Macro Commentary

Dive deeper into economic trends

Markets Defaulting to Rate Cut Narrative

Jacob Hess
May 20, 2024

As we kick off NVIDIA earnings week, global markets are showing mixed signals. The overall economic environment is characterized by a gradually slowing economy and the default expectation of global rate cuts by central banks. However, rising commodity prices signal ongoing inflation concerns.

Equity futures continue to inch upwards, with the S&P 500 gaining 0.13%, NASDAQ climbing 0.18%, and the Dow increasing by 0.07%. Volatility remains low, with VIX futures testing 13.5, the lowest since February. This stability in equities is largely driven by the narrative of impending global interest rate cuts, despite a gradually slowing economy.

NVIDIA's upcoming earnings report is highly anticipated as the company has been a key driver of S&P equity gains this year, nearly doubling its stock value. This follows an impressive performance last year, where NVIDIA tripled its value.

Asian markets posted gains across the board with China up 0.54%, Japan 0.73%, Australia 0.63%, and the Hang Seng Index 0.42%, nearing 10-month highs. In Europe, markets also moved higher, except for Italy, where many companies were trading ex-dividend. The Euro STOXX 600 rose by 0.16%, Germany by 0.46%, the FTSE by 0.11%, and France by 0.52%.

The Bloomberg Commodity Index continued its upward trend, increasing by 0.4% and up 7.8% year-to-date. This surge in commodity prices hints at persistent inflation. Brent and WTI oil prices reversed earlier gains to fall about 0.45%, influenced by Middle Eastern geopolitical events and upcoming OPEC meeting on June 1st. Gold also hit a new high of $2,450 before retreating to $2,425, driven by geopolitical tension and potential Fed rate cuts.

The rapid rise in Henry Hub natural gas futures, up 2.4% to $2.69 today, is causing inflation worries as bulls latch onto reports of increased power consumption due to hot weather and AI development.

Today's macro data pointed to economic weakness. Japan's tertiary industry index fell by -2.4% month-over-month, largely due to a drop in wholesale trade. Mexico's retail sales also declined by -1.7% year-over-year. Both data points underscore the global economic slowdown following a strong Q1.

Multiple Federal Reserve speakers are scheduled this week, with indications that the economy is slowing down gradually. The Bank of England (BoE) remains cautious about cutting rates due to recent inflationary pressures. The People's Bank of China (PBoC) held its prime rates steady, focusing on stabilizing the real estate sector.

Political uncertainty is on the rise after the deaths of the Iranian president and foreign minister in a helicopter crash and the Saudi crown prince canceling a trip due to health issues. However, initial reports suggest no foul play in these events.

Markets across the globe have generally defaulted to the prevailing narrative that major central banks are set to cut interest rates beginning in the summer which will broadly ease financial conditions by reducing the cost of borrowing. There were very few macro data releases today, but the ones that trickled came in below expectations (Japan service sector, Mexico retail sales). Sitting side-by-side with the cutting narrative is the view the economies are slowing from what can be perceived as a slightly hotter-than-expected Q1. This is mostly true for developed markets like Japan, Europe, and the US.

The key pushback against the view that economies are gradually slowing and inflationary pressure that was seen in Q1 to be sticky in some countries and increasing in others is the trend in commodity prices. The GSCI commodity index is up 0.5% and 11.3% YTD, and the London Metal Exchange index is up 2.3% today and 21.0% YTD. The rise in input costs which will flow into producer prices and very likely flow into consumer prices is keeping some central bank policymakers wary of dropping interest rates too soon. The threat of geopolitical tensions rising as a result of the death of the Iranian president is likely empty as the first notes from reporting organizations suggest that the helicopter crash was an accident. VIX is sitting at a 2024 low of 12.21 despite rising 1.8% in early trading. Downside risks are creeping up on the bull case of strong corporate earnings of which Nvidia will be championing on Wednesday.

Another Hot CPI Report is Likely to Push Back Rate Cuts

Jacob Hess
April 10, 2024

The March CPI report felt like it was a bit more important than usual as many were starting to doubt the continuation of the trend of disinflation that was seen in the final quarter of 2023. After the release of the data, those doubts have only intensified. CPI grew 0.4% MoM and 3.5% YoY in March, beating expectations of 0.3% MoM and 3.4% YoY and reflecting a slight acceleration in consumer prices from February's annual rate of 3.2% YoY. The MoM rate of 0.4% is the second straight increase of the pace and faster than the growth observed in the October 2023 to January 2024 when the disinflationary trend was strongest. With March data now in, we see that CPI grew 1.1% QoQ in Q1 2024, much faster than 0.5% QoQ in Q4 2023 and the fastest since 2.6% QoQ in Q2 2022.

Core CPI inflation, at 0.4% MoM and 3.8% YoY, saw a similar trend in that it saw a gentle acceleration in the annual rate and both the monthly and annual increases were higher than expected. The 0.4% MoM increase is the third in a row and a noticeable acceleration over the MoM rates at the end of 2023. We can see that near-term inflationary pressures have gotten worse in this less volatile segment in the quarterly rates just like we saw when including food and energy. In Q1 2024, core CPI grew 1.1% QoQ, up from 0.8% QoQ in Q4 2023 and the fastest since Q1 2023. The evidence continues to build against disinflation.

Let's look at some of the details that stuck out:

  • Food inflation looks to have more or less returned back to the 2% target. Food prices were up just 0.1% MoM in March after being flat in February and the annual rate is now 2.2%. Food at home prices were flat for the second month in a row, and while that doesn't help the absolute level of food prices, it does provide some relief to consumers who felt like grocery store prices were getting away from them. Food away from home is hotter, up 4.2% YoY and averaging growth of about 0.3% MoM in Q1 2024. That still seems linked to services supremacy.
  • Energy CPI had been deflationary some time but is not back up to growing around 2% on an annual basis after two strong increases in February and March. The gasoline and electricity indexes were up 1.7% MoM and 0.9% MoM respectively, and the natural gas index was unchanged. Based on current trends in commodities, it looks like energy prices will continue on a gradual incline which will have a significant impact on the headline rate.
  • The shelter index increased another 0.4% MoM with both rent and owners' equivalent rent increasing at that same rate. Though growth has downshifted, the increase in the shelter index remains the largest factor in the core CPI MoM gain. This index continues to be discounted for its lagging nature. When disregarding it, core CPI is up 0.3% MoM and is much closer to the Fed's inflation target on an annual basis at 2.4% YoY (however, this is up from 2.2% YoY in February). Using an alternate shelter index from Zillow/ApartmentList data puts core CPI at around 1.8% YoY.
  • The transportation services subcomponent is being singled out for its rapid rise in the last three months where it averaged monthly growth of 1.3%. The annual growth of this index, which has a relative importance of about 6.39 ppts, is 10.7%. Under the hood, we see spikes in motor vehicle insurance (up 2.6% MoM and 22.2% YoY) and motor vehicle maintenance (up 1.7% MoM and 8.2% YoY) that are driving transport services prices higher and in turn leading to stickiness in services inflation which is stuck over five percent on an annual basis at 5.4% YoY.
  • While services is hot, goods is cool. Excluding energy commodities, goods CPI contracted in March at -0.2% MoM and is down -0.7% YoY with new and used vehicles dragging the index lower. Apparel did print its second hot MoM rate in a row (0.6% MoM in February and 0.7% MoM in March), and medical care commodities are up 2.5% YoY, but in general, we continue to see goods in disinflation.
  • If we do some more excluding from core CPI of shelter which is considered lagging and of used cars which has been volatile over the last two years, we see that Supercore CPI (ex-energy, food, shelter, used cars) was up 0.4% MoM and 2.6% YoY in March, an acceleration from 2.4% YoY in February. To zero in on core short-term inflationary pressures, we can look at the 3Mo3M% annualized rate. It now sits at 4.4% after a few consecutive hot readings, and this is the highest since February 2023 when it was at 4.1%.

The reaction to the hot report was more pronounced than usual. Treasury yields shot up after the CPI release with many rates reaching the highest level of 2024. Major index futures all sold off by about a full percentage point and are trending that way so far in morning trading. The Russell 2000 was down almost -3% at the morning low. It appeared that the March CPI report seems to have struck a nerve in particular. The newest data suggests that the Fed will have to admit that it can't cut three times this year or at least that June and maybe July are off the table. At the very least, the market believes that FOMC members have to back down as many speakers said they would if the disinflationary trend subsides. Also following the CPI release, the probability of a June rate cut according the CME's FedWatch was crushed down to 21.1% today when yesterday it was at 56.1%. This is a consequence of the Fed insisting on being data-dependent. When the data moves, the market responds to it. And that limits the Fed's flexibility.

Jobs Growth Gained Momentum in Q1 2024 Despite Higher Rates

Jacob Hess
April 05, 2024

The US labor market remains a powerful force, relentlessly cranking out jobs. In March, nonfarm payroll employment increased 303,000, the strongest job gain in almost a year (303,000 back in May 2023) and above consensus expectations of 214,000. In addition to that, there were no major changes to January and February numbers. In total, revisions added just 22,000. The robust job growth caused the unemployment rate to dip slightly to 3.8% after the increase to 3.9% in February. Momentum in hiring has accelerated each month so far in 2024 according to the three month moving average, accentuating how hot the current labor market still is. After a year of strong job growth the three month average is only marginally lower, 305,000 in March 2023 to 276,000 in March 2024 (up from 243,000 in January 2023).

The establishment data shows that job growth was exceptionally strong across the service and public sectors while the goods sector saw moderate growth itself. As a whole, the service sector added a majority of the 303,000 jobs with an increase of 190,000. The strongest industries within that sector were education & health services (+88,000), other services (+71,000), and leisure & hospitality (+49,000). Utilities was the only service industry to note a loss in employment, with a decline of only -400. Also showing strength was the public sector which saw hiring of 71,000 in March. Government job growth continues to be fueled by strong fiscal growth that has filled in for gap left by monetary policy as the Fed maintains restrictive rates.

The household data echoed the establishment data's strength with a reported 498,000 increase in employment and a -29,000 decline in unemployment. This meant that all of the 469,000 individuals who joined the work force in March successfully found a job which is a notable sign of strong labor demand. Both the labor force participation rate and the employment-participation ratio grew 0.2 ppts to 62.7% and 60.3%, respectively, which is a good sign for the supply of labor. In another show of strength, we see that unemployment was mostly voluntary for those exiting a job. Specifically, the number of unemployed who were job losers (or who completed temporary jobs) fell -174,000 to 3.0 million while the number of unemployed who were job leavers grew 112,000 to 823,000.

Finally, we have the wage data. Average hourly earnings grew 4.1% YoY in March, down from 4.3% YoY in February. This was in-line with the expectation that wage growth would continue its gradual deceleration and contradicted the surge in the ADP's Job Switcher Annual Pay growth rate from 7.6% YoY in February to 10.0% YoY in March seen earlier this week. Goods wage growth accelerated slightly with a strong MoM rate of 0.6% MoM, but services wage growth was weaker, and the annual rate of growth fell below four percent to 3.9% YoY.

The market is taking the 3XX,XXX headline jobs number and running with it. Rates jumped right after the report was released including a 7 bps move in the 10-year Treasury yield to 4.39%, the highest since November 2023. Additionally, Fed Funds futures saw a hawkish adjustment as the probability of a June rate cut moved closer to a coin flip at 55.5% which is down from 65.8% yesterday. July cut probabilities also shrank. In response to the short-term adjustment in rate expectations, S&P futures pared the light gains of the morning.

Are these hawkish moves justified? Probably, but they should not be carried on for too long. It is easy to focus on the robust headline jobs growth but that does not accurately describe the situation in March. The 0.2 ppt increase in the participation rate is very good news for labor supply after a short-term move lower from 62.8% in November to 62.5% to start 2024 threatened to prolong the threats of labor shortages. On top of that, wage growth did continue its deceleration. The combination of strong job growth and easing wage growth is a dream scenario for the Fed as it satisfies the dual mandate and gives the Fed room to cut if it needs to as price pressures would be less of a concern. The bottom line is, the US economy is still very strong and unemployment is unlikely to be a problem in 2024.

PCE Inflation Meets Forecasts, Yet Fed May See Hawkish Signs

Jacob Hess
March 29, 2024

After a slightly underwhelming January income and outlays report where consumers appeared to be taking a step back from spending, February data provided a bit of a counter to that account. While personal incomes were up just 0.3% MoM and real disposable income actually declined on the month (down -0.1% MoM), personal consumption expenditures expanded 0.8% MoM and when accounting for inflation were up 0.4% MoM. The consensus estimates expected income to be slightly stronger at 0.4% MoM vs 0.3% MoM reported and consumption to be much weaker at 0.5% MoM vs 0.8% MoM reported. This data lends some credence to the narrative that colder weather in January was had an economically chilling effect and there was a slight bounce from that in February.

Spending was relatively strong across both goods and services with the former up 0.5% MoM and the latter up 0.9% MoM. Goods spending was boosted by a strong increase of $28.5 billion in motor vehicle and parts sales as there was a noted pick up in the sales of new light trucks. Behind that category were gains in every service industry including transportation services up $17.0 billion, housing & utilities up $16.3 billion, and recreation + food services & accommodation up $16.3 billion. US consumers remain committed to portioning a large slice of their budgets to services, and that trend has not really faded away.

The all-important PCE price indexes looked to be mostly nonevents. All of the main rates came in in-line with consensus expectations except for the headline MoM move which was a tick below. The core PCE price index grew just 0.3% MoM which matched consensus projections as did the annual rate of growth at 2.8% YoY. At that rate, the Fed's main gauge of inflation is now at the lowest since March 2021. However, other data points that are key to the Fed are pointing to sticky inflationary pressures. Personal income growth is still strong at 4.6% YoY (though this slowed from 4.9% YoY in Jan), and the annualized rate of average of the last three MoM gains in income is over 6.5%. Similarly, services inflation is sticky at 3.8% YoY in Feb, down only 0.1 ppts from 3.9% YoY in Jan. The annualized rate of the average of the last three MoM gains in services prices is a touch above 4.9%. At the moment, it is base effects that is keeping annual rates on a trend of gentle deceleration while underlying near-term trends are strong.

Nothing summarizes the current consumer landscape more than the trend in the personal savings rate. With consumer spending remaining robust in February, the personal savings rate dropped to 3.6% which was down from 4.1% in January and the lowest since December 2022. It seems that higher interest rates are not necessarily tightening the purse strings of the US consumer despite that being one of the goals of the Fed. This could be a signal that inflation expectations are settling higher than pre-pandemic levels as consumers struggled to shake the feeling that inflation is becoming entrenched. While year ahead inflation expectations have come down from above 4%, they have settled at or just below 3% in the last four months, according to the most recent UMich Index of Consumer Sentiment data. This is slightly higher than the average expectation of 2.64% YoY inflation from 2015-2019.

With all this being said, the Fed should not make any major changes in their position on rate cuts as a result of this report. If anything, it should give a bit of a hawkish tilt to some FOMC members who will want to continue to stress caution when it comes to loosening monetary policy.

2024 Inflation is Off to a Hot Start

Jacob Hess
March 12, 2024

The latest data from the US Bureau of Labor Statistics reports that the Consumer Price Index (CPI) grew by 0.4% month-on-month (MoM) and 3.2% year-on-year (YoY) in February, a slight uptick from the 3.1% YoY reported in January. Core CPI, which excludes volatile food and energy prices, also saw a 0.4% MoM increase but moderated to 3.8% YoY from 3.9% YoY previously. Consensus expectations were beat almost across the board. Forecasters had CPI MoM at 0.4% and YoY at 3.1%, and for core CPI had MoM at 0.3% and YoY at 3.8% YoY. The biggest news is the monthly core CPI inflation beat as it calls into question when the disinflation trend of 2023 will pick back up in 2024.

Breaking down the CPI segments:

  • Food prices remained relatively flat, with the food at home index unchanged and food away from home registering a mere 0.1% MoM increase. Notably, six out of six major grocery group indexes decreased during the month, driving food inflation down to 2.2% YoY, the lowest level since May 2021.
  • Energy prices rebounded by 2.3% MoM in February, with notable increases in gas and natural gas prices of 4.3% MoM and 2.3% MoM respectively. Electricity prices were more muted at just 0.3% MoM. While energy CPI did jump on the month, it is still down by -2.3% YoY (notably higher than the -4.6% YoY in January).
  • Core CPI outpaced expectations with a 0.4% MoM increase, driven primarily by a 0.4% MoM growth in the shelter index. Shelter prices maintain a hearty gain of 5.7% YoY. Despite the moderation in YoY core CPI growth to 3.8% YoY, which is the lowest since May 2021, concerns persist as the deceleration in core prices does not seem fast enough.
  • Goods prices saw a slight uptick, ending three months of deflation, with used cars bouncing back 0.5% MoM after a drop of -3.4% MoM in January. Apparel provided a meaty gain of 0.6% MoM itself. In general, however, goods prices are still down -0.3% YoY.
  • On the services front, inflation maintained its momentum at 0.5% MoM in February after a 0.7% MoM increase in January. The monthly gain was driven by increases in transportation services, up 1.4% MoM (second 1%+ gain in a row) and shelter up 0.4% MoM. Airline fares prices were a major cause of the rise in transportation services as they grew 3.6% MoM February, adding on to a 1.4% MoM gain in January.
  • The Supercore CPI index, excluding food, shelter, energy, and used cars, grew by 0.3% MoM and 2.4% YoY, down marginally from 2.5% YoY previously. When just removing shelter from CPI, prices are up just 1.8% YoY; however, at a monthly rate of 0.5% MoM, they grew at an annualized rate of around 6%.

The February CPI report is definitely a hot one. With the exception of food prices, which were flat on the month, the key CPI segments substantiated the case that inflationary pressures of strengthening in 2024. A good measure that demonstrates this is the near-term three month annualized average of core CPI. That number has creeped back above 4% for the first time since June 2023 at 4.18%. The medium-term six month average also increased to 3.85%, the highest since July 2023. Finally, we can do a bit of data cherry-picking to get an even more frightening number. The annualized rate of Supercore inflation so far in 2024 (average of Jan-Feb) comes in at 4.3%, more than double the 2% inflation target that the FOMC wants to achieve.

The March FOMC meeting is more-or-less settled. Even after the hot February CPI report, Fed Funds futures prices in a 99% chance of no move later this month with that other 1% dedicated to a rate cut. The next meetings to consider are in May and June and both are now seeing lower probabilities of rate cuts following this morning's report. Specifically, the May cut probability fell from 18.0% to 9.1%, and the June cut probability fell from 71.6% to 65.4%. More important to those probabilities will be the guidance provided by the Fed's projection. As of December, the Fed expects around 75 bps of cuts in 2024, which was an increase from the 50 bps expected in the September projections. A reversal in disinflation could cause 2024 rate cut projections to be cut back to that 50 bps level which would be a corrective of a bond market where the 1-year Treasury yield is trading just below 5% (as of 10:30 am).

The bottom line is that inflation is too hot in 2024 so far, and it may catch the market out since investors are trading partly on the AI tech boom and partly on the hopes for rate cuts sooner rather than later. Based on the current trend in inflation, that second tailwind is likely to fade and could become a headwind in the near future.

Getting Back on Track to Disinflation: February 2024 CPI Preview

Jacob Hess
March 11, 2024

The market gets only one day of rest between the February jobs report and the February CPI report which is set to come out on tomorrow on Tuesday, March 12. The highly anticipated report is the last one before the Fed begins in next policy meeting later this week. The outcome of this meeting had at one point been a highly uncertain one as many thought the Fed could start cutting rates this month. However, the investors have eventually agreed that there will be no change in the Fed funds rate at the March meeting. Nevertheless, February inflation data will still be crucial in helping to decide how the FOMC members will shape their expectations that will be communicated in the update of the Summary of Economic Projections.

In January, CPI grew at the fastest monthly pace since September 2023 at 0.3% MoM, officially marking an end to the cool streak in Q4 2023. Despite that, the annual pace cooled from 3.4% YoY in December to 3.1% YoY in January. The more concerning number was a 0.4% MoM increase in the core CPI which was the highest since April 2023, and this caused the annual rate to stay at 3.9% YoY to start 2024. At an annualized rate, January CPI grew 4.8% whereas it had been running at an annualized rate from the low-to-mid 2% to high 3% range in Q3 and Q4 2023. The obvious concern is that disinflationary forces have pulled back, and the January report showed that there was evidence that this has been the case since the softness in pricing in Q4. The February report could exacerbate this concern or help provide some much needed relief to the Fed who have voiced their concern over the data recently.

  • Financial conditions eased significantly in the last half of 2023 according the Chicago Fed national Financial Conditions Index and eventually reached the easiest level in two years in January at -0.495. That has slightly reversed in February to -0.473 (a largely miniscule change).
  • The Manheim Used-Vehicle Prices Index moved down just -0.1% MoM in February. With no seasonal adjustment, the index actually increased 1.7% MoM. After a -3.4% MoM drop in the used car index in January, we're likely see a positive rate there in February.
  • On a more deflationary note, retail sales excluding gas stations fell -0.8% MoM which could be a precursor to weakening consumption. However, food services & drinking places sales were up 0.7% MoM which is not a disinflationary sign in recreation and food away from home pricing.
  • In terms of how businesses have talked about their pricing in February, the ISM Manufacturing Prices index remained in a slight expansion at 52.5, and the ISM Services Prices index also pointed to moderate price inflation at 58.6 (although it did fall -5.4 pts from the January index). We will get small businesses' February pricing indexes tomorrow, but if we just look at the last few Price Plans readings, we see a slightly inflationary trend. Nov-Jan readings averaged 33 which if above the lows of 2023 but below the highs of 2022.
  • In terms of statistical trends, the January and February 2023 core CPI monthly rates were high relative to the months around it at 0.427% MoM and 0.467% MoM. With the former rate falling out of the calculations, this should give some leeway to slightly hotter rates for February 2024 in terms of how the annual rate will look.

So what numbers should we expect tomorrow? The consensus estimate sees US CPI growing 0.4% MoM and 3.1% YoY (Jan: 3.1% YoY), and US Core CPI growing 0.3% MoM and 3.7% YoY (Jan: 3.9% YoY). In other words, expectations are seeing a slightly cooler report than January, but one that doesn't necessarily quell the concerns the Fed may have about the path of disinflation. An upward surprise on the core MoM number could cause a pause in the recent drop in yields (the 2-Year Treasury is down from 4.73% to 4.50% in the last two weeks). Unfortunately, I think an above-expectations reading is likely the case, and I have a 0.4% MoM rise penciled in for tomorrow. The main drivers of inflation will be services maintaining its momentum and used cars reversing from the Jan drop and keeping goods deflation in check. The result of the overshoot will be the YoY rate also coming in above consensus at 3.8% YoY, though this will be a slight deceleration from January.

Employment Preview: Moderating but Strong Labor Market

Jacob Hess
January 03, 2024

Another jobs report is coming this week, and it will be the biggest economic news of 2024 once it is released. However, it will be reporting on how the previous year ended and provide important context to a Fed that described job gains as having “moderated” but still “strong”. In the context of sharp monetary tightening, in 2023, that assessment is definitely fair.


In November, the establishment survey found that 199,000 jobs were added which topped both the previous month’s gain of 150,000 and the consensus estimate of 180,000. What was also noteworthy was that downward revisions were mostly inconsequential with just a -35,000 change to the September number. As these gains have moderated, the unemployment rate has started to trend upward. Despite the rate falling -0.2 ppts to 3.7% in November, it had reached 3.9% in the month before (about 0.5 ppts off the trough of 3.4% in April 2023). The Fed sees an unemployment rate of 3.8% to end 2023 which is what it has projected since September. This is significantly lower than the 4.6% projection that the Fed set in December 2022.

The consensus estimate for the nonfarm payroll increase in December 2023 sits just below the November number at 168,000 meaning that the trend of “moderating but strong” job gains is likely to continue. Analysts have also matched the Fed’s view of the unemployment rate reaching 3.8% in December. These results would be indicators of the continuation of the tight labor market where businesses are still finding their demand for labor unmet. Thus, the it is also expected that upward pressure on wages remains at the end of 2023. The consensus on that is an 0.4% MoM uptick which will push the YoY average hourly earnings gain back to 4% YoY.

An important factor in staffing levels in December is the demand for holiday shopping in the first two-thirds of the month. Mastercard reported that total holiday retail sales grew 3.1% in 2023 over 2022 with online sales up 6.3% YoY and in-store sales up 2.2% YoY. The moderate gains in consumption were likely enough to keep businesses hiring in December, but weaker in-store sales gains suggests the impact will not be large for retailers. However, food services and drinking places likely felt the need to boost their employment as holiday spending in that segment jumped 7.8% YoY. Therefore, I see the leisure and hospitality sector leading the jobs gains in the December report (around 100,000 jobs added) while the retail trade industry could lag a bit below what might be usually expected during the holiday season (around 20,000 jobs added).

In general, my expectations are that nonfarm payrolls should increase by about 150,000, and the unemployment rate should tick up to 3.8%. The latter could be a bit of an underestimation if the trend of higher participation is extended into December. November saw a strong increase of 532,000 in the labor force which pushed the participation rate up 0.6 ppts above where it was in November 2022 at 62.8%. I expect participation to continue to increase in early 2024 as consumers continue to spend down their cash stockpiles and sticky wage increases coax more people off the sidelines. This is likely one of the keys to the Fed’s path towards a looser a labor market.

Chinese CPI Trying to Buck the Deflation Trend

Jacob Hess
October 12, 2023

The latest data on Chinese inflation for both consumers and producers continues to reflect a struggling economy, despite expectations for some improvement. CPI growth had only recently recovered from a slightly deflationary trend observed during the summer, registering -0.2% YoY in July and accelerating to 0.1% YoY in August. However, the latest data for September shows no growth on an annual basis, indicating that consumer prices threaten to resume a downward trend. On a more positive note, the monthly rate of CPI growth has stabilized over the last three months, growing around 0.2-0.3% MoM from July to September. This consistency at the monthly rate should help inflate prices to a more normal level in the near future.

From China National Bureau of Statistics

Food and consumer goods prices have been the main sources of deflationary pressure, declining by -3.2% YoY and -0.9% YoY, respectively. When food is excluded from the equation in the calculation of core CPI growth, prices appear healthier at 0.8% YoY, primarily due to a growth of 1.3% YoY in the services sector. However it is worth noting that on a monthly rate, services prices edged down by -0.1% MoM. This is particularly concerning if it serves as a broader signal of weakness in services activity, which is supposed to be the main driver of economic growth.

Further up the pipeline, pricing and profit margins for producers continue to be weak. While input and output producer prices have grown at the strongest monthly rates so far this year, on an annual basis, PPI remains deflationary. The most significant downward pressure on PPI comes from extracted commodity prices, which are down -7.4% YoY, and raw materials, down -2.8% YoY. Both categories did see substantial improvements in September. Consumer durables and production prices are also weak, registering -1.2% YoY and -3.0% YoY, respectively, and saw less of an acceleration in September.

The Chinese economy seems to be in need of additional support, but the options for monetary intervention may have already been exhausted. The silver lining in this challenging economic landscape is that the monthly rates suggest some life is coming back into firms’ pricing power. This could potentially help inflation rates reach a healthier level by the end of the year. Nonetheless, the overall picture remains one of an economy in desperate need of support, with inflation metrics serving as a critical barometer of China's systemic challenges.

Energy Prices Rise but the Core Disinflationary Trend is Maintained in September

Jacob Hess
October 12, 2023

The US Consumer Price Index (CPI) for September showed a month-over-month (MoM) growth of 0.4% and a year-over-year (YoY) increase of 3.7%, unchanged from August. This was mostly in line with market expectations that inflation rates would remain roughly the same as the previous month. Much of the trends that were evident in August were maintained, and in general, inflation continued its slow cooling outside of energy prices.

From BLS

One of the key drivers of September's inflation was the energy sector. Thanks to hot commodity markets stoked by expectations of low supplies, energy prices followed up their 5.6% MoM increase in August with a 1.5% MoM gain in September. Specifically, gas prices jumped 2.1% MoM, and electricity prices grew 1.3% MoM, both showing consistent uptrends. Natural gas prices are bucking the trend, down -1.9% MoM and -19.9% YoY. Despite the resurgence in energy costs, they are still lower than a year ago, down -0.5% YoY. Without this negative contribution to headline inflation, the CPI would be above 4%.

Food prices grew at a rate of 0.2% MoM for the fourth month out of the last five. The annual rate is now only up 3.7% YoY. A divergence exists in the details segregating food at home and food away from home prices. The food at home index was up 0.1% MoM and 2.4% YoY, while the food away from home index grew 0.4% MoM and is up 6.0% YoY. The larger increases in the latter are likely correlated with stronger services prices from restaurants and bars.

Core inflation, which excludes volatile food and energy prices, cooled down in September to 4.1% YoY from 4.3% YoY in August. The shelter index was once again a significant driver, up 0.6% MoM and 7.2% YoY, accounting for 70% of the YoY increase in core CPI. Other areas in services also showed robust growth: car insurance was up 1.3% MoM, hospital services increased 1.5% MoM, and transport services grew 0.7% MoM. Despit all of this, the annual rate of services inflation edged down -0.2 ppts to 5.7% YoY. The warmer services sector was offset by the very cool goods sector. Goods prices continued their broad deflationary streak with a negative monthly print for the fourth consecutive month. Prices fell in the used cars and trucks index (-2.5% MoM), the apparel index (-0.8% MoM), and the medical care commodities index (-0.3% MoM).

Inflation data continues to be a bit noisy with certain areas like energy and used car & vehicles driving the trends. That’s why the Fed is focused on the “super core” segment. The "super core" inflation, which excludes food, energy, shelter, and used cars, was up 0.2% MoM and 2.8% YoY in September, down from 3.2% YoY in August. The annualized rate of the last three monthly rates is just above 2.4%. The disinflationary trend is intact but hasn't really accelerated. This month's CPI data will likely leave Federal Open Market Committee (FOMC) members' opinions on the next policy step largely unchanged. The next FOMC meeting is at the end of the month, and there's still more data to come that will inform the decision... assuming the government stays open.

PPI's Quiet Rise and the Energy Elephant in the Room

Jacob Hess
October 11, 2023

Moderate gains continue for the Producer Price Index (PPI), with a September increase of 0.5% MoM. This marks the third straight month of increases in the 0.5-1.0% range. The annual increase of PPI was 2.2% YoY, just slightly higher than the 2.0% YoY. These gains in the headline index are heavily impacted by the rebound in energy goods producer prices, which grew 3.3% MoM in September, following a large 10.5% MoM jump in August. Core PPI increased at a more modest rate of 0.2% MoM. The annual increase remained sticky, just below 3% at 2.8% YoY, very similar to where it has been for the last five months. Let's look at the breakdown of the goods and services subcomponents.

From BLS

The PPI for goods increased 0.9% MoM and 0.8% YoY. Just like the headline PPI index, this was heavily impacted by energy, with the 3.3% MoM rise in energy PPI accounting for 75% of the rise in goods PPI in September. More specifically, 40% of the rise in goods PPI was attributed to a 5.4% MoM rise in producers’ gas prices. Core goods PPI, excluding food and energy, was up only 0.1% MoM but had a more robust annual gain of 2.0% YoY. The annual gain was driven by a 3.3% YoY increase in finished consumer goods PPI and a 3.6% YoY increase in private capital equipment PPI, although both are moderating on a monthly basis. Moving up the supply chain, there continues to be near-term upward pressure input costs from commodity prices. Unprocessed goods PPI jumped 4.0% MoM after two months of 2% or higher monthly gains in August and July. While the pressure here is almost entirely being applied by energy (7.5% MoM) and food (3.5% MoM), it is something worth watching.

Now we turn to the services sector. Services PPI increased at a moderate pace of 0.3% MoM in September and was up 2.9% YoY. The annual pace picked up considerably, around 0.7 percentage points from the previous reading of 2.2% YoY. That acceleration came on the back of a large upward revision to July’s monthly rate from 0.5% MoM in the August report to 0.8% MoM in September’s report. Another major reason for the acceleration in PPI growth was a 13.9% MoM increase in deposit services, which are now up a whopping 32.3% YoY. This large increase can likely be attributed to rising interest rates increasing the costs banks have to pay on deposits as a result of the Fed’s hiking. All together, the consumer services PPI (less trade, transport, and warehousing) grew 0.4% MoM and is up 4.0% YoY, which is actually a slight deceleration from the 4.1% YoY reported in August.

To really get to the core of the issue, we can look at a “Super Core” version of PPI which excludes energy, food, and trade services. This index increased just 0.2% MoM in September and was up 2.8% YoY, slowing from 3.0% YoY in August. Thus, in the end, we see that through the noise, producers are seeing a general trend of disinflation. This would be all fine and dandy, but the volatility in energy can’t be ignored. With new supply risks in the outlook from conflict in Israel and Gaza, which could lead to sanctions against Iranian oil, and from OPEC+ countries looking to maintain production cuts, high energy prices could be here to stay. With little volatility to the downside, this becomes an inflationary pressure that all producers have to pay attention to since energy input costs are almost universal. Suddenly, the picture becomes a lot less rosy.

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