It was a down week for the stock markets due to the negative publication of the CPI (+9.1% Y/Y) on Wednesday (July 13). Another recovery took place on Friday with the markets using the figure of +1.0% M / M Retail Sales as the latest hope that the recession will lead to a soft decline.
Although the risk and residual indicators show that the economy is slowing down, almost all leading indicators are warning (see chart above). Therefore, our view continues to be that the markets are oversold and encourage the prospect of a soft landing. But we still doubt that anyone will be found. For example, 1% growth in nominal retail sales looks good on the surface, but when set against a 1.3% rise in the CPI, Real Retail Sales was negative on a volume level.
Seeing the Future of Inflation
The increase in the CPI for June was due to the increase in electricity prices that rose at the time the June price survey was conducted. The PPI (Producer Price Index) was also hot in June coming in at +1.1% M/M with the strong sector rising +9.9% M/M. Because food and energy prices are generally stable (no kidding!), inflation watchers focus on the “core” CPI and PPI which excludes food and energy. The table shows “core” Y/Y inflation data.
Although the reduction has not been huge (yet), the trend is in the right direction.
Yes, food and energy are necessary for daily life, so, if this continues, it is a big problem. Let’s also agree that inflation is a variable, not a rate, so if all prices were suddenly frozen at their current levels, inflation would be 0% even if prices were to rise.
This is the good news! The price of oil (WTI crude for August delivery) was $123.70/bbl. on March 7 and $122.11 late on June 7, it closed at $97.57 on Friday (July 15). That’s a -21% fall from the peak. According to AAA, the national average for a gallon of regular gasoline in June was $5.01. In the middle of July it fell to $ 4.58, a decrease of -8.5%. Although it was not as dramatic (yet) as the fall of WTI, it is still falling, (Yes, gas prices always go up faster than they go down!) at the pump. The chart shows that the price of WTI has fallen over the past four weeks.
The good news does not end there. In the agricultural market, the 2022 pop in ag prices have completely changed (see chart) and this is true for all commodities (see second chart).
Remember, inflation is change in trees. So, the implication of what we’re seeing in oil fields, ag, and commodities is that futures prices are going down, i.e., a bit of a welcome drop. Here are some real examples: Between July 1 and July14, oil: -13%; metal base: -13%, food goods: -11%, and, as seen above, between June and mid-July prices at the pump: -8.5%. We’ve also seen a significant drop in shipping costs. The Baltic Dry Index, which measures the cost of shipping dry goods, is down -64% from its recent peak.
What is causing this? Part of the decline in commodity prices, especially in the steel sector, is the economic recovery of China due to their zero-Covid policies. Their closure of cities is well known. They just reported Q2 Real GDP at +0.4% and there is a lot of skepticism about that number among Chinese observers. The European economy is already in recession and may be headed for Depression. And, as seen below, the US economy is less than healthy. The result is that futures prices are in a “retracement” situation as traders in the commodity pits see a decline in futures and lower futures prices.
To summarize the good news, it seems that the rate of inflation increased in June and will decrease rapidly in the future, for example, at the end of the year.
Labor Market Health
As we saw in our previous blog, the unemployment rate is calculated from the Family Survey which showed -315K job loss (although that number was completely ignored by the media). The unemployment rate remained at 3.6% due to the number of workers, who are said to have decreased. The Household Survey has shown negative numbers in two of the last three months and, historically, has been a better indicator of the health of the labor market than the headline Survey Payroll (+372K). Unemployment is a late sign. Because labor costs are high, businesses hold onto their workers as long as possible, first by reducing working hours (and that’s what we’re seeing). That’s why job data and residual indicators. So, when the weekly Initial and Continued Unemployment Figures begin to rise, one knows something bad is happening.
Initial Jobless Claims rose +21K for the week of July 8 (Not Seasonally Adjusted; +9K Seasonally Adjusted). Until the most recent report, First Claims were rising, but slowly. But now, since the low point last spring, Initial Inquiries are up about +80K. Historically, when Initial Claims rise above 60K, recessions follow. First Claims are different, meaning Claims are now up to 80K per week. Doing the math, at the current rate, in 13 weeks (one GDP Quarter), there will be million + many people are unemployed. So, this is not trivial.
Continuing Complaints (those who have been unemployed for more than a week) also jumped +72K in the week of July 1 (Continuing Complaints are reported by week). There are 72,000 people who have lost their jobs and have not found another job. The total number of those who have been out of work for more than a week is now 1.4 million. What happened to the difficult labor market?
Creating things the worst, inflation has ruined the lives of Americans. The first chart below shows that Average Weekly Earnings has been negative Y/Y since April 2021.
The following chart shows that the average worker is no better off today than he was in April 2019; that’s more than three years ago and before the Pandemic.
We’re also seeing credit card fees rise as consumers try to keep up with their lifestyles. This, however, does not last as the credit limit approaches.
For several blogs, we’ve reviewed the University of Michigan’s Consumer Sentiment Index. Total research is at the lowest level in its 70+ year history.
And, it doesn’t look any better for the real estate industry, the auto industry, or the manufacturers and suppliers of big-ticket items, such as appliances, carpets, home improvement, and more. We’ve included a housing chart below that recent headlines have complained about housing markets cooling as interest rates rise, and there have been early signs of housing prices falling in some previously hot markets.
The next meeting of the Fed is the week of July 25. The CPI numbers (remember, this is a residual indicator) have set a 100 point (1 pct. point) increase in Fed Funds. There are two reasons why this Fed would raise the Fed Funds rate from 1.50%-1.75% to 2.50%-2.75%. The first is that it is fixed at 9.1% Y/Y rise in the CPI, a residual indicator, which, as mentioned above, will be at the peak of this cycle. The second, and in our opinion, the most reliable reason, is that they would like to reach the “political” rate, which economists have calculated in 2.50%. Given the rapidly deteriorating data, the July meeting could be their last chance to do so if, as we expect, the data shows a slowdown in the economy and a drop in inflation by the time they plan to meet again (September).
In any case, we believe that the 75-basis rate hike is a lock for the July meeting, and we believe that it will be the last or near-last hike of this trip because, by September, even the economy will slow down. the indicators will be distorted to the point where they cannot be ignored and the inflation data will go down. Finally, if this goes well (the end of inflation) after the Fed’s September meeting, stock markets may respond positively.
(Joshua Barone contributed to this blog)