The Week in Charts (11/20/20)

By Charlie Bilello

20 Nov 2023

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The most important charts and themes in markets and investing

1) The Road to Lower Inflation

The US continues down the road to lower inflation with a lot of good news in the latest CPI report.

Overall CPI of 3.2% for October came in below the 3.3% consensus estimate and Core CPI of 4.0% also beat expectations of 4.1%. Importantly, this was the lowest core inflation reading since September 2021.

Here’s a breakdown of the major inflation categories today versus June 2022 when overall CPI peaked at 9.1%. Helping drive the rate down to 3.2% today are a number of areas showing YoY declines, including Fuel Oil (-21%), Gas Utilities (-16%), Used Cars (-7%), Gasoline (-5%), and Medical Care (-2%). With the exception of Transportation and Shelter, all of the major CPI components have a lower rate today than back in June 2022.

As CPI’s largest component, Shelter has the most impact on the direction of the headline index and is even more influential in terms of core prices.

The good news: Shelter CPI has declined for 7 consecutive months, moving down to 6.7% from a peak of 8.2% earlier this year. Given its long lag versus real-time data (listed rents are down 1.2% over the past year), a continued move lower should occur in the coming months. This, in turn, should lead to a continued decline in core inflation.

2) Thankful for Lower Food Prices

What was best data point in the October CPI report?

Lower food price inflation, particularly food at home.

At 2.1%, that was the smallest increase we’ve seen since June 2021, down from a peak of 13.5% last year.

The cost of a Thanksgiving dinner is expected to decline 4.5% this year from 2022’s record high. While this still 25% above 2019 levels, any decline is a welcome sign for American households.

Wholesale turkey prices are 32% lower than a year ago as supplies have normalized after last year’s bird flue outbreak. However, retail prices are only 5.6% lower than last year because grocery stores lock in their turkey purchases early in the year. Which means that if wholesale prices stay down, we should see the cost of a Thanksgiving meal fall further in 2024.

3) Back on the Path to Prosperity

The last three years have been extremely difficult for many Americans, with price increases in the most important areas (food, energy, housing) outpacing the growth in wages by a considerable margin.

But recently, this trend has reversed, with wages now outpacing inflation on a YoY basis for six straight months. This is a great sign for the American worker that hopefully continues.

4) More Evidence of Cooling Inflation

In addition to the CPI report, other signs of cooling inflation include:

  • US Producer Prices, which were down 0.5% in October and increased just 1.3% over the last year. This was well below consensus estimates for a 0.1% monthly increase and a 2.0% YoY increase.
  • US Import Prices, which fell 2% over the last year, the 9th consecutive YoY decline.

5) Will CPI Continue to Decline?

The early indication for November is that the downward inflation trend will continue, with the Cleveland Fed estimating a move to 3.1%.

Leading on that front are gas prices, which at $3.34/gallon (national average) are at the lowest levels since January.

The mid-November update on wholesale used car prices (Manheim index) is also encouraging, showing a move down to the lowest levels since March 2021.

This should lead to a continued decline in retail prices, which are already moving lower. The average price of a used car is on pace for a 6th consecutive monthly decline.

Lastly, the Global Supply Chain Pressure Index recently hit a record low of -1.74 standard deviations below the mean, indicating that supply chains are back to normal and functioning well. As long as this continues, this will put less pressure on businesses to raise prices, and help to cool inflation further.

6) Market to Fed: “No More Hikes”

After the benign inflation report, the market had a resounding message for the Fed: “no more hikes!”

Fed Funds Futures are now pricing in a 0% chance that the Fed will hike rates in December, down from a 42% probability just a month ago.

Looking out further, the market is pricing in rate cuts to start in May 2024 with the Fed Funds Rate moving back below 4% by the end of 2025.

7) Earnings at New Highs & Stocks Not Far Behind

With earnings season nearly complete (91% of companies reported), S&P 500 operating earnings per share are now on pace to set a new record high. At $210.48 over the last 12 months, this would surpass the prior high from the first quarter of 2022.

Stocks are not far behind, with the S&P 500 and Nasdaq 100 indices both less than 3% away from new highs (note: total returns including dividends).

8) Back to March 2000

Speaking of new highs, the S&P 500 technology sector is already there, beating everything this year by a wide margin (up 48% vs. 19% gain for the S&P 500). Its relative strength versus the broad market has now surged to its highest level since March 2000.

Over the last decade, the Tech sector ETF ($XLK) is up 513% (20% annualized return) vs. a 202% gain (12% annualized) for the S&P 500 ETF ($SPY).

9) The Manufacturing/Industrial Slowdown

While stocks have surged higher this month, the manufacturing sector continues to illustrate weakness.

The US ISM Manufacturing PMI has now been below 50 (in contraction) for 12 straight months, the longest down streak since 2008-09.

US Industrial Production fell 0.7% over the last year, the largest YoY decline since February 2021.

10) The Retail Sales Slowdown

The retail sector continues exhibit weakness as well.

After adjusting for inflation, US retail sales fell 1.6% over the last year, the 12th consecutive YoY decline. That’s the longest down streak since 2008-09. Nominal retail sales increased 1.6% YoY vs. a historical average of 4.7%.

Both Home Depot ($HD) and Target ($TGT) reported lower revenues than a year ago. The Home Depot CFO noted a “period of moderation in home improvement” with more customers opting for “partial remodels” instead of the widescale projects they were undertaking back in 2021. The Target CEO had similar comments to last quarter, noting that shoppers aren’t buying much more than necessities and are hungry for lower prices.

The good news for shoppers is that weak demand is translating into more discounts, with Black Friday coming early this year. During October, the average discount of 24% was noticeably higher than previous years with more items (8%) on discount as well.

11) When Debt Matters

When interest rates were at record lows in 2020, many said that the exploding National Debt “didn’t matter” because servicing that debt was costing us very little.

Fast forward to today and few are making that same argument, as National Debt has continued to increase (now at $33.7 trillion) and the average interest rate on that debt has moved substantially higher.

The result: the Interest Expense on US Public Debt has now moved up to $924 billion over the last 12 months, another record high. If it continues to increase at the current pace it will soon be the largest line item in the Federal budget, surpassing Social Security.

12) Higher Rates, Lower Homebuilder Confidence

The US Housing Market Index moved down again in November, indicating another sharp decline in homebuilder confidence. Rising mortgage rates have crushed affordability and purchaser demand. 36% of builders reported cutting prices (average cut of 6%), the highest percentage in the current cycle.

Lower homebuilder confidence has translated into lower housing starts. Incredibly, fewer homes are being built today in the US than in 1960 while the US population is 87% higher.

13) A Few Interesting Stats

a) US Commercial Bank deposits fell 2.5% over the last 2 years, the largest 2-year decline on record.

b) Lenders have issued 62 mezzanine loan foreclosures on commercial properties so far this year, a record high and more than double the amount from last year.

c) US large caps (S&P 500) are outperforming small caps (Russell 2000) by over 15% this year, on pace for the biggest outperformance since 1998.

d) Investors have withdrawn more than $14 billion from “ESG” funds over the last year.

e) How many people do you know? If you’re like most: 472. But a small share of the population actually knows over 1,500 people, driving the average up to 611.

And that’s it for this week. Have a great week and a Happy Thanksgiving!


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