Inflation Jumps, but Is Likely to Slow The consumer-price index increased 0.3%, the largest monthly gain since January
Yes, everything points to slower inflation in coming months.
- Core CPI growth remains below 0.2% MoM (+1.6% annualized in last 3 months)
- Core Services have decelerated throughout 2018, indicating that there is no major cost-push from wages:
Sticky-Price CPI Rose in October
The Atlanta Fed’s sticky-price consumer price index (CPI)—a weighted basket of items that change price relatively slowly—rose 2.0 percent (on an annualized basis) in October, following a 2.7 percent increase in September. On a year-over-year basis, the series is up 2.4 percent.
- The Sticky-Price CPI is showing no signs of acceleration. If anything, it is suggesting slower inflation ahead:
- The flexible cut of the CPI (brown line below) -a weighted basket of items that change price relatively frequently- tends to react much faster to demand/supply conditions. It has turned up in 2018 but remains subdue within its recent range:
The recent drop in oil prices adds to downward pressures on inflation throughout the economy. All good for the world economy, interest rates, profits and non-energy equities. Caveat:
One reason there is little apparent tariff effect on prices might be that companies, having seen earlier sets of tariffs from Washington, raced to import goods before the tax went into effect. In the third quarter, goods imports rose an annualized 10.3% from the second quarter, according to the Commerce Department, and inventories swelled.
That could help retailers and other consumer-facing companies keep prices low during the coming holiday shopping period, but the cushion on prices will only last so long.
If President Trump follows up on his plan to raise the tax on the goods hit with tariffs in September to 25% at the end of the year, prices could experience a sudden lurch. (WSJ)
In the meantime, the Rule of 20 P/E has fallen below 19.0 at 18.9 while the Rule of 20 Fair Value (yellow line) keeps climbing with rising trailing earnings and slowing inflation. Fair Value is now 2868, up 19% from its January level as trailing EPS have jumped 21%.
Global Economic Slowdown Deepens
Fed Tracking World Growth Worries, Powell Says
(…) “You’ve seen a bit of a slowdown—not a terrible slowdown,” Federal Reserve Chairman Jerome Powell said Wednesday evening. “You still see solid growth, but you see growing signs of a bit of a slowdown. And it is concerning.”
One-time events played a role in some of these bumps, including a typhoon and earthquake that hit Japan and bottlenecks at German auto plants associated with new emissions standards.
But across the globe, economists and business executives warned about a common denominator that is hurting growth: trade battles among the U.S., China and others. Tariffs are hitting some businesses, and worries about the impact of worsening trade discord are also weighing on sentiment. (…)
“I’m very happy about the state of the economy now,” he said. “Our policy is part of the reason why our economy is in such a good place right now.”
One risk is that U.S. economic growth could slow in coming years as recent fiscal stimulus from tax cuts and spending increases wears off, Mr. Powell said during a moderated discussion at the Dallas Fed with the reserve bank’s president, Robert Kaplan.
A separate challenge is that U.S. growth continues to outpace the rest of the world, putting strains on some emerging-market economies that face headwinds from a stronger dollar.
“The U.S. economy is just really strong, and it is stronger than many other major economies right now,” he said. (…)
Mr. Powell said Wednesday the main challenge facing the Fed now is to consider how much further and at what pace to raise rates. He said the central bank would evaluate “really carefully…how the markets and the economy and business contacts are reacting to our policy.” (…)
Mr. Powell said Wednesday he was optimistic the U.S. economy could sustain a higher growth rate, which could potentially allow for faster growth without a large increase in inflation. “You always want to be on the optimistic side of this economy,” he said. (…)
China Outlines Possible Trade Concessions to U.S. Before G20, Sources Say
The commitments for now fall short of the type of major structural reforms that President Donald Trump has been demanding, two of the people said, cautioning that a long road lies ahead in negotiations. One person said that talks between the world’s two largest economies are continuing and constructive. (…)
Most of the document appeared to be a rehash of previous changes already made by Beijing, such as raising equity caps on foreign investment in certain industries, according to one person. It did not contain the sort of commitment to change industrial policies such as Xi’s “Made in China 2025” that Washington has been seeking, according to one person familiar with the discussions.
Two other people familiar with the talks also said the Chinese offer was a sign of what they characterized as constructive discussions between the two sides ahead of the planned G20 meeting between the two leaders. (…)
Treasury Secretary Steven Mnuchin and Xi’s main economic emissary, Liu He, spoke last Friday for the first time in months. Since then, lower-level discussions have been held and Larry Kudlow, the head of Trump’s National Economic Council, on Tuesday said the two capitals were in touch “at all levels.”
On the American side, the discussions are currently being led by Mnuchin and the Treasury, which has raised questions among some observers about the process.
Mnuchin is seen as an advocate within the administration of a deal, while others such as Robert Lighthizer, the U.S. trade representative, have been pushing to continue raising pressure on Beijing to try to push for more meaningful reforms. (…)
Scissors, who has previously advised the Trump administration on its China trade stance, said in an interview Wednesday the most likely outcome of the Trump-Xi meeting at the G20 was a “cease fire,” or a deal to avoid any further escalation in tariffs while the two sides hold deeper discussions.
But he said the chasm between the two sides on issues such as Chinese industrial policy and intellectual property theft remained vast and that any post-G20 negotiations were likely to be difficult as a result. (…)
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Trump holds fire in trade fight with Europe and China After several months of tough talk and even tougher tariffs, President Trump may be pulling some punches in his “America First” global trade offensive.
The president has deferred until next year a decision on imposing 25 percent tariffs on imported automobiles and is considered likely to hold off on new trade restraints on Chinese imports when he meets China’s President Xi Jinping later this month at the Group of 20 summit — refraining for now from moves that would mean higher prices for American consumers.
Larry Kudlow, the director of the National Economic Council, this week also publicly rebuked a prominent advocate of hard-line trade measures, White House adviser Peter Navarro, saying he was “way off base” with recent remarks assailing Wall Street supporters of a compromise with China.
“The recent market turmoil, House election result and angst in farm states has the Trump team rattled on trade,” said one multinational executive, who spoke on the condition of anonymity to speak freely about White House deliberations. “The president still wants to pull the trigger on crazy stuff like an autos tariff, but he’s lost some of his swagger, and a lot of people around him are saying he needs to back away from extreme action.” (…)
Favorite Stock Market Crystal Ball May Have a Crack in It High-yield bonds, one of the stock market’s best-known bellwethers of doom and gloom, might be missing a beat when it comes to predicting the next meltdown.
(…) So far, the evidence is leaving investors scratching their heads. High-yield credit spreads—the extra yield investors demand to hold junk bonds over ultrasafe Treasurys—narrowed in the months leading up to the S&P 500 slumping 7% in October, its worst month in over seven years. Junk bonds outperformed during that selloff, with the ICE BofAML U.S. High Yield Index declining only 2% last month.
That could mean all is well with stocks. But some wonder if the predictive power of junk bonds won’t work this time. Changes in the market, central banks distorting asset prices, and the surge of tech stocks, which don’t tend to issue junk bonds, has sapped high yield of its previous highly predictive quality. (…)
I don’t pretend to know exactly why HY bonds are still holding except to suggest that investors probably are not sniffing a recession just yet and that the enormous profits this year are obviously helping debt ratios. That said, the hunt for yield still seems very much present:
The Case of the Disappearing Collateral Investors are literally giving away the store to squeeze out meager returns from the picked-over market for corporate debt.
Demand for riskier bonds and loans has been so intense that companies selling them are able to move valuable assets beyond the reach of creditors. And investors continue to make it easier for them to do so by agreeing to terms in new debt sales that offer them fewer and fewer protections. (…)
The erosion in lender protections—which has made it easier for businesses not only to shift assets from lenders but issue more debt and use asset-sale proceeds for purposes other than paying down debt—is expected to have meaningfully negative impact on debt investors during the next wave of bankruptcies. The typical recovery on leveraged loans will likely decline to 61% of face amount in the next downturn, compared with the 77% historical average, according to Moody’s Investors Service. (…)
“Look Ma, no hands”
Uber Posts Slower Sales Gains, Widening Loss Ahead of 2019 IPO Results for the three months ending in September show that Uber is still growing quickly but is likely to be unprofitable for some time.
The ride-hailing company on Wednesday announced third-quarter revenue rose 38% from a year earlier to $2.95 billion, but that was less than the second-quarter year-over-year jump of 63%. Its loss widened to $1.07 billion from $891 million in the second quarter.
Uber has accrued roughly $2.5 billion in losses this year, not including the sale of its unprofitable businesses in southeast Asia and Russia. Last year, Uber lost about $4.5 billion. (…)
In documents for a bond offering last month, Uber said it expected it wouldn’t reach a profit for at least three years. (…)
Unicorns (e.g. Uber, WeWork, AirBnB, Palentir) seem to be piling up losses at the same rate that their valuation is rising. According to Grant’s, CB Insights counts 287 unicorns worldwide with a collective value of $952 billion, most losing money and most planning a 2019 IPO. The last time we saw something similar was in the late nineties. Maybe they lost their window. Tech stock indices are the only sectors left with a rising 200-day moving average, but for how long. The FAANGs have lost 18% of their combined market cap since Aug. 30.
Big Tobacco Warns Against Menthol Ban
Will they put their warning on packages?