Note: I will be travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.
I arrived in Hong Kong yesterday. This is what I got when browsing for the official BLS inflation data:
Access Denied
You don’t have permission to access “http://www.bls.gov/” on this server.
February CPI: FOMC Still Searching for Confidence
The February consumer price data came in a touch stronger than expected. The headline CPI increased 0.4% in the month, led by higher gasoline prices (+3.8%). Excluding food and energy prices, core inflation also registered 0.4%. However, the unrounded 0.36% bump in core CPI was not too far off our forecast for a 0.30% gain.
Furthermore, core price growth was flattered by bigger than expected increases in volatile components such as used autos and airfares. Housing inflation cooled as owners’ equivalent rent increased 0.4%, a step down from the eye-catching 0.6% jump in January.
In our view, the details of today’s CPI report generally were encouraging. We expect core goods deflation to return in the coming months amid improved supply chains and less supportive seasonal factors. The much-anticipated slowdown in primary shelter inflation is ongoing. A cooling jobs market has brought about slower labor cost growth, and the widespread easing in this month’s “super core” suggests services inflation may not be as sticky as some feared following last month’s CPI report
That said, we doubt today’s report fills the FOMC with the confidence it needs to begin cutting rates. The core CPI has risen at 4.2% annualized rate over the past three months, which is a bit higher than the 3.8% increase in core prices over the past 12 months. We expect disinflation progress to resume in the coming months for the reasons listed above, but we think the FOMC will need to see it to believe it.
The first rate cut from the FOMC looks increasingly likely to occur this summer.
Source: U.S. Department of Labor and Wells Fargo Economics
Consumer prices advanced 0.4% in February, in line with consensus expectations. The overall energy index, which accounts for a little under 7% of the CPI, increased 2.3% in February. As expected, the headline CPI was lifted by a jump in gasoline prices (+3.8%). Compared to one year ago, gasoline prices are still down 3.9%. Energy services rose a smaller 0.8%, led by utility gas service (+2.3%). Food inflation was more benign in February, with prices unchanged in the month. Grocery store prices were flat while prices at restaurants and bars increased 0.1%—the smallest monthly increase in three years. Over the past year, food inflation has cooled significantly and is now back in line with pre-pandemic norms.
Excluding food and energy, the gain in CPI was a touch stronger than expected. The core index advanced 0.36%, a bit above the Bloomberg consensus and our own expectation for a 0.30% gain. The somewhat firmer reading stemmed from core goods, which rose for the first time in eight months (+0.1%). (…) Contributing to the rise was a small rebound in prices for used vehicles, apparel and education and communication goods, which offset declines in new vehicles, motor vehicle equipment, household and recreational goods. (…)
Core services, on the other hand, cooled largely as expected. A 0.7% jump in core services in January drove inflation’s unexpected pop to start the year. In February, core services prices advanced “just” 0.5% (0.46% before rounding). After making waves in January, owners’ equivalent rent growth eased in February (+0.4%). With rent of primary residences picking up in February (+0.5%), last month’s eye-catching gap between the two largest components of the CPI collapsed.
Through the recent monthly volatility, the trend in housing inflation remains downward. Both the year-over-year rate of OER and rent of primary residences registered the smallest increases since the summer of 2022, and a further slide appears in store with private-sector measures of rent growth having largely returned to their pre-pandemic rates.
Source: U.S. Department of Labor, Zillow Inc. and Wells Fargo Economics
Excluding primary shelter, core services also advanced at a less concerning rate in February. The CPI version of the “super core”, watched by Fed officials to better gauge services inflation given the long lag in shelter inflation, advanced 0.4% after a 0.9% gain in January. The more moderate reading was helped along by a partial reversal of last month’s jump in medical and personal care services, as well as smaller monthly gains in lodging away from home, motor vehicle insurance and maintenance services. The broad cooling in the CPI “super core” in February suggests services inflation is not as sticky as initially feared following January’s sharp upside surprise.
Source: U.S. Department of Labor and Wells Fargo Economics
On a year-ago basis, consumer prices are up 3.2%, a more palatable increase than the 6.0% increase registered this time last year but little different from the past few months. The recent pace of core inflation, having registered a 4.2% annualized rate over the past three months, also points to some near-term stalling in inflation’s descent.
However, we expect the lack of recent progress to be temporary. Price pressures across the economy continue to broadly abate. Labor costs are cooling as the jobs market softens. Consumers, while still spending, are not the price-takers they were a year or two ago as revenge spending dissipates and delinquencies creep higher. The supply chain kinks that helped drive core goods inflation to 47-year high largely have unwound, making it easier for businesses to secure product. In a separate report this morning, the February NFIB Small Business Optimism Index showed the smallest share of businesses raising prices in three years.
While a downward trend in inflation remains in place in our view, the slow progress seen over the past few months is likely to keep the Fed searching for a bit more confidence that inflation is on a sustained path back to its 2% target. The first rate cut from the FOMC looks increasingly likely to occur this summer.
Goldman Sachs keeps analyzing even the smallest items but its 6-m change chart does not look great, does it?
February core CPI rose 0.36%, 6bp above consensus expectations, and the year-on-year rate fell one tenth to 3.8%.
The composition was disinflationary however, with a sharp normalization in non-housing services inflation (+0.47% vs. +0.85% in January and +0.33% average in Q4) and a return to the Q4 trend for the owners’ equivalent rent category (+0.44%).
These inflections support our view that last month’s report received a one-time boost from the January effect and from sample-related volatility in OER. Within non-housing services, February inflation slowed in labor-reliant categories including medical services (-0.1% vs. +0.7% in February), car insurance (+0.9% vs. +1.4%), car repair (+0.4% vs. +0.8%), and personal care services (+0.3% vs. +0.7%), though daycare prices remained strong (+0.9% vs. +0.7%). Food away from home—which flows into the core PCE but is not in core CPI—was also soft (+0.1% vs. +0.5%).
The large and persistent owners’ equivalent rent category (OER) retraced its January spike, though the rent category was slightly above our expectations (+0.46% vs. GS +0.42% and prior +0.36%). Used car prices surprisingly rose 0.5%, and we expect a return to declines in the spring given the continued rebound in auto inventories and decline in auction prices. Airfares (+3.6%), apparel (+0.6%), and tobacco (+0.8%) prices also rose. Communications prices increased sharply (+0.5%) for the second straight month and will boost the PCE measure. Headline CPI rose 0.44%, as energy prices rose 2.3% and food prices were unchanged.
“Deflationary” as Goldman claims? “Temporary lack of progress” per Wells Fargo?
The Cleveland Fed’s Median CPI printed +0.4% in February after +0.5% in January and +0.3% in December. Last 3 months: +4.9% a.r. vs +4.5% in the previous 3 months. The 16% trimmed-mean CPI: +4.5% a.r. in the last 3 months vs +3.6% in the previous 3 months.
Meanwhile, CPI-Services is no longer trending towards the pre-pandemic growth rates. Maybe only “temporary”.
Much depends on wages. Through January, the Atlanta Fed`s composition adjusted wage tracker shows a stalling in the wage growth trends:
Ed Yardeni’s views is dominant in this market:
However, excluding shelter (which is a lagging component of the CPI and a flawed measure of current market rents), the headline and core CPI inflation rates are only 1.8% and 2.2% y/y.
Ed has been mostly right so far this cycle but his “lagging and flawed measure of current market rents” is debatable. Zillow’s is arguably the best measure of market rent. CPI-Rent growth MoM has now converged.
NFIB Small Business Optimism Index Dips in February Inflation Continues to Hold Down Small Business Confidence
NFIB’s Small Business Optimism Index fell to the lowest level since May 2023 during February. Firms reported seeing improvements in terms of labor availability, while a lower share of firms raised selling prices during the month. Expectations for real sales and better credit conditions also notched improvements during the month. On balance, however, most other components slipped, notably hiring and capex plans. What’s more, the share of small businesses reporting inflation as the single most important operational problem rose during the month, overtaking labor quality at the top of the list.
Source: NFIB and Wells Fargo Economics
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The NFIB Small Business Optimism Index fell to 89.4 in February. Although confidence has shown signs of improvement at various times, the headline index has mostly bounced around at a level well below the long-term historical average over the past two years.
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The lack of meaningful improvement largely reflects ongoing challenges dealing with higher costs for materials, labor and financing. The share of small businesses reporting inflation as the single most important operational problem continues to be elevated and turned up further in February. Although inflation appears to be subsiding on trend, small businesses still appear to be having difficulties balancing the sharp rise in prices over past several years with slowing sales and uncertain future demand.
- Expectations for real sales notched an improvement during the month, however the subindex is still very depressed relative to recent periods of economic expansion. Lower earnings expectations coincides with a generally dim outlook for the economy. The share of firms expecting the economy to improve over the next six months, which has trended slightly higher over the past year, edged lower in February and is still close to its recent low point.
- Small firms have seen some improvements recently. For example, labor availability for small firms looks to be getting better. During February, the share of businesses reporting labor quality as a top problem fell to the lowest share since April 2020. Difficult to fill job openings also declined.
- Labor cost pressures appear to be easing as a result. The share of firms raising compensation, both currently and expecting to in the near future, both dipped during the month.
- On the other hand, hiring intentions for small firms sunk to a low not seen since May 2020 during the throes of the pandemic. The drop suggests the labor market may start to lose momentum over the coming months.
- The share of firms which are currently raising prices continues to decline and is now at the lowest reading since January 2021. Encouragingly, the share expecting to raise prices, which spurted higher over the past several months, pulled back slightly during February.
Source: NFIB and Wells Fargo Economics
Source: NFIB and Wells Fargo Economics
Source: NFIB and Wells Fargo Economics
SENTIMENT WATCH
The company [NVDA] will be hosting its AI conference in San Jose at the beginning of next week:
“Come connect with a dream team of industry luminaries, developers, researchers, and business strategists helping shape what’s next in AI and accelerated computing. From the highly anticipated keynote by NVIDIA CEO Jensen Huang to over 900 inspiring sessions, 300+ exhibits, 20+ technical workshops covering generative AI and more…” It’s hard to imagine being short tech stocks ahead of this AI happening.
Helping to drive the S&P 500 to a new record high today was Oracle, which soared after reporting better than expected results (chart). Microsoft rents GPUs from Oracle to run the AI functions of its Bing search engine. Founder Larry Ellison said, “We’re building an AI data center in the United States where you could park eight Boeing 747 nose-to-tail in that one data center.” (Ed Yardeni)