Headline CPI rose .3% m/o/m and 1.5% y/o/y. That y/o/y gain is up from 1.1% in August and is the quickest pace of gain since October 2014. While the headline was in line, the core rate was one tenth less than expected with a .1% m/o/m rise and 2.2% y/o/y jump. Energy prices were still down 2.9% y/o/y but that continues to shrink. Food prices were lower by .3% y/o/y. Services inflation ex energy was up by 3.2%, remaining sticky above 3%. Medical care was higher by .2% after the 1% rise in August and is up 4.9% y/o/y. Within that, health insurance was up by 8.4% y/o/y, hospital services by 6%, nursing homes by 3.7%, home care by 2.1% and physicians services by 4.1%. With high deductible health insurance plans it should be no wonder where retail spending is being shifted to. Rent of primary residence was higher by .3% and 3.7% y/o/y continuing that persistent trend but there are signs growing that at least in San Francisco and NY, rent growth has peaked in some markets. The faux rent calculation know as Owners Equivalent Rent was up by .4% m/o/m and 3.4% y/o/y. Keeping a lid on the core rate were m/o/m drops in vehicle prices, both new and used. Apparel prices fell .7% m/o/m and .1% y/o/y.
Bottom line, short term treasuries rallied on the relief that the core rate was a touch below the estimate notwithstanding the two year high in the headline figure. Still, at 2.2% the core rate is above 2% for the 11th straight month. The headline figure should continue higher in coming months due to the rise in energy prices but we’ll be watching to see if rent growth has peaked, at least in some cities, although rent increases in many other cities are still occurring. What does this all mean for the Fed? We’ll, they’ve basically met their made up inflation target on top of their belief that we’ve reached full employment or something close to it in the new reality of today’s labor market. On the other hand, they have a 1.5% economy on their hands and a US Citi Surprise index that is at a 3 month low.
The NAHB home builder survey for October fell to 63 as expected from 65 in September (which itself was a 6 pt jump to the highest of the year from August). Thus, this is the 2nd highest print over the past 12 months. The internal components were mixed as the Present Situation fell 2 pts after rising by 6 last month. Future expectations rose 1 pt, a follow up to the 5 pt rise in September. Prospective Buyers Traffic still can’t get back above 50 (hasn’t been there since October 2005) as it fell 1 pt to 46 after rising by 3 pts last month.
Bottom line, the level of confidence among builders remains good but of course is relative in the context of the current level of new home sales which is still below its 25 yr average. The same headwinds remain according to the NAHB as they said “builders in many markets continue to express concerns about shortages of lots and labor.” The other headwind not mentioned is the persistent 5% home price increases that has encouraged many households to rent instead of buy. While low mortgage rates is a good offset to the price gains, families still feel priced out in many instances. This sentiment survey comes before the hard data of housing starts tomorrow and existing home sales Thursday both for September. ITB, the builder etf, is up on the day but off a few pennies after the release. Over the past two months ITB has been pretty much trading inversely to the US 10 yr note yield as makes sense. The US 10 yr snapped above the previous ceiling of 1.75%.
The Reserve Bank of Australia released its minutes from its last meeting and they seem to be a central bank that is not cutting rates again anytime soon. The Aussie$ is rallying on that and its helping the other commodity currencies such as the Loonie. The dollar is also lower against the euro and pound and little changed against the yen.
The pound in particular had a strong bid after the higher than expected CPI figure where the y/o/y gain was 1% (vs .6% in August) and the core rate was higher by 1.5%. Both were one tenth more than expected. That headline rate is the highest since November 2014 as energy prices fell just .1% y/o/y. To quantify how the rate of change is changing with energy prices, the decline was 2.6% in August, 3.4% in July, 4.1% in June and 4.9% in May. I repeat, headline inflation will be turning higher globally in coming months. Also out in the UK were input prices which are spiking because of the pound plunge. They rose 7.2% y/o/y in September and while two tenths less than expected, the pound took its next leg lower in October. The UK 5 yr inflation breakeven is higher by 3 bps to 3.01%. Below is a chart overlaying input PPI (white line) and CPI (orange line). Mark Carney is about to get what he wants.
Like an addict on smack, the Chinese just can’t quit the credit high. Aggregate financing in September totaled 1.72T yuan, 330b yuan more than expected and up from 1.47T in August. That is also up 29% y/o/y. Of the total, banks issued 1.22T of the loans. The main factor explaining the increase was a 230b yuan increase m/o/m in yuan denominated loans with a large chunk being household loans which are then used to buy more apartments and fueling that bubble. With a property crackdown begun on October 1, expect this figure to moderate. Evidence of a clear decline in the velocity of money and continuing a trend, M1 grew by 24.7% y/o/y while M2 was up by 11.5%. Many are sitting on their cash. This news came out after the Shanghai comp closed which was still up 1.4% on the day. The H share index was higher by 1.9%. All of Asia was in the green. The yuan is little changed. China announces another round of data tonight as they remained trapped in their desire for growth but at the same time acknowledging the massive credit problem they have.
The ECB released its quarterly lending survey and it reflected the conundrum of current policy, cheap money that encourages borrowing but banks that can’t make much money lending. “The ECB’s negative deposit facility rate continued to have a positive impact on lending volumes, while having a negative impact on loan margins and banks’ net interest income.” In terms of the supply and demand for loans, “Loan demand continued to increase across all loan categories, while credit supply conditions remained unchanged for enterprises and improved for households.” Credit standards were little changed. Hopefully Mario Draghi at his press conference on Thursday address the damage he is doing to bank profitability. As for what companies are doing with the money they borrow, it isn’t for capital investment as the ECB survey said “the positive contribution from fixed investment remained low.” They are using it for “M&A activities and refinancing.” Sounds familiar. The Euro STOXX bank index is leading the market rally in Europe as its becoming clear that further easing (outside of an extension of QE) is likely over.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.