Note: view the video of this post here.
The charts and themes from the past week that tell an interesting story in markets and investing…
1) Downward Inflation Trend Continues
Overall US CPI moved down to 6.4% in January, the 7th consecutive decline in the YoY rate of inflation and the lowest level since October 2021.
US Core CPI (ex-Food/Energy) moved down to 5.6%, the 4th consecutive decline in the YoY rate and the lowest level since November 2021.
US CPI has now moved down from a peak of 9.1% last June to 6.4% in January. What’s driving that decline?
Lower rates of inflation in New/Used Cars, Gasoline, Medical Care, Apparel, Food at Home, Electricity, Gas Utilities, and Fuel Oil.
Rates of inflation in Shelter, Transportation, and Food Away From Home have increased since last June but declines in the other major components have outweighed these increases.
The continued move higher in Shelter CPI is most notable, given its outsized weighting in the CPI Index (34%). At 7.9%, this is the highest rate of housing inflation since 1982. Why is Shelter CPI still moving higher while actual rents are moving lower? Shelter CPI is a lagging indicator that had significantly understated actual housing inflation over the last 2 years.
Shelter CPI has been playing catch up but still only shows a 14.9% increase since the start of 2020 versus a 20.3% increase in actual Rents and a 40% increase in Home Prices (nationally). Which means that we could still see more increases in Shelter CPI to close some of that gap.
Elsewhere on the inflation front, PPI moved down to 6.0%, its lowest level since March 2021.
And US Import Prices increased 0.8% over the last year, the smallest YoY increase since December 2020 and back below the historical average of 2%.
2) Higher For Longer?
That’s the question many are asking after the inflation data came in above expectations (6.4% YoY CPI vs. 6.2% consensus).
The market now seems to be pricing in not one, not two, but three more 25 bps rate hikes.
Current market expectations for the path of the Fed Funds Rate…
-Mar 22, 2023: 25 bps hike to 4.75%-5.00%
-May 3, 2023: 25 bps hike to 5.00-5.25%
-Jun 14, 2023: 25 bps hike to 5.25-5.50%
-Pause
-Rate cuts start in December 2023 and continue throughout 2024
Why is the Fed still hiking rates if inflation is clearly slowing?
This chart, which shows real (inflation-adjusted) hourly earnings declining in January for the 22nd consecutive month (a record). The Fed wants to see this number back in positive territory. While the decline in the rate of inflation has certainly helped, we’re not there just yet.
3) Soft/Hard/No Landing
The stock market may not be the economy but it does often drive how people feel about the economy. On that point, after the 20% rally in the S&P 500, there’s growing optimism in a “no landing” scenario where the US avoids a recession altogether.
The strong jobs data (3.4% Unemployment Rate) continues to be the rallying cry of the economic bulls, while data elsewhere continues to suggesting increasing odds of a downturn…
-The Philly Fed Manufacturing Index has moved down to -24, its lowest level since May 2020. In the past (data since 1968), every time this indicator was at or below current levels the US economy was either in or approaching a recession.
-Housing Starts hit a 31-month low in January, down 21% year-over-year. This tends to be a leading indicator for the economy, with peaks preceding the start of recessions in the past.
-US retail sales increased 3.9% over the last year, the lowest growth rate since May 2020 and below the historical average of 4.8%. After adjusting for inflation, though, the picture is much worse. Real retail sales declined 2.3% over the last year, the 5th consecutive YoY decline. If the economy is headed for a soft/hard landing, we would expect to see continued weakness here, and in the “no landing” scenario this should soon reverse course.
4) Rewarding Profitability
During the mania of 2020-21, top-line revenue growth was all that seemed to matter. Fast forward to today and we’ve seen a 180 degree shift, with investors focused much more on the bottom line.
Two recent examples of this:
-Lyft stock gapped down after reporting yet another annual loss.
-Airbnb stock gapped up after reporting its first year of profitability.
5) Housing Investment Boom/Bust
During the US housing boom of 2020-21 investor demand spiked to record levels. We’re now seeing the opposite, with a 46% drop in investor purchases over the last year, the largest decline on record.
What’s driving this downturn?
a) Higher financing costs, with mortgage rate more than doubling from their lows.
b) Investors learning once again that home prices do in fact go down from time to time, and that downturn has already begun:
-US home sale prices are down 12% from their peak last June, and up only 1% YoY.
-Only 21% of homes for sale in the US sold above their final list price in the last 4 weeks, down from 40% a year ago. This is the lowest % since March 2020.
6) Record Trade Deficit
The US Trade Deficit totaled $948 billion in 2022, the largest annual deficit on record.
7) The Safety Bubble?
Google now has a lower P/E ratio than many leading consumer staples companies. Is this evidence of a safety bubble?
8) There is An Alternative Again
You can now buy a 1-Year US Treasury bill and earn 5% on your money.
When was last time we saw yields that high?
July 23, 2007.
What will have a higher return over the next year: a 1-Year Bill or the S&P 500? Poll results…
And that’s it for this week. Have a great week everyone!
-Charlie
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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.
