Note: I am travelling this month. Posting will be sporadic and shorter due to limited time and equipment.
Inflation Trends Keep Fed Rate Hikes on Pause Underlying inflation picked up in September, government data showed, keeping the Federal Reserve on track to hold short-term interest rates steady at its next meeting.
The personal-consumption expenditures price index, the Fed’s preferred inflation gauge, rose 0.4% in September from the prior month, the same pace as in August, the Commerce Department said Friday. So-called core prices, which exclude volatile food and energy categories, increased 0.3% in September, compared with a 0.1% rise in August.
Core prices were up at a 2.8% annualized rate in April through September, down considerably from a 4.5% annualized rate in the prior six-month period. The Fed’s inflation target is 2%. (…)
At their meeting last month, Fed officials projected core inflation would fall to 3.7% in the fourth quarter from a year earlier. Friday’s report suggests inflation would end the year below that projection, which could strengthen the case to hold rates steady.
But some measures of underlying prices closely watched by Fed officials, such as services excluding housing and energy, showed more strength in September, highlighting why policy makers are likely to keep another rate rise on the table in the coming months. (…)
Consumer spending, the primary driver of economic growth, rose 0.7% in September from the prior month, compared with a 0.4% increase in August, Friday’s Commerce Department report showed. Americans spent more on services such as travel, housing and healthcare, as well like goods such as prescription drugs and vehicles.
Consumer spending growth in September was much faster than income gains, which rose 0.3%. The personal saving rate—a measure of how much money people have left over after spending and taxes—fell to 3.4% in September. That was the lowest rate since December of last year, suggesting households used part of their savings to finance their spending. (…)
- US Core PCE Prices Jump Most in Four Months as Spending Picks Up One key area of concern for officials is service-sector prices, which rose by 0.5%, the most since January. Excluding housing and energy, services inflation accelerated to 0.4%, from 0.1% in the prior month.
The personal-consumption expenditures price index, the Fed’s preferred inflation gauge, rose 0.4% in September from the prior month, the same pace as in August, the Commerce Department said Friday. So-called core prices, which exclude volatile food and energy categories, increased 0.3% in September, compared with a 0.1% rise in August.
Core prices were up at a 2.8% annualized rate in April through September, down considerably from a 4.5% annualized rate in the prior six-month period. The Fed’s inflation target is 2%. (…)
At their meeting last month, Fed officials projected core inflation would fall to 3.7% in the fourth quarter from a year earlier. Friday’s report suggests inflation would end the year below that projection, which could strengthen the case to hold rates steady.
But some measures of underlying prices closely watched by Fed officials, such as services excluding housing and energy, showed more strength in September, highlighting why policy makers are likely to keep another rate rise on the table in the coming months. (…)
Consumer spending, the primary driver of economic growth, rose 0.7% in September from the prior month, compared with a 0.4% increase in August, Friday’s Commerce Department report showed. Americans spent more on services such as travel, housing and healthcare, as well like goods such as prescription drugs and vehicles.
Consumer spending growth in September was much faster than income gains, which rose 0.3%. The personal saving rate—a measure of how much money people have left over after spending and taxes—fell to 3.4% in September. That was the lowest rate since December of last year, suggesting households used part of their savings to finance their spending. (…)
Interesting that most media highlighted the inflation data rather than spending trends. To me, the surprise was that September demand for durable goods jumped 1.1% (+5.5% YoY), in real terms, amid very high interest rates, a depressed housing market and after 3 years of strong goods consumption.
Spending on goods is not only not falling back to trend, as widely expected, it seems to be creating a new, faster growing trend, unlike spending on services which is merely back to trend.
But this is only “transitory”: Americans are catching up on their cars/trucks purchases, delayed by the shortages during the pandemic but recently encouraged by rising labor market participation. Similar trends happened after previous recessions.
It can only be transitory because total spending has unusually diverged from disposable income (left chart) which is now 4% lower than expenditures. Whatever excess savings (deposits) remain, they are illusory since their purchasing power has been totally eroded by inflation.
Almost 4 years after the start of the pandemic, helicopter money and floored interest rates, we are back to basic fundamentals: income growth, inflation and savings.
This chart stacks the YoY changes in hours, employment and wages, highlighting the diminishing contribution from the actual job components while wages, up 4.2% in September (down from 4.8% last December), now contribute most of the 5.6% growth rate in total labor income.
Note, however, that wage growth slowed to 2.7% annualized in the last 2 months, well below the PCE deflator growth rate. At that rate, YoY wage growth would slow to 3.6% in December.
Headline and core PCE inflation are now in the 3.5% YoY range. However, on a MoM basis, core PCE inflation jumped from 0.1% in August to 0.3% in September mainly due to services inflation which abruptly interrupted its nice descent since January, rising at a 5.5% annualized rate in September (+4.0% in Q3 after +3.6% in Q2), more than twice the pre-pandemic pace.
Sticky rents were not the sole culprit. Services ex-housing (black bars) are also back in the 5% annualized range.
In truth, wages rising 4% are likely to keep services inflation sustained in the 4% range as well: there is a 99.7% correlation between these two series since 1994. If so, core PCE inflation should stabilize around 3.3%.
The math so far:
- job components: 1.5- 2.0% (employment + hours)
- wages: 3.5- 4.5%
- inflation: 3.0- 4.0%
- = real income 2.0- 2.5% (worst/best cases 1.0%- 3.5%)
Real income growth averaged 4.2% in 2023.
The big wild card is what happens to savings. The savings rate fell to 3.4% in September, meaningfully lower than the 6.5% pre-pandemic average. It has very, very, very rarely, been lower…
…but even more rarely if we account for consumer interest payments. This next chart plots personal expenditures plus interest payments as a % of disposable income. It was 95.4% in September, very uncomfortably high looking at the last 30 years and significantly higher than pre-pandemic levels.
On September 11, I wrote The Wealth Defect, arguing that the Fed-induced jump in household wealth has been working against FOMC policies aimed at curbing demand.
(…) The Fed’s policies boosted household wealth 15.5% above their 2019 level and 35% above trend. Thanks to rising stock prices but, principally, to rising home values due to unusually low supply of existing homes due to Fed-supplied mortgage handcuffs. (…)
From a monetary policy perspective, the wealth effect is now a wealth defect: rising interest rates have little impact on a very wealthy, under leveraged, consumer looking to enjoy life AMAP (as much as possible) post pandemic.
The coming holiday season will be an interesting test. True, the less wealthy, and often more indebted, segment of the population is under some inflation duress but unemployment is still very low and lower wage earners are enjoying strong wage increases.
This now fairly widely held theory will be put to serious test in coming months, particularly after the recent debacle in financial markets.
Maybe the Fed’s aggressive tightening will finally bite enough, perhaps even too much.
Personal interest payments (which exclude mortgage interest) have doubled since the end of 2021, jumping by $267B to 2.7% of disposable income from 1.5% in December 2021. Both the absolute and percentage numbers are bound to rise further.
The remarkable resilience of the American consumer may be reaching its zenith.
Let’s hope for a soft landing, but we’re defying the odds…
- Americans Hold Off From Big Purchases in Worrying Sign for the Economy Sales of appliances, orthodontics and boats weaken, firms say
(…) Take Whirlpool Corp., the maker of Maytag appliances. The company said consumers continue to replace machines that break, but spending on new ones for renovations or new homes — what the company dubs discretionary purchases — has been weaker than expected, Chief Executive Officer Marc Bitzer said Thursday on a call with analysts.
The softening demand, which includes customers trading down to cheaper models, has sparked discounting across the industry. Now promotions are back to pre-pandemic levels after waning the past three years because Covid-19 upended supply chains and limited production. (…)
At Abbvie Inc., sales of Botox missed estimates last quarter and other facial treatments, such as fillers, declined.
For Harley-Davidson Inc., higher borrowing rates hurt sales of motorcycles, which tumbled 15% in North America. The company has rolled out generous new incentives to stimulate demand, but even then, sales were weak in the third quarter, according to dealerships and research from UBS Group AG. (…)
Marine Products Corp., which makes Robalo boats, reported a 22% drop in revenue last quarter. Brunswick Corp. had a 16% decline in its boat segment. And revenue at Polaris Inc., maker of a wide range of snowmobiles, motorcycles and pontoon boats, fell 4% last quarter. (…)
That said,
This week’s employment indicators are likely to remain strong. Initial unemployment claims (Thu) should remain low as they have been in recent weeks suggesting that October’s unemployment rate (Fri) remained low too and that payroll employment (Fri) expanded at a solid pace during the month (chart). September’s NFIB small business owners survey showed an increase in job openings suggesting that the comparable JOLTS series (Wed) will do the same. (Ed Yardeni)
The flattening trend in Indeed’s job postings through Oct. 20th supports that view:
BTW, FYI, Taylor Swift’s 53 US concerts this year are estimated to have added $4.3 billion to GDP (Bloomberg).
China Evergrande Winding-Up Hearing Adjourned to Dec. 4
EARNINGS WATCH
245 companies in the S&P 500 Index have reported earnings for Q3 2023. Of these companies, 77.6% reported earnings above analyst expectations and 17.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 22% missed estimates.
In aggregate, companies are reporting earnings that are 7.9% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 4.8%.
Of these companies, 60.2% reported revenue above analyst expectations and 39.8% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 69% of companies beat the estimates and 31% missed estimates.
In aggregate, companies are reporting revenues that are 1.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.9%.
The estimated earnings growth rate for the S&P 500 for 23Q3 is 4.3% [it was estimated +1.6% on Oct.1]. If the energy sector is excluded, the growth rate improves to 9.7%.
The estimated revenue growth rate for the S&P 500 for 23Q3 is 1.4%. If the energy sector is excluded, the growth rate improves to 3.6%.
The estimated earnings growth rate for the S&P 500 for 23Q4 is 8.5% [+11.0% on Oct. 1]. If the energy sector is excluded, the growth rate improves to 11.6%.
Trailing EPS are now $217.27. Full year 2023: $219.91e. Forward EPS: $238.46. Full year 2024: $246.10.
The S&P 500 Falls Into a Correction, Following the Nasdaq Composite. The S&P 500 entered corrections three times in 2022, according to Dow Jones Market Data, most recently in September of that year.
- Worst October for Stocks in Five Years Has Investors Exiting Market Active manager poll, positioning show investors reduce risk
(…) Surveys of professional managers show big-money allocators have cut their equities to levels last seen at the depths of the 2022 bear market. Hedge funds just pushed up single-stock shorts for an 11th straight week. Models of investor positioning show everyone from mutual funds to systematic quants reducing equity exposure well below long-term averages. (…)
Dip buyers are hard to find, with the S&P 500 falling more than 1% five different times in October and pushing the index into a correction on Friday. A gauge of projected price swings in the Nasdaq 100 Index hovers near the highest level since March. Even after tech finally caught a break Friday on solid earnings from Amazon.com Inc. and Intel Corp., the Nasdaq 100 closed out the worst two-week drop this year and is poised for its steepest October loss since 2018. (…)
Equity positioning has fallen below long-term averages for most investor categories, particularly hedge funds and mutual funds, according to Barclays Plc analysis of CFTC data. A nearly three-month ramping of short positions by professional speculators is the longest increase in the history of data, says Goldman Sachs Group Inc.’s prime brokerage.
Wall Street’s “fear gauge,” the Cboe Volatility Index, held above 20 for a second consecutive week after staying below the threshold more than 100 days. (…)
Strategists at Barclays said lower exposure to stocks, bullish technical signals and seasonality are raising the odds of a year-end rally. It’s a message that was echoed earlier at Bank of America Corp. and Deutsche Bank AG.
- Bye Bye Buybacks: Q4 is typically a stronger quarter in terms of buybacks, but it is notable that the recent trend has been down in terms of buyback announcements. Some of this will have to do with the cost pressures dampening margins last year, but especially also with borrowing costs now a lot higher — making it more difficult a calculus for firms to fund buybacks with debt. (Callum Thomas)
Source: @WallStHorizon via Daily Chartbook and @MikeZaccardi
US, China Agree in Principle to Hold Biden-Xi Meeting Next Month
Where Americans are moving
Data: U.S. Census American Community Survey; Chart: Erin Davis/Axios Visuals
New data from the U.S. Census shows that around 820,000 people moved out of California and 550,000 out of New York in 2022. They join more than 8 million Americans who moved states in 2022.
The rising cost of living is pushing people out of expensive coastal areas, and the trend doesn’t look likely to change in coming years: four in ten Californians and and three in ten New Yorkers say they’re considering moving out of state.
- Many of those moving are headed to Florida or Texas, the states with the largest influxes in 2022.
- But Texans worried about the “California-ing” of their state may not need to worry: Democrats are much more likely to move to blue states, while Republicans move to red states.
