Headline CPI rose .6% m/o/m, double expectations and brings the y/o/y gain to 2.5%, the highest level in almost 5 years. Yes, energy was a main factor (up 4% m/o/m and 11% y/o/y) but the rate ex energy and food jumped .3% m/o/m and 2.3% y/o/y, also above expectations. The core rate pace matches the most since September 2008 as services inflation ex energy was up .3% m/o/m and 3.1% y/o/y. Rent of Primary Residence (8% of CPI) was up by .3% m/o/m and 3.9% but the faux measure of rent called Owners Equivalent Rent (25% of CPI) moderated the impact as it was up .2% m/o/m and 3.5% y/o/y. I will say that rent growth in some large coastal cities has certainly moderated, NY and San Fran in particular. Medical care was up by .2% m/o/m and 3.9% y/o/y. Apparel prices jumped by 1.4% m/o/m and brings the y/o/y gain to positive territory. New car prices jumped by .9% m/o/m but used car prices were lower by .4%. Airline fares jumped 2% vs December but are down 3.3% y/o/y. Food prices were up by .1% m/o/m but are down .2% y/o/y. Keep eye on food prices as the CRB food stuff index is just a few points from the highest level since September. We’ve likely bottomed here.
Bottom line, I’ve been saying for a while now that with sticky underlying services inflation (has been running at 3%+ for a few years) combined with a rise in commodity prices was going to lead us to a sharp rise in the inflation stats and we’re finally seeing it. Yes, the energy base effects will wear off at some point but core CPI is now 2%+ for 15 straight months. How much longer is the Fed going to wait? We repeat, the Fed will most likely hike rates in March. Rate hike odds for March are now up to 42% from 30% before Yellen spoke and up from 24% last week. The 2 yr note yield is rising by 2 bps to 1.25-.26%, the highest in 2 months and is just 1 bps from the highest since 2009. The 10 yr yield is back above 2.50% and will now test the upper end of the 2.3-2.60% range.
Digging further into services, here is where prices are rising more than 2% y/o/y: tax return preparation (3.3%), checking account and other bank services (5.3%), financial services (4.4%), apparel services ex laundry and cleaning, 2.4%, laundry and dry cleaning (2.4%), legal services (6.6%), delivery services (2.2%), technical and business school tuition (3%), child care and nursery school (3.2%), elementary and high school tuition (3.5%), college tuition and fees (2.1%), admission to sporting events (2.6%), admission to movies, theaters, concerts (3.4%), club dues for sports and group exercises (2.7%), veterinarian services (2.6%), rental of video or audio discs (4%), cable and satellite TV and radio (5.3%), recreation services (3.4%), ship fare (2.3%), intercity train fare (8.8%), parking fees and tolls (2.5%), motor vehicle insurance (7.5%, thank you all you drivers while texting), motor vehicle repair (2.4%), motor vehicle body work (3%), car & truck rental (3.2%), health insurance (3%), nursing homes and adult day services (3.4%), outpatient hospital services (3.4%), inpatient hospital services (4.6%), dental services (2.1%), physicians services (3.8%), repair of household items (4.9%), moving/storage/freight expense (5.9%), garbage & trash collection (2.1%), water & sewer maintenance (4.2%), and lodging away from home (2%).
Industrial production fell .3% m/o/m in January instead of seeing no change as expected and December was revised down by 2 tenths. Weather was certainly an influence as utility output fell by 5.7% m/o/m but auto production fell by 2.9% and brings the y/o/y gain to barely above zero at .9%. This is likely in response to a right sizing of inventories which have gotten high and has led to large incentives. Mining is finally getting out of its multi year funk with a 2.8% m/o/m rise and up .4% y/o/y. That’s the first y/o/y gain in years. Machinery production also improved as did computer/electronics.
Capacity utilization came in at 75.3%, a still pathetic number at this stage of the economic cycle. It’s near the lowest since November 2010 and is well below the 25 year average of 78.7%. We will hopefully see the immediate expensing of capital investment in any new tax reform but in certain areas of the economy there is still too much capacity. Manufacturing capacity utilization is running at 75.1% vs the 25 year average of 77%. This was above 80% in the late 1990’s and between 77-79% in the mid 2000’s. This number is never market moving and we await what tax reform will come next as this area of the US economy will be highly impacted for better (lower export taxes and immediate expensing of cap ex) or worse (for importers if BAT passes and elimination of interest expense deductability).
The NAHB home builder survey for February fell 2 pts to 65. The estimate was for no change. This index has now given back 4 of the 6 pt post election jump over the past two months but still remains well above the breakeven of 50. Present conditions fell 1 pt to 71. It touched 75 in December vs 69 in October. Future expectations fell 3 pts to 73. It was 78 in December and 71 in October. Disappointingly, Prospective Buyers Traffic fell 5 pts to back below 50 at 46. It was also 46 in October before the election. This squares with the 13 week low in mortgage applications seen today.
The NAHB said “we are seeing the numbers settling back into a normal range…With much of the decline this month resulting from a decrease in buyer traffic, builders continue to struggle to minimize costs while dealing with supply side challenges such as a lack of developed lots and labor shortages.” They don’t mention higher home prices and higher mortgage rates as possible factors. They do though remain optimistic by saying “the overall housing market fundamentals remain strong and we expect to see continued growth this year as some of these concerns are addressed.” Bottom line, with the pace of new home sales still well below its 25 year average, the industry is still not back to normal and the missing piece remains the slower pace of purchases from first time households.
Business inventories grew by .4% m/o/m as expected in December but because sales rose 2%, the inventory to sales ratio fell to 1.35 from 1.38. That’s the lowest since December 2014 and while its well off the post recession low of 1.24, it has come off its January 2016 high of 1.41 which was a 7 yr high. A continued pruning of inventories relative to sales will be a good set up for an improvement in manufacturing if end demand holds up.
After a mediocre holiday season, retail sales in January were better than expected. The core rate taking out auto’s, gasoline and building materials saw sales rise by .4% m/o/m vs the estimate of up .3% and December was revised up by two tenths. The sales gains were led by clothing (inflation based as seen above?), electronics, department stores (finally, but still down 5.6% y/o/y), and sporting goods. Online sales were flat m/o/m, auto sales dropped 1.4% m/o/m and building materials were up by .3%.
Bottom line, the 4% y/o/y core rate of sales is the best since January 2015 which puts it above the five year average of 3.3%. It was as strong as 5%+ in the two previous expansions though. These are nominal figures and should be compared with the inflation stats. Q1 GDP estimates may rise a touch on the slight upside in core sales. As for the influence of the election, who knows. Half the country is psyched, half are miserable.
The February NY manufacturing index jumped to 18.7 from 6.5 in January. That’s well above the estimate of 7.0 and at the best level since September 2014. New orders, backlogs and shipments led the gains. Employment rose to 3.7 pts to +2 which doesn’t sound like much but it’s the first positive print since May 2016. The average workweek also went positive. Prices paid rose 1.7 pts to the highest level since 2012 and prices received was up almost 2 pts to also the most since 2012. The fly in the data was the cool down in 6 month expectations which fell 8 pts and capital spending plans fell by almost 3. Bottom line, this is a good number as Trump optimism continues but at the cost of rising price pressures.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.