Rising U.S. Consumer Prices Are Eroding Wage Gains Months of steady increases have pushed up the inflation rate to the highest level in years. Overall prices are up 2.9% over the past 12 months, a rate last exceeded in early 2012.
From the Cleveland Fed:
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.7% annualized rate) in July. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.3% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.
[Friday], the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.2% (2.1% annualized rate) in July. The CPI less food and energy rose 0.2% (3.0% annualized rate) on a seasonally adjusted basis.
Over the last 12 months, the median CPI rose 2.8%, the trimmed-mean CPI rose 2.2%, the CPI rose 2.9%, and the CPI less food and energy rose 2.4%.
REAL EARNINGS GROWTH
INFLATION TRENDS
The UIG measures currently estimate trend CPI inflation to be approximately in the 2.3% to 3.3% range. Since January, there has been a notable pickup in the twelve-month change in the CPI from 2.1% to 2.9%, with this series now moving closer to the UIG “full data set” measure.
UIG Measures and 12-Month Change in the CPI
NY Fed:
Do Import Tariffs Help Reduce Trade Deficits?
(…) The evidence from China’s experience strongly suggests that a country that increases its tariffs is likely to not only reduce its imports but also reduce its exports. Many large exporters are also large importers that depend on imported inputs for production of their exports. Even if U.S. exporters switch to domestically produced inputs their costs will still rise, because competing domestic suppliers will be able to increase their markups in the industries that are protected by higher tariffs. For example, with a 25 percent steel tariff, domestic steel producers can increase their markups and still stay competitive. It is the U.S. exporters that rely on these inputs that will be adversely affected. And this is even before we take into account the cost to exporters from the retaliation by other countries.
While we cannot predict the size of the trade deficit, what seems clear from our analysis is that import tariffs will reduce both imports and exports.
Robust Growth Pushes Canada’s Jobless Rate to Lowest Since 1970s
The unemployment rate declined to 5.8 percent from 6 percent in June, matching the lowest level since the 1970s, Statistics Canada reported Friday from Ottawa. The economy added 54,100 jobs, marking a second straight month of exceptionally strong labor market gains.
While the breakdown was less rosy in July — all the gains were part-time and concentrated in public sector service jobs — the report is consistent with a robust economy that continues to generate jobs at a steady pace and looks to be running up against capacity. Canada’s economy has added more than 600,000 new jobs over the past two years — most of them full-time — raising concerns the nation’s tightening jobs market is running out of room to grow much further. (…)
Wage gains slowed during the month, with average hourly wages up 3.2 percent from a year ago. That’s the slowest pace since February. Wage gains for permanent workers were 3 percent, the slowest this year. (…)
Turkish Lira’s Fall Hammers Emerging Markets World-Wide Turkey’s currency plunged again, rattling other vulnerable emerging markets, and a defiant speech by President Tayyip Erdogan and policy moves by country’s central bank failed to ease investors concerns.
Somebody will show up naked pretty soon.
- Spanish, French and Italian banks have the highest exposure to Turkey. (The Daily Shot)
Source: Capital Economics
EARNINGS WATCH
Thomson Reuters:
Through Aug. 10, 454 companies in the S&P 500 Index have reported earnings for Q2 2018. Of these companies, 78.9% reported earnings above analyst expectations and 16.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 64% of companies beat estimates and 21% miss estimates. Over the past four quarters, 75% of companies beat the estimates and 18% missed estimates.
In aggregate, companies are reporting earnings that are 5.1% above estimates, which is above the 3.2% long-term (since 1994) average surprise factor, and below the 5.3% surprise factor recorded over the past four quarters.
The estimated earnings growth rate for the S&P 500 for 18Q2 is 24.4%. If the energy sector is excluded, the growth rate declines to 21.3%. The estimated revenue growth rate for the S&P 500 for 18Q2 is 9.3%. If the energy sector is excluded, the growth rate declines to 8.2%.
The estimated earnings growth rate for the S&P 500 for 18Q3 is 22.4%. If the energy sector is excluded, the growth rate declines to 19.5%.
Estimates continue to get revised up:
All U.S. ex-S&P 500 revisions also remain positive at 54% last week from 57.5% the previous 2 weeks on average.
This is in spite of worsening corporate guidance:
- The number of positive guidance has dropped quite a bit. Worrisome since companies are quick to guide up when they can.
- Negative guidance is up 26% from Q2’18 while positive guidance is down 18%.
- Last 9 days: 2 positives and 18 negatives.
According to Factset data, the most negative guidance so far are from Consumer Discretionary companies (1 Pos vs 12 Neg) and Health Care (2 vs 12).
In Europe
- Second quarter earnings are expected to increase 9.9% from Q2 2017. Excluding the Energy sector, earnings are expected to increase 5.8%.
- Second quarter revenue is expected to increase 3.9% from Q2 2017. Excluding the Energy sector, revenues are expected to increase 0.5% (S&P 500 +9.3%!)
- 215 companies in the STOXX 600 have reported earnings to date for Q2 2018. Of these, 52.6% reported results exceeding analyst estimates. In a typical quarter 50% beat analyst EPS estimates.
- 246 companies in the STOXX 600 have reported revenue to date for Q2 2018. Of these, 62.2% reported revenue exceeding analyst estimates. In a typical quarter 54% beat analyst revenue estimates.
Frackers Burn Cash to Sustain U.S. Oil Boom American oil companies—primed to reap the benefits of rising prices after years of wringing more from wells for less—are seeing profits erode in the face of rising costs.
(…) Two-thirds of U.S. oil producers failed to live within their means in the second quarter, even as oil rose above $70 a barrel. Collectively, 50 major U.S. oil companies reported in their second-quarter results that they have spent $2 billion more than they took in, according to an analysis of free cash flow by FactSet. (…)
The drilling frenzy has increased demand for materials like sand and water that are used in hydraulic fracturing, driving up prices. (…)
In recently reported second-quarter earnings, more than a dozen shale companies either lowered this year’s production targets, said they would have to spend more to extract roughly the same amount of oil and gas or missed analyst expectations for growth. To be sure, many continue to expect their production to increase compared to last year, but they are having to spend more to meet those goals. (…)
TECHNICALS WATCH
Lowry’s Research points out that, as of Aug. 7th, 2018, the NYSE all-issues and Lowry’s Operating Companies Only (OCO) Adv-Dec Lines were at new all-time highs. Same with the Advance-Decline lines for large, mid and small caps. “Evidence of strong support by market breadth for the rallies in the various price indexes doesn’t get much more
compelling than this.”
Lowry’s concludes that market breadth, together with measures of Supply and Demand, continue to suggest a healthy bull market.