Note: I will be traveling until June 27, with limited posting whenever possible given limited time, equipment and time zone constraints.
CPI Report Shows Inflation Has Been Cut in Half The consumer-price index rose 4% in May from a year earlier, well below the recent peak of 9.1% last June and down from April’s 4.9%
(…) So-called core consumer prices, which exclude volatile food and energy categories, climbed 5.3% in May from a year earlier, down from 5.5% in April. Economists see core prices as a better predictor of future inflation.
Core prices remain elevated in part because an earlier surge in housing-rental prices continues to show up in the inflation figures. Apartment-rent growth has since cooled significantly—declining to just under 2% over the 12 months ended in May from double-digit increases a year ago. Those price changes will take pressure off inflation, but they take time to show up in inflation data due to the lag in how rent is calculated.
Overall consumer prices increased a seasonally adjusted 0.1% in May from the prior month, down from April’s 0.4% increase. Core consumer prices rose 0.4% in May from the prior month, the same pace as in April and March, suggesting underlying price pressures remain firm.
Rising housing, used-vehicle and food prices drove inflation last month, the Labor Department said. Gasoline prices declined 5.6% in May from April, and other energy prices also dropped.
Fed officials have focused recently on prices for a subset of labor-intensive services by excluding food, energy, goods and housing prices, believing that category could reveal whether wage pressures from the strong labor market are passing through to consumer prices. That category rose 0.24 percentage point in May, close to its average in the two decades before the pandemic, J.P. Morgan economist Michael Feroli said in an analyst note. (…)
Renters Are About to Get the Upper Hand New-lease rents are poised to fall on an annual basis for only the second time since the 2008 financial crisis.
Apartment rent growth is declining fast, shifting the rental market to the tenant’s favor for the first time in years.
The average of six national rental-price measures from rental-listing and property data companies shows new-lease asking rents rose just under 2% over the 12 months ending in May.
That is down from the double-digit increases of a year ago and represents the largest deceleration over any year in recent history, according to data firm CoStar Group and rental software company RealPage. (…)
One of the rent measures, from real-estate brokerage Redfin, already shows asking rents turning negative with a decline of 0.6% in May, compared with the same month last year. The data includes both apartments and single-family rental homes, Redfin said.
A decline in asking rent over a 12-month period has only happened one other time since the 2008 financial crisis, according to some data sources, when the rental market briefly dipped in 2020 because of the outbreak of Covid-19, ending a decadelong streak of rent increases. (…
A historic number of new apartments under construction is also forcing more competition among landlords. That will help slow down rents in some parts of the country, such as the South and Southwest, which are seeing the most construction, housing analysts said. (…)
“There’s certainly a correction taking place,” said Rob Warnock, a researcher at rental website Apartment List. Apartment List reported rents rising under 1 percentage point for the year ending in May.
Relatively high renewal increases are one reason why rent, as captured by official inflation measures, is still shown to be rising at a higher-than-normal rate. The shelter component of the consumer-price index rose 0.6% in May to reach an 8% annual increase.
But new-lease rents, which measure the change in price for apartments available to be leased to new tenants, are considered more of a leading indicator. As new-lease rent prices cool, landlords also are expected to keep dropping how much they ask their existing tenants to pay, said Jay Parsons, chief economist at RealPage.
Property owners who don’t lower renewal rates risk watching too many of their tenants move out, driving up vacancies, which already increased 2.6 percentage points over the course of 2022.
“There’s effectively a cap on how much rents can rise on renewal in today’s market,” Parsons said.
The increases tenants pay to renew existing leases are also going down this year. The typical renter living in a professionally managed apartment building paid 6.5% more to renew their lease in May, according to RealPage. That figure has been falling for 10 months and is down from a peak rate of 11%. (…)
Overall, 48 of the 100 largest U.S. cities are posting negative rent growth for new leases, measured on an annual basis, according to Apartment List.
“It’s a break from the affordability crunch, but it is not an affordability windfall,” Warnock said.
Ed Yardeni shows these charts of the two CPI rent components. Still up more than 8.0% YoY and in the 6% annualized range using the latest 3 months.
Most rent data use new leases which account for less than 10% of all leases. Renewals are a better reflection of the market that the CPI tries to measure. Apartment List has the best data on renewals: we are now well past the year-end seasonal declines in MoM rents. The last 3 months have each been up more than 0.5% MoM, annualizing 6.5%. May was up 0.52% (6.3% a.r.)
So, beyond the positive YoY trends from the base effect, the secular trends are for rents to rise in a steady 6% range which mirrors the trends in wages.
BTW, while everybody focuses on so-called “super-core” inflation, my calculations of “Inflation on Essentials” shows the continued squeeze face by most Americans:
The good news is that the squeeze has become more bearable in the last 3 months:
John Authers: The Great Inflation Scare Reaches Its Final Phase
(…) In all, then, this was not a report that greatly shifts things in either direction. The overriding issue concerns services inflation. To look at the most important drivers that aren’t in the highly variable food and energy sectors, this chart shows the difference between inflation in “owner equivalent rent” — a statistical measure to capture the rise in accommodation costs — and core goods. The latter, thanks to some notorious pandemic horrors such as used cars, shot upwards and drove the initial shock. Now, shelter inflation, roughly a third of the index, is what keeps it at a politically and economically unpalatable level. (…)
The Cleveland Fed publishes “trimmed mean” inflation data, in which the biggest outliers in either direction are stripped out, and an average taken of the rest. This measure has turned down sharply on a year-on-year basis, while the latest month-on-month number, when annualized, implies that inflation is now below 3%, the upper range of the Fed’s target. (…)
The Atlanta Fed, meanwhile, publishes measures that divide prices into those that are “sticky” — meaning harder to adjust — and those that are flexible (such as for gasoline). The central bank’s great concern will be to keep sticky prices from growing out of control. On a year-on-year basis, sticky inflation has turned down but remains very high. However, once shelter is excluded, the trend over the last three months suggests that other sticky price rises are abating. The issue again is primarily shelter. (…)
In line with this, Michael Feroli of JPMorgan notes that core services ex-rent, Fed Chair Jerome Powell’s “super-core,” was up 0.24% month-on-month; “for context, in the two decades before the pandemic, this measure increased 0.23% on average.” And if there’s one startlingly positive news item buried in the data, it concerns the highly politicized but extremely important business of health insurance. Thanks largely to being driven so much by shifting political tides, premiums have had periods of extreme inflation in the decade since “Obamacare” came into effect. The latest data suggest that premiums are down more than 20% over the last 12 months. That might just be a handy spur to consumers’ disposable income if it continues. (…)
The upshot for all this is that the futures market now prices a “pause” for the fed funds rate this week as a virtual certainty, while continuing to retreat from predictions of any significant easing this year. The market’s prediction is now that there will be no net cuts at meetings of the Federal Open Market Committee for the rest of 2023. (…)
In as much as we try to analyse and decipher the CPI and its components, the reality is that core CPI inflation has stabilized in the 5.0-5.5% range, more than double the FOMC’s objective.
Meanwhile, the economy is also benefitting from lower energy prices, down 11.5% YoY in May. For how long?
OPEC Production Slumps as Voluntary Cuts Bite The group accelerated its efforts to tighten the oil market as a handful of the group’s largest members sharply slashed output as planned.
Output from OPEC’s 13 members slumped by 464,000 barrels a day to 28.07 million barrels a day, the cartel said in its monthly market report, citing figures sourced from independent data providers.
The drop suggests the group’s members have largely made good on a pledge announced in April to reduce their collective output. But the figures also show an uptick in production from other members who aren’t party to the plan that could soften the cuts’ impact on oil prices.
OPEC and a collection of Russia-led allied nations—known collectively as OPEC+—pledged in April to reduce oil production by around 1.1 million barrels a day from May onward. Russia said it would extend an already announced 500,000 barrel-a-day production cut. (…)
Saudi Arabia, OPEC’s de facto leader and largest producer, slashed its output by 519,000 barrels a day last month, slightly more than the half-a-million barrel cut it had announced. The United Arab Emirates also cut output by 140,000 barrels a day, largely in line with its agreed voluntary cuts
Kuwait reduced output by 95,000 barrels a day, falling short of its planned 128,000 barrel-a-day cut. Iraq, which had pledged to reduce output by over 200,000 barrels a day, saw its output tick slightly higher as supply disruptions at a major pipeline eased.
Still, the cuts’ impact on oil prices could be undermined as members of the group not party to the voluntary cuts boosted their output. Nigeria and Angola, which have long struggled to meet their output targets due to a lack of investment, lifted their production by 171,000 barrels a day and 54,000 barrels a day in May.
Iran, which is exempt from OPEC’s system of oil production quotas, increased its output by 61,000 barrels a day. Libya and Venezuela, two OPEC members that are also exempt and whose oil industries have been beset by problems, also saw their output inch upward. (…)
Separately, the oil producers group lefts its forecasts for global oil supply and demand largely unchanged. That means the group continues to expect a sharp run-up in demand later this year that supplies will struggle to keep pace with, raising the prospect of higher oil prices.
OPEC expects global oil demand will grow by 2.3 million barrels a day this year to 101.91 million barrels a day. Meanwhile, oil supplies from non-OPEC nations will grow by 1.4 million barrels a day to 72.61 million barrels a day.
The group also made no major changes to its forecasts for global economic growth, which it continues to see at 2.6% this year. China’s economy is forecast to grow by 5.2% in 2023, while the eurozone is expected to grow by 0.8%, in line with earlier forecasts. The exception was the U.S. economy, which OPEC now expects to grow by 1.3% this year, up from last month’s 1.2% forecast.
China’s Recovery Is in Real Peril Now China’s central bank cut its key short-term rate on Tuesday. On top of weak lending data for May, that should be ringing alarm bells.
(…) Chinese banks have suffered in recent quarters from narrowing net interest margins, which make it difficult to boost lending—and growth—without putting profits and balance sheets at risk. If the PBOC now guides its key medium-term lending facility rate lower this week, then the cost of three major funding channels for banks—deposits, the money market and central bank lending facilities—will all have moved meaningfully lower. That will lay the groundwork for actual cuts to borrowing costs for households and businesses.
The problem is that many households, already heavily indebted and viewing a shaky labor market, don’t seem all that inclined to borrow. By 2021, Chinese urban households already had a higher debt load as a percent of their disposable income than U.S. households, according to data from Clocktower Group, a California-based asset manager. Mortgage debt in China has risen rapidly in recent years, in part because Beijing has relied on household borrowing to revive the housing market during previous stimulus episodes. (…)
What this probably means is that more direct fiscal support from the central government will also be needed, one way or another. China’s economy came strong out the gate in the first quarter but it is increasingly clear that repairing the housing sector and the labor market could be a long slog—unless Beijing is willing to act much more decisively, and take on significantly heavier direct debts itself.
The Profit Squeeze Is On American companies’ profitability is worse than headline figures suggest
(…) Refinitiv now estimates that earnings per share among S&P 500 companies were flat versus a year ago. Compare that with April 1, when analysts had expected a 5.1% decline. Even allowing for analysts’ tendency to lowball ahead of earnings season, and for the fact that companies reduced their share count through stock buybacks, that is a significant beat.
S&P 500 sales grew more swiftly, rising 3.6% overall from a year ago (and more, on a per share basis), so profit margins did slip. Plugging Refinitiv’s earnings-per-share figures into sales-per-share figures from S&P Dow Jones Indices, earnings came to 11.8% of sales in the first quarter compared with 13.2% a year earlier. That is still a historically high level of profitability, however. In the prepandemic first quarter of 2019—a good quarter for margins—the margin was 11.6%.
Considering how companies’ labor bills, in particular, keep climbing, this might count as evidence that they have been fairly successful in passing rising costs on to their customers. But other data tell a different story.
The so-called pro-forma results that many companies highlight don’t include many of the charges (often characterized as “one-time,” or “nonrecurring”) that they must include under generally accepted accounting principles, or GAAP.
Use GAAP, and S&P Dow Jones Indices estimates S&P 500 profit margin in the first quarter was 10.8%. And in the fourth-quarter—the quarter when many companies kitchen-sink “one-time” problems, it was 8.6%. Moreover, as The Wall Street Journal recently documented, many companies have been employing earnings-boosting moves that are acceptable under accounting rules, such as reducing depreciation expenses. (…)
Commerce Department figures give a more sobering read on profit margins. Its measure of after-tax corporate profits as a share of gross domestic product—a common proxy for economywide profit margins—came to 8.7% in the first quarter. That was the lowest level since the first quarter of 2016. One factor behind the margin squeeze: Private industry’s wage and salary bill rose by 5.8% from a year earlier.
Separate data, also from the Commerce Department, shows that some of the industries that saw some of the biggest profit boosts from the flurry of buying, and price increases, set off by the pandemic, are now experiencing sharp margin declines. Profits for food producers came to 5.7% of sales in the first quarter compared with 8.2% a year earlier, for example, while metals producers’ margins slipped to 9.5% from 16.1%.
The decline in margins could persist. Analysts’ current estimates show overall revenue for companies in the S&P 500 falling by 0.5% from a year ago in the current quarter, but pro forma earnings per share falling by a steeper 5.4%. Moreover, with demand for workers still high, rising labor costs could outstrip companies’ ability to pass on costs. This could be especially true for the makers and sellers of goods—a much more significant share of employers represented in the stock market than in the overall economy. That is because, even as goods demand, and prices, seem likely to moderate, they must compete for workers with a growing services sector.
Companies might want to sugarcoat what is happening to margins, but for investors it could still be hard to swallow.
FYI:
May ranked as the largest month of buying of US equities since 2010. US L/S net leverage rose to 12 month highs as a result of the buying. Mega-Cap TMT drove the bulk of the buying in North America pushing net exposure to these names to decade highs. Traditional defensive continued to be bought with May being the 4th largest month of buying since 2018. (The Market Ear)
