. Biden officials have argued that the technology competition between the two nations is one of the administration’s main focuses. (…)
ZeroHedge has its own color:
(…) According to an account of the conversation reported by Chinese state television, Xi said that “cooperation was the only choice and that the two countries need to properly manage disputes in a constructive manner.” Xi also told Biden that “confrontation between China and the United States would be a disaster and the two sides should re-establish the means to avoid misjudgments.”
Xi also said Beijing and Washington should re-establish various mechanisms for dialogue in order to understand each others’ intentions and avoid misunderstandings, the report said.
Finally, and most bizarrely, Xi told Biden that he hopes the United States will cautiously handle matters related to Taiwan, Hong Kong and Xinjiang that deal with matters of China’s sovereignty and territorial integrity. Quite the opposite of what Biden reportedly told Xi… (…)
On Sunday, Biden told CBS News that China would face “extreme competition” from the US. While he praised his Chinese counterpart — whom he knows from his time as Barack Obama’s vice-president — as “very bright”, he said he “doesn’t have a democratic . . . bone in his body”.
Just a few days prior, Blinken told Yang the US would stand up for democracy and human rights, signalling a hawkish stance towards China. “I made clear the US will . . . hold Beijing accountable for its abuses of the international system,” Blinken wrote on Twitter following the call. In response, Yang warned the US not to interfere in Hong Kong and Xinjiang, saying “no one can stop the great rejuvenation of the Chinese nation”. (…)