Thanks to a sharp drop in gasoline prices, a fall in food prices, price cuts on a variety of goods like apparel, and the implicit belief that aggressive rate hikes are going to further hurt demand and thus prices, the NY Fed yesterday said one yr inflation expectations fell to 6.2% from 6.8%. The 3 yr outlook fell to 3.2% from 3.6%. They said “Both decreases were broad based across income groups, but largest among respondents with annual household incomes under $50k and respondents with no more than a high school education.” This group of course is the most sensitive to gasoline and food prices. The squeeze on housing affordability has finally led to a cooling of the industry as we know and in turn, median home price growth expectations a year out slipped to 3.5% from 4.4%.
There wasn’t much change to the employment picture but it seems that every day I’m seeing companies, mostly in tech and related businesses, announcing a trimming of their workforce. Yesterday Groupon said it’s firing 15% of its employees, which is about 500 people. Income expectations rose two tenths to 3.4% which is a new high in this survey. “The increase was most pronounced for respondents without a college education and with lower (below $50k) annual household incomes.” We know that a lot of small businesses have to pay up in order to compete with Amazon, Walmart, Costco, etc… in starting wages.
This of course comes before tomorrow’s July CPI where both the headline and core figures are expected to moderate from June. For perspective, if headline CPI is zero m/o/m for the last 6 months of 2022, it will still be up 6.3% in December y/o/y. If it was up .1% per month for the next 6, it would be up 6.9% y/o/y in December y/o/y. Thus, still elevated even with the expected moderation.
I think the Fed will give us a 50 bps increase in September to 2.75-3% and not much more, if any, after that as QT kicks into full gear.
With respect to the housing market, Fannie Mae’s Home Purchase Sentiment index for July fell 2 pts to 62.8 and that is the lowest since 2011. Only 17% said it’s a good time to buy and with prices trends softening, 67% said it’s a good time to sell, down from 76% in May. Let’s do some math to give you an idea of home much a monthly payment has gone up over the past two years. Let’s take a $250k home in July 2020 that now costs $350k and mortgage rates that are at 5.40% vs 3.15% two years ago. Let’s also assume a 20% down payment, which now is $70k vs $50k in 2020. The monthly payment today would be $1,572 vs $859 two years ago, an increase of 83%. Thank you Federal Reserve, AGAIN.
The July NFIB small optimism index was 89.9, up a touch from the 89.5 print seen in June which was the lowest since January 2013. After dropping another 7 pts in June to a survey record high dating back to the 1970’s, those that Expect a Better Economy bounced by 9 pts to a still deeply negative -52%. Those that Expect a Higher Sales fell another 1 pt to the weakest since April 2020 when the world was shut. There was 1 pt gain after a 3 pt drop in those that said it’s a Good Time to Expand. Plans to Hire rose 1 pt after falling by 7 last month and is 1 pt below its 6 month average and there was a 1 pt drop in Positions Not Able to Fill to 49% which is exactly what the 6 month average is. Compensation was unchanged just off its record high while Compensation Plan fell 3 pts but after rising by the same amount last month. Plans to Increase Inventory rose 3 pts after falling 3 pts in June while Capital Spending Plans declined for a 3rd month to the lowest since March 2021. There was a further tightening of credit conditions and with respect to pricing, Higher Prices fell to the lowest since November 2021. Finally, and most relevant for the stock market, Earnings Trends weakened for the 3rd straight month to the softest since July 2020.
Bottom line, while price pressures moderated, the NFIB said the number of small businesses that are saying that inflation is their number one problem reached the highest level since 1979. The NFIB said, “The uncertainty in the small business sector is climbing again as owners continue to manage historic inflation, labor shortages, and supply chain disruptions. As we move into the 2nd half of 2022, owners will continue to manage their businesses into a very uncertain future.” Of course the future is ALWAYS uncertain but I’m sure you get their point.
As we see this growing bifurcated labor market where there is a clear focus on redundancies (the nicer way of saying firing’s I guess) in tech land, the NFIB said “The difficulty in filling open positions is particularly acute in the transportation, construction, manufacturing, and wholesale sectors.”
NFIB
Expect a Better Economy
Higher Prices
On the heels of what Nvidia said yesterday, here was the Micron comment in their 8k released this morning before a conference in which the CFO was speaking today, “Recently, due to macroeconomic factors and supply chain constraints, we have seen a broadening of customer inventory adjustments…In FQ1, bit shipments are now expected to decline sequentially, and we expect significant sequential declines in revenue and margins.” Assume it’s mostly related to PC’s and smartphones, what many stocked up on over the past few years.