Consumer Prices Moderate After Run-Up Earlier in 2018 Consumer-price pressures began to moderate in August after a buildup in inflation through much of the year, a positive signal for workers who have seen bigger paychecks largely eaten by price increases.
(…) When adjusting for inflation, hourly earnings rose just 0.2% from a year earlier. While modest, that’s an improvement from the prior three months when there was no real wage growth. (…)
The price of goods, excluding food and energy, fell 0.2% from a year earlier. That includes the cost of imported goods, such as clothing and electronics, but the report doesn’t break out imports versus domestic products. One major exception is washer and dryer prices, up 13.6% from a year earlier. (…)
Shelter and rent costs, which account for about a third of overall consumer spending, rose 0.3% in August from July and were up 3.4% from a year earlier. (…)
MEDIAN CPI UP 0.1% IN AUGUST
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.7% annualized rate) in August. The 16% trimmed-mean Consumer Price Index rose 0.2% (1.9% 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.
Yesterday, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.2% (2.7% annualized rate) in August. The CPI less food and energy rose 0.1% (1.0% 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 2.7%, and the CPI less food and energy rose 2.2%.
- Here is the decomposition of monthly changes in the CPI. (The Daily Shot)
Source: Nomura Securities
The decline in core goods prices, led by apparel but nonetheless fairly general, coupled with stable services prices, provides a welcomed slowing in monthly inflation trends. Six of the last 7 months have seen inflation below 0.2% and August’s +0.08% rise brought the 7 month annualized rate to 1.89%. Unless more tariffs are imposed, the inflation threat seems to have subsided.
The trend in the Median CPI has also slowed sharply (Bespoke)
This is significant since it means that investors do not need to be too scared of the Fed, potentially keeping earnings multiples higher than otherwise. Per the Rule of 20, fair P/E just rose by 0.2 points.
U.S. Budget Deficit Widened in August, Treasury Says The monthly U.S. budget deficit nearly doubled in August compared with a year earlier, as government spending swelled and revenues declined.
(…) More broadly, the federal deficit is ballooning as government spending outpaces revenues. The budget gap totaled $898 billion in the first 11 months of the 2018 fiscal year, 33% larger than at the same point in fiscal year 2017. The government’s fiscal year ends Sept. 30.
Last week, the Congressional Budget Office projected a total deficit of $793 billion for fiscal year 2018, compared with a $665 billion deficit in fiscal year 2017, a 19% increase.
Spending is up 7% so far this fiscal year while revenues have risen 1%, the Treasury said. That doesn’t capture the full impact of the Republican tax overhaul that took effect in January, because it includes revenue from October, November and December—the first three months of fiscal year 2018.
“When you remove all of the last-year tax revenue and just focus on this year, revenue is actually down about 4%,” said Marc Goldwein, a senior policy director at the Center for a Responsible Federal Budget.
Corporate income taxes in particular have dropped off. The Treasury said Thursday gross corporate taxes have fallen 20% so far this fiscal year, while individual income-tax receipts are up 1%.
As a share of gross domestic product, the deficit over the past 12 months totaled 4.4% in August, the highest level since May 2013. (…)
China Hits Record-Low Investment Growth as Beijing Battles a Slowdown Investment in factories, railways and other projects in China so far this year grew at its slowest pace in more than a quarter-century, pointing to challenges in government efforts to arrest an economic slowdown.
Fixed-asset investment outside rural households rose 5.3% in the January-August period from a year earlier, the National Bureau of Statistics said Friday. The rate was the most sluggish since 1992, when the investment data was first available, according to data provider Wind.
Economists had expected the pace to at least match the 5.5% rate recorded from January to July, given that the government has been encouraging more investment. While investment in property and manufacturing held steady, infrastructure—a key part of the government’s program to prevent a slippage in growth—remained weak, according to the official statistics. (…)
Value-added industrial output in China rose 6.1% in August from a year earlier while retail sales climbed 9.0%—both slightly higher than their July rates and stronger than economists’ expectations. Meanwhile, a national urban survey unemployment rate stood at 5.0% last month, slightly lower than the 5.1% in July.
At a briefing Friday, statistics bureau spokesman Mao Shengyong said investment growth should stabilize in the coming months because the government was expanding efforts to kick-start large projects. (…)
China’s fiscal expenditure rose 3.3% in August from a year earlier, unchanged from July’s rate, while loan demand and total credit growth remains soft, according to official data released earlier this week.
Investment in infrastructure rose 4.2% in the first eight months, slowing from a 5.7% growth in the January-July period. Rail investment contracted 10.6% so far this year, extending a decline of 8.7% in the first seven months. (…)
Russia Surprises With First Rate Hike Since 2014, Boosting Ruble
ECB Lowers Growth Forecasts as It Confirms Stimulus Taper European bank pivots from years of ultralow interest rates just as eurozone economy softens and faces risks ranging from Britain to Turkey
(…) In a statement, the ECB said it expects to wind down its €2.5 trillion ($2.9 trillion) bond-buying program—known as quantitative easing, or QE—by year-end, confirming a plan outlined in June. The bank also expects to hold its benchmark interest rate at the record low of minus 0.4% at least through the summer of 2019. (…)
The ECB shaved its forecasts for growth in the 19-nation currency union by 0.1 percentage points for this year and next, to 2% and 1.8% respectively. It expects eurozone inflation to average 1.7% this year and the following two years, unchanged from its forecast three months ago. (…)
“In the aggregate what’s happening in Argentina and Turkey so far doesn’t show any significant spillover, although at the level of individual institutions you may well see significant exposures,” Mr. Draghi said. (…)
So far. FYI, many Korean money funds, reaching for yield, have placed Korean money in Qatar whose banks lent to Turkey borrowers who now lack USD to repay. Worried Koreans are now withdrawing their money from Korean money funds, yaddi, yaddi, yadda…
SENTIMENT WATCH
Shiller Says U.S. Stocks Could Go ‘A Lot Higher’ Before Dropping They still have scope to soar to new highs, according to the Nobel laureate.
(…) “The stock market could get a lot higher before it comes down,” Shiller said in an interview with Bloomberg Television Thursday. “It’s highly priced, but it could get much more highly priced. It’s a risky market now.” (…)
Shiller’s focus instead is on President Donald Trump’s support for corporate America, which he says is driving sentiment and market strength. (…)
“It has something to do with our president, who is an exceptionally business-oriented president and who wants to deregulate and favors lower taxes,” he said. “That has an effect on the market but it goes beyond the rational, logical effect — it has something to do with our animal spirits. The U.S. is just doing great right now in terms of the strength of the economy and the stock market. That seems to be built around the Trump story at this point in history.” (…)
Wow! Really? Hmmm…
March 14, 2017: Why Robert Shiller Is Worried About the Trump Rally
(…) Shiller says when markets are as buoyant as they are now, resisting the urge to pile in is hard regardless of what else might be happening in society.
“I was tempted to do it, too,” he says. “Trump keeps talking about a new spirit for America and so you could (A) believe that or (B) you could believe that other investors believe that.”
On whether stocks are nearing a top, Shiller can’t say with any certainty. He’s loathe to make short-term forecasts. (…)
What Shiller will say now is that he’s refrained from adding to his own U.S. stock positions, emphasizing overseas markets instead. One factor that makes him cautious on American shares is the S&P 500’s cyclically-adjusted price-earnings ratio: While the metric is still about 30 percent below its high in 2000, it shows stocks are almost as expensive now as they were on the eve of the 1929 crash.
“The market is way over-priced,’’ he says. “It’s not as intellectual as people would think, or as economists would have you believe.’’
For the record, the S&P 500 is up 22% since it was “way over-priced” in March 2017. Per the Rule of 20, equities were 13% overvalued in early March 2017 (22.3 Rule of 20 P/E) but inflation was stable and earnings resuming their rise. By mid-April 2017 after a 3% slide, equities’ overvaluation dropped to 6% at 21.2 on the Rule of 20 P/E while the Shiller P/E was still “way over-priced”.
Anyway, we have been fully warned by Professor Shiller: “It’s highly priced, but it could get much more highly priced. It’s a risky market now.”
Also:
Mark Hulbert: Investors now are greedy, and that’s bearish for stocks
(…) Consider the average recommended equity exposure among a subset of short-term market timers who focus on the Nasdaq market in particular (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). Since the Nasdaq responds especially quickly to changes in investor mood, and because those timers are themselves quick to shift their recommended exposure levels, the HNNSI is my most sensitive barometer of investor sentiment in the equity market.
This average currently stands at 64.9%, having risen in recent sessions to as high as 70.1%. On the occasion of my early-August column on stock market sentiment, in contrast, this average stood at minus 2.7%. This represents a significant shift towards irrational exuberance. (…)
It’s interesting to note that this 70.1% recent reading is almost identical to the HNNSI level that prevailed on the day of the stock market’s late January high, when the HNNSI closed at 70.6%. The Nasdaq Composite COMP, +0.75% fell almost 10% over the two weeks following its January high, and the S&P 500 lost even more.
To be sure, not every HNNSI reading of 70.1% or above is followed by such a precipitous drop. But more often than not the stock market struggles when the HNNSI is this high, especially in comparison to its performance in the wake of widespread fear. (…)
Small investors don’t seem to read the same stuff:
(Bespoke)
Lastly:
JPMorgan Predicts the Next Financial Crisis Will Strike in 2020
Speaking of Dimon, he said at a conference Wednesday that he could beat Trump in an election:
I’m as tough as he is, I’m smarter than he is. I would be fine. He could punch me all he wants, it wouldn’t work with me. I’d fight right back.
The President fought right back:
The problem with banker Jamie Dimon running for President is that he doesn’t have the aptitude or “smarts” & is a poor public speaker & nervous mess — otherwise he is wonderful,” Mr Trump said in a tweet on Thursday. “I’ve made a lot of bankers, and others, look much smarter than they are with my great economic policy!
