Note: I am travelling (ancient word: “go from one place to another, typically over a distance of some length”) in Europe until August 23rd. Postings will thus be sporadic, limited and time-zones impacted.
CPI from Goldman Sachs:
July core CPI rose 0.31% (mom sa), below consensus of 0.5% and its slowest pace since September 2021. The year-on-year rate remained at 5.9%. Airfares declined 7.8% (mom sa), similar to our expectations, but inflation in the hotel lodging (-2.7%), used cars (-0.4%), communication (-0.4%), and education (+0.1%) categories was softer than we had forecast.
Shelter categories rose at a sequentially slower but still elevated pace (rent +0.70%, owners’ equivalent rent +0.63%), similar to our estimates. Monthly inflation remained strong for car insurance (+1.3%), pet services (+1.2%), recreation admissions (+0.9%), and household furnishings and operations (+0.6%).
Also of note, the labor-intensive “food away from home” category remained firm at +0.7%, and the climb in new car prices continued (+0.6%). Apparel prices edged down slightly (-0.1%), reflecting the interplay between higher discounting activity and continued upward pressure on base prices.
Headline CPI was flat (vs. consensus of 0.2%), as energy priced declined 4.6% and food prices rose 1.1%.
My CPI-Essentials data was flat MoM bringing the YoY change to 9.7% from 10.4%.
Axios:
- Online prices declined by 1% in July, compared with a year earlier, according to the Adobe Digital Price Index.
- It marks the first price decline in the index in 25 months — and it’s the fifth straight month in which the index has fallen.
- The downward trend suggests that retailers are dropping online prices for excess inventory.
Core commodities nonetheless rose 0.2% MoM in July and are up 7.0% YoY.
Core services rose 0.4% after 0.6% and 0.7%. They are now up 5.5% YoY, keeping pace with wages.
Curb Your Enthusiasm on the Good Inflation News Core inflation remains stubborn, and the Fed cares less about headline numbers than sticky prices. They’re still moving upward.
This piece by John Authers deals with most everything from CPI day and the market reaction. Some extracts:
(…) In this chart from Steven Englander of Standard Chartered PLC, the green line shows an “adjusted core” excluding the most directly pandemic-affected items. It also reduced last month, but at this point, the transitory effects are flattering the overall core numbers:
(…) Two widely followed measures come from the Cleveland Fed, which publishes a trimmed mean (excluding the biggest outliers in either direction and taking the average) and the median. These measures were never moved by rental cars or gasoline in the first place. And unfortunately, both continued to rise, and both are at their highest since the series started in 1984:
Narrowing down to look at the month-on-month change, however, it’s good to see that July’s increase in the trimmed mean was the lowest since last August:
The Atlanta Fed monitors prices that are “sticky” (which require lengthy planning to change and are hard to reduce), against flexible prices that can rise or fall swiftly with little difficulty. The early months of the inflation scare were dominated by flexible prices, for which inflation is beginning to drop a little. What matters for the Fed is whether expectations have become so dislodged that sticky prices are moving. And again, the year-on-year rate of sticky price inflation rose last month, to a new 40-year high. This is a big problem that implies a need for extreme central bank vigilance. The good news is that sticky prices didn’t inflate as much last month as they did the month before — but this is still strong evidence that as far as the Fed is concerned, the peak is not yet in:
Then there is the critical issue of housing costs, which account for about a third of the entire index. Year-on-year inflation in owner-equivalent rent, which aims to capture changes in accommodation costs for renters and buyers, rose again last month to set a new high since 1990. This number tends to come through with a lag; despite signs that the big increase in borrowing costs driven by the Fed’s tightening to date is already having an effect on the housing market, the number is likely to keep rising — and take core inflation up with it.
U.S. Productivity Declines in Q2, Pushing Unit Labor Costs Higher
Nonfarm business sector productivity fell 4.6% (AR) during Q2’22 following a 7.4% Q1 decline, revised from 7.3%. The 2.5% decline during the last four quarters was a record for the series which dates back 1948.
Nonfarm business output declined 2.1% (+1.5% y/y) after a little-revised 2.5% drop in Q1. Hours-worked rose 2.6% (4.1% y/y) after increasing 5.3% in Q1.
Hourly compensation strengthened 5.7% last quarter after increasing an unrevised 4.4% in Q1. As the labor markets tightened, forcing bidding wars to fill job positions, the y/y gain in hourly compensation remained strong at 6.7%. Adjusted for a 9.4% surge in price inflation, real hourly compensation fell 4.4% last quarter, down 1.7% y/y.
The combination of falling productivity and strength in compensation raised quarterly nonfarm business sector unit labor cost growth to 10.8%. It followed a 12.7% gain Q1. The 9.5% y/y increase was increased from a 0.9% low in decline in Q3’19.
In the manufacturing sector, output per hour grew 5.5% last quarter (0.4% y/y) following a 1.0% decline in Q1. Hourly compensation increased 4.9% (4.8% y/y) after a 5.8% Q1 increase. Real hourly compensation fell 5.1% (-3.5% y/y). That produced a dip in factory unit labor costs of 0.5% (+4.4% y/y), following a 6.9% Q1 rise.
Labor hoarding is becoming more expensive as companies retain less productive employees. The -2.5% YoY trend is unprecedented.
It is not impacting profits yet because sales are still rising at double digit rates thanks mainly to commodity prices. But you can’t have lowflation and strong nominal sales.
From maximum fear to a bit of greed
The Fear & Greed Model, based on the inputs published by CNN, has entered excessive optimism territory. Over the past 24 years, the S&P 500 has returned an annualized -0.3% when the model is above 80%.
Note that our figures will differ from the one published on CNN. We use different inputs for the put/call ratio and, more importantly, junk bond spreads. But the general inputs and model calculations are essentially the same.
The current level of optimism comes after what was, for all intents and purposes, maximum pessimism in May when the model fell below 5%. It has cycled from near-maximum pessimism to optimism seven other times when the S&P 500 was below its 200-day average.
The S&P’s future returns are interesting. During the failed bear market rallies, the index saw weakness almost immediately. During the bull markets ones, it didn’t.
The Risk/Reward Table highlights this further. After all the failed signals, the S&P never gained more than 3.5% at any point in the month following the first 80% reading. After all the successful signals, it rallied at least 3.5% each time.
So, that’s a good test here. If stocks can gain more than a few percent in the coming weeks, it will suggest a bull market.
When we zoom in on the 2001 instances, it’s obvious how limited the reward for buyers was after the model reached its extreme.
There were a couple of near misses for these sentiment cycles in 2007-08 when the model didn’t drop or rise quite far enough, though the implication was the same – limited upside and a quick reversal into a downtrend.
Contrast that to the bull market signals. After these triggered, buyers’ reactions were to just keep buying. There was minimal drawdown in the weeks after the model reached excessive optimism territory.
