U.S. Inflation Outlook Falls for First Time Since October 2020 U.S. consumers don’t expect red-hot inflation levels to last in the long term.
(…) The authors drew in part from the January consumer survey from Federal Reserve Bank of New York, which showed that the median one-year-ahead inflation expectations fell for the first time since October 2020, to 5.8%. The outlook over three years dropped even more sharply, and the decline was broad-based across age, education and income.
Combined with data from the University of Michigan’s sentiment index, this indicates that consumers seem to recognize the unusual nature of the current bout of high inflation, the economists said in the blog post Monday. (…)
In their analysis, Williams and his five co-authors found that medium-term expectations have exhibited lower sensitivity to inflation surprises during the pandemic than before it. They also found that the five-year inflation outlook has remained “remarkably stable” since last summer.
Taken together, this suggests that consumers “do not view the current elevated inflation as very long-lasting,” they wrote.
All products and services surveyed by the New York Fed declined in January, including the year-ahead price changes for food, rent, gas, medical care, college education and gold. The survey also showed that the median households is expecting one-year-ahead earnings growth to rise by 3%, the same as last month. Last year, an average gain of 2.6% was expected.
The median three-year ahead inflation expectations decreased by 0.5 percentage point to 3.5%. (…)
The New York Fed President John Williams was a co-author of this analysis which will surely find its way to the next FOMC meeting, reassuring the doves, surely happy and secured seeing how the prescient American consumer shares their disinflationary views.
I suppose this next chart will not get inserted in the presentation package, however. Even though it reveals how non-economist Americans arrive at their three-year forecasts for “food, rent, gas, medical care, college education and gold” simply watching how prices fluctuate at their corner gas station.
More interesting from the survey, however, were these findings:
- The median expected growth in household income fell by 0.1 percentage point to 3.3% in January, but remains above its trailing 12-month average of 2.9%.
- Median year-ahead household spending growth expectations remained unchanged at 5.5%, substantially above its pre-pandemic level.
Since the median one-year-ahead inflation expectations from the survey is 5.8%, Americans seem willing to dip into their savings just to keep pace with inflation. They might be helped by lower gas prices but I bet they can’t forecast that.
CEOs are probably better placed to see what’s ahead: The WSJ tallies corporate conf. calls. CEOs trying to protect profit margins and stock valuations.
What CEOs Are Saying: ‘We See Inflation Going Up Everywhere’
- “We do have a view that we have to have brands that earn the right to take pricing, and secondly, we very much are not looking to just pass through in price, but to do it intelligently because whilst it’s easy to respond to inflation by putting up the prices, there is clearly, as there is broad-based inflation, going to be a squeeze on real incomes in a number of countries.” (Feb. 10) (Coca-Cola)
- “We see inflation going up everywhere. We have the brands, and we have again the capabilities to price. That’s what we’re doing in the majority of the markets…I’m a bit more cautious on emerging markets. I want to see a few more months to understand how the consumer is kind of absorbing all these high costs in multiple parts of their budget, household budget. But we’re feeling good about how our consumers are staying loyal to our brands in spite of some of our pricing decisions.” (Feb. 10) PepsiCo)
- We do have the pricing coming into play, but it still remains a challenging environment, we think, in 2022.” (Feb. 7) (Hasbro)
- “We have seen a lot of inflation…Labor costs have been up 20%, cattle costs are up—have been—they’re up 22%. Grain has been up 29%. This year in freight, I mentioned earlier, is up 32%. We’re not asking customers or the consumer ultimately to pay for our inefficiencies. We’re asking them to pay for inflation.” (Feb. 7) (Tyson Foods)
- “You should think about the pricing pass-through as inflation or cost recovery mechanisms. Our primary driver for growth is new account wins, new customers and increasing participation. So we’re not trying to build margin by pricing pass-through. We’re trying to recover our costs.” (Feb. 8) (Aramark)
- So we are expecting double-digit inflation in 2022, and the bulk of it is market-driven…We’re seeing inflation in ingredients and packaging, oil, corn, wheat, and on the packaging side, cans, cartons. So we’re seeing broad-based inflation across our ingredients.” (Feb. 10) (Kellogg)
- “We plan that raw material inflation stays where it’s at for the full year. So that’s an assumption that we have in our planning. So again, we’ve got to continue to get the price to cover the logistics and any other raw inflation that we see.” (Feb. 8) (DuPont)
- “We feel confident that we’re going to be able to offset raw material costs with price/mix. The real challenge in terms of 2022 earnings is going to be addressing inflation in other costs, so nonmaterial costs. And, obviously, we think price and mix can help with that. (Goodyear)
- “We also do the analytical side of things where after we take pricing, we really do analyze what happens to transactions, and the good news is, we have so much data now with our loyalty database that we’re able to understand…any behavioral impacts from what we’re seeing, and we see very little resistance there.” (Feb. 8) (Chipotle) (…)
Miami, Tampa Post Largest Jump in Rents as Sun Belt Prices Soar
Among the 50 largest metropolitan areas, Tampa ranked No. 1 with a 27% surge in rent in the 12 months through January, according to the Zillow Observed Rent Index. Rents also rose 27% in the Miami area, while they were up 26% in No. 3 Phoenix, the data show.
The other metros in the top 10 include Austin, Texas; Las Vegas and two other Florida cities: Jacksonville and Orlando. (…)
According to LinkedIn data, Sun Belt cities such as Nashville, Tennessee; Austin and Tampa are among the largest per-capita recipients of net job migration. Miami didn’t make LinkedIn’s top 10 overall, but it has proved a popular destination for the emerging crypto economy, and has attracted some high-profile new finance and tech firms. (…)
FIBER: Industrial Commodity Price Strength Continues
The improvement in factory sector activity has given life to industrial commodity prices. The Industrial Materials Price Index from the Foundation for International Business and Economic Research (FIBER) strengthened 1.2% during the four weeks ended February 11 and increased 17.6% during the last year. The level of the price index stands at a record high for the series which dates back to January 1985. (…)
- Cass Inferred Freight Rates rose 3.0% m/m on a seasonally adjusted basis in January, to a new record. The freight rates accelerated to a 35% y/y increase in January from 33% in December.
- Inflation is growing on the farm. American farmers are paying significantly higher prices for herbicides, seed, fertilizer, equipment repairs and seasonal labor, eroding some of 2021’s windfall from rising crop prices. Higher farm costs could help further push up grocery bills in 2022, analysts say, following a year in which global food prices rose to decade highs.
EARNINGS WATCH
Roughly half of the 153 S&P 500 companies providing FY1 guidance this quarter guided below consensus. The median stock providing below-consensus guidance underperformed by 199 bps during the day following guidance, compared with 187 bps of outperformance for the median stock guiding more than 5% above consensus. (…)
At the sector level, Energy 2022 EPS estimates have experienced the largest positive revisions during the reporting season, while Industrials estimates have been cut most. In aggregate, the bottom-up consensus S&P 500 2022 EPS estimate has been lifted by just +0.6% despite 4Q results coming in 5% above expectations. (Goldman Sachs)
Goldman Sees a Big Change Coming to the Bond Market And it could be bad news for stocks.
(…) In one view, low yields are an ominous signal for future economic growth. In another, they reflect a change in the market’s ownership, with a greater proportion of U.S. government debt locked up by the Fed or by price-insensitive banks in general.
Whatever the reason, you can see just how ‘resilient’ yields have been in the below chart from Goldman Sachs Group Inc. economists led by Jan Hatzius.They note that in 2021, the average move in the benchmark 10-year U.S. Treasury security has been just 24% of its long-term average, citing the standard-deviation measure during data surprises. In other words, bond yields haven’t been reacting very much to big shifts in U.S. economic data. (…)
“These lower-than-warranted sensitivities may be one reason financial conditions haven’t tightened very much in response to this year’s inflation and policy surprises.”
But they argue, that could all be about to change.
The bond market’s sensitivity to growth surprises should increase as we move into an era of higher inflation and interest rates, they say. That would eventually feed into financial conditions and potentially impact growth. “We see scope for increased data sensitivity that could in turn catalyze additional Financial Conditions Index tightening — particularly if inflation remains stronger-than-expected or if growth concerns return,” they write. (…)
It’s worth noting here that last week’s higher-than-expected inflation numbers already kicked off some big moves in bond yields, with the 10-year rising above 2% for the first time since 2019 and the two-year jumping more than 20 basis points in its biggest intraday move since 2009. (…)
Per Goldman:
“Some risk assets appear to be “having their cake and eating it too”: discounting a benign economic environment but not the funds rate adjustments needed to arrive there. After all, if some of the flatter yield curve reflects rising growth risks, then equities should embed a larger risk premium—and a lower expected value of earnings. Our equity strategists have lowered their price targets, and our credit strategists continue to forecast rising risk premia.”
Per J.P. Morgan:
“We believe risky asset markets have mostly adjusted to monetary policy shifts by now,” the JPMorgan analysts wrote in a note to clients Monday. “Short-term rates markets have likely moved too far vs. what CBs will ultimately deliver in hikes this year.” (…)
Kolanovic and his colleagues are steadfast equity bulls who favor cheap, economically sensitive stocks. Last month, the team urged investors to buy beaten-down stocks such as small caps after those companies priced in an economic recession — spurred by a Fed hawkish policy mistake — that’s unlikely to come true. (…)
Chinese Developers’ Sales Tumble in January Real-estate firms struggle to rekindle interest, despite Beijing’s recent attempts to ease restrictions
January contracted sales reports released in recent days by more than a dozen Chinese developers showed year-over-year declines ranging from about 10% to more than 80% for some companies. They also reflected price reductions by industry heavyweights such as Country Garden Holdings Co. Ltd. and Sunac China Holdings Ltd.
In all, total contracted sales of the country’s 100 largest developers saw a year-over-year drop of nearly 40% in January, according to earlier data from Chinese data provider CRIC. (…)
Financially weaker developers such as China Aoyuan Group Ltd. , Modern Land (China) Co. Ltd. and Fantasia Holdings Group Co. Ltd. suffered a sales drop of more than 70% last month compared with a year ago, according to their stock-exchange filings. Meanwhile, some stronger developers also didn’t manage to escape the slowdown in sales. Sales of China Vanke Co. Ltd. fell more than 50% to the equivalent of $5.6 billion. (…)
Land purchases by private developers have also slowed sharply, as their borrowing has been sharply curtailed. “The main source of internal funding for developers is still sales proceeds,” Mr. Tsang added. (…)
Buyers are currently hesitant to buy houses from developers with funding uncertainties. Meanwhile, many also have reservations about the real-estate market as a whole since Beijing is seemingly determined to try to slow down price increases, Mr. Macgregor said. (…)
China’s Approval of Pfizer Pill Opens Door to Ending Covid Zero
China’s surprise decision to clear Pfizer Inc.’s coronavirus pill for use offers rare insight into how Beijing may be planning to move beyond the Covid Zero strategy that’s leaving it increasingly isolated.
Paxlovid’s conditional approval over the weekend makes it the first foreign pharmaceutical product China has endorsed for Covid-19, with the country until now sticking steadfastly to domestically developed vaccines and therapeutics, even withholding approval for the highly potent mRNA shot co-produced by Pfizer and BioNTech SE. (…)