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The most important charts and themes in markets and investing…
1) A Second Wave of Inflation?
The overall US inflation rate moved up to 3.7% in August, the second increase in as many months. Is this the start of another wave higher? That’s the big fear among market participants.
Allaying some of those fears is the continued positive trend in core inflation (excludes food/energy), which moved down to 4.4% in August. That was the smallest increase in core prices since September 2021.
Why is the overall rate rising while core prices are still moving down?
The spike in Energy prices, with Fuel Oil (+9.1%) and Gasoline (+10.6%) surging in August.
Energy had been a major tailwind in recent months that helped push overall CPI down to 3% in June, but the YoY change was markedly less negative in August.
As for core inflation (which excludes Food/Energy), Shelter continues to be the major driver. Shelter CPI inflation declined for the 5th straight month in August, moving down to 7.3% YoY. And with actual rents now down 1% over the last year, we should see a continued move lower in the notoriously lagging Shelter CPI for the remainder of the year. This should, in turn, help push down core inflation.
The biggest positive in the CPI report was the sharp decline in Food inflation, particularly “Food at Home.” At 3%, this was the lowest reading we’ve seen since August 2021, down from a peak of 13.5% last year.
The average price of a dozen eggs in the US has moved down to $2.04, a 58% decline from the peak back in January ($4.82).
2) A Long Pause?
There was almost no change in Fed expectations after the CPI report. The market continues to say the Fed will pause at its upcoming meeting (September 20) with a 97% probability.
After that, a continued pause is expected until next June, when the start of a rate-cutting cycle is priced in.
But in a big shift from earlier this year, the market is now saying rates will stay higher for longer with a 4% Fed Funds Rate priced in two years from today.
What could change these expectations?
On the hawkish side, the Fed may hike again if we see CPI move back above wage growth. Real wages have now increased on a YoY basis for 4 consecutive months, a great sign, but if this trend reverses all pause bets are off.
The direction of energy prices will be a key factor in the near term. Crude Oil continues to march higher (>$90/barrel) and gasoline prices are now above year-ago levels.
As for the potential for a dovish shift, economic growth will likely play a major role. While the US economy is still in an expansion (Real GDP +2.6% YoY), we’re seeing much slower growth rates throughout most of the world. The largest economy in Europe (Germany) has now contracted for two straight quarters.
Should the US join Europe in a slowdown and should the Unemployment Rate move substantially higher, the Fed would likely be more aggressive in cutting rates than the market is currently expecting.
3) All Is Calm
The $VIX hit 12.82 last Thursday, its lowest close since January 2020.
All seems to be calm in the stock market, and the credit market is very much on the same page. US High Yield spreads moved down to 3.78% last week, the tightest we’ve seen since April 2022.
4) An Arm and a Leg
Arm Holdings ($ARM) went public last week in the biggest IPO of the year (market cap of $68 billion).
In a sign of renewed optimism, the company shares are trading at over 24x sales. This is somewhat surprising to me given that sales growth actually declined over the past year (-2%), as did net income growth (-53%).
With $18 billion in issuance this year, the US IPO market is on pace to exceed 2022’s total but remains far below the record surge in 2020-21.
Investors would be wise to remember that chasing “hot IPOs” rarely ends well. Exhibit A: the IPO ETF ($IPO) is down 48% since the start of 2021 versus a 25% gain for the S&P 500 ETF ($SPY).
5) Big Demands
The United Auto Workers (UAW) union went on strike last week after the deal deadline passed.
Here’s a list of some of their demands to the big 3 automakers (Ford/GM/Stellantis):
- 40% increase in hourly pay over 4 years
- Reduced 4-day, 32-hour workweek
- Faster path to top pay
- Shift back to defined benefit pensions
- Cost-of-living adjustments
- 5+ weeks of vacation, more paid holidays, extended parental leave
Significantly higher pay for less hours worked seems like a bit of a stretch, as does a move back to defined benefit pensions.
My question: would it even possible for these companies to remain in business if they agreed to these demands?
Ford would likely argue no, as they’ve stated they would have lost $14 billion in the last 4 years had the UAW’s demands been in place.
It remains to be seen what will be agreed upon, but there seems to be broad consensus that big pay increases are coming at minimum.
Which begs the question? Will this accelerate a) a move towards automation and b) a move overseas. Both seem likely, with the latter an immediate risk to consider for striking US workers (Stellantis currently employs over 15,000 workers across 8 plants in Mexico, where its workers earn as little as $2.54 an hour with reportedly high productivity rates).
The real winner in this strike may be the auto company that has been winning all along: Tesla ($TSLA). With a non-unionized workforce and rapidly growing market share, Tesla has seen its share prices rise 2,390% over the last decade versus 24% for GM and 17% for Ford.
And while the big 3 will likely be forced to raise prices again due to increasing labor costs, Tesla continues to do the opposite.
6) Retail Sales Slump
After adjusting for inflation, US retail sales fell 2% over the last year, the 10th consecutive YoY decline. That’s the longest down streak since 2009. Nominal retail sales increased 1.6% YoY vs. a historical average of 4.7%.
A number of retailers have expressed concerns that we may see a continued dip in the months to come with the resumption of student loan payments. After a 43-month pause, roughly 44 million borrowers will be required to start paying back their loans again in October, an estimated $10 billion a month. This will likely cause these households to cut back on some of their discretionary spending, particularly in retail.
7) Tightening Lending Standards
A net 51% of US Banks are now tightening their lending standards, the highest since 2020 and at levels that have coincided with recessionary periods in the past.
8) Deficit Spending
US government spending increased 9% over the last year while tax receipts declined 8%.
The result: a $2 trillion deficit and US National Debt fast approaching $33 trillion (up 54% in the past 5 year).
9) A Few Interesting Stats
a) The states with the highest income tax rates (#1: California @ 13.3%).
b) The states with the highest and lowest property tax rates.
c) The WSJ’s top 10 colleges and the amount their graduates’ salaries exceed high school graduates.
d) The least and most expensive states to retire.
e) Less than half of American households are likely to be able to cover at least their essential expenses in retirement.
And that’s it for this week. Have a great week!
-Charlie
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