My readers know I’ve always preferred the CPI over the PCE, in contrast to the Fed, in giving a more accurate measure of inflation because of the higher allocation to housing that matches reality and healthcare costs that are not price fixed by Medicare and Medicaid reimbursement rates. Well, for the next 12 months that is going in reverse because of what the BLS announced a few weeks ago with CPI. Beginning with the January print seen in February, the “BLS plans to update the spending weights in the calculation of the CPI every year instead of every 2 years. Spending weights indicate what share of total expenditures each item represents.” They claim that “This change will improve the relevance of CPI spending weights by using the most recent consumer spending information. By improving the relevance of spending weights, BLS can improve the accuracy of the CPI.”
Maybe so but because the comparisons are very high using just one year, the CPI figures over the next 12 months will come in lower than otherwise. In the press release the BLS literally said “we hope you will love” the new “improvement” but making this vital economic stat no longer apples to apples for the next 12 months, I don’t really love it but the Fed will because it will make this inflation gauge lower than it would have been. //www.bls.gov/blog/2023/weight-wait-up-increasing-the-relevance-of-consumer-price-index-weights.htm
So, the PCE, which the Fed in fact prefers anyway, will be the apples to apples inflation gauge starting with next month’s print, not today’s. Just an fyi.
A sector not talked about a lot but crucial because its products end up in just about everything is chemicals and here are some earnings related quotes of note from Dow Chemical and Eastman Chemical yesterday.
“We expect the market dynamics we experienced in late 2022 to continue into early 2023. While the pace of inflation has moderated, overall cost levels remain elevated, which has continued to trigger tighter monetary policy in those parts of the world and is weighing on both business investment and consumer sentiment…In the US, we see signs of moderating demand and the continuation of year end destocking trends early in the quarter. Building and construction end markets have been particularly impacted by inflation and rising interest rates with housing starts declining by more than 20% y/o/y in December. Manufacturing PMI contracted for the 3rd consecutive month of 48, while light vehicle sales in the US were down for the full year by 8 percentage points. Easing inflation is leading to improving confidence, albeit from depressed levels in late 2022, while consumer spending remains resilient.
In Europe, we expect demand to remain constrained despite recent improvements in regional energy prices…In China, while we’re very encouraged by recent shifts in Covid policy to ease restrictions and open up orders, we expect these actions to take some time to improve economic activity. This is an area we’re closely monitoring as it has the potential to provide a source of significant demand recovery following the Lunar New Year.
And in Latin America, overall economic growth is expected to slow driven by political tensions, high inflation and restrictive monetary policy.”
“We ended the year with a challenging fourth quarter primarily due to lower demand in key end markets and geographies, customer inventory destocking beyond normal seasonality, and limited benefit from lower raw material and energy costs in this reduced demand environment.
We enter 2023 during a challenging period for the global economy characterized by significant inventory destocking, soft end market demand, and uncertainty about the full year. As we developed our outlook, we included volume/mix expectations that reflect a manufacturing recession scenario that began in the fourth quarter. We expect aggressive inventory destocking to predominantly conclude in the first quarter with modest volume recovery in the back half of the year.”
With regards to consumer spending, here are some quotes from Mastercard and Visa, though each do not take credit risk. And it is hard to differentiate out what is the secular trend of more credit/debit card usage instead of cash and what is genuine, organic consumer spending patterns.
“From an overall consumer spending standpoint, we expect the consumer to be relatively resilient. Spending patterns have largely normalized, relative to the effects of the pandemic with the notable exception of China. In terms of switched volumes, domestic volumes in the fourth quarter remains steady relative to 2019 levels with some slight moderation in the US related to lower gas prices recently.
“Cross border travel continued to recover in quarter four, with inbound travel either flat or up in every region sequentially relative to 2019 levels. As of the first three weeks of January, inbound cross border travel to all regions is now above 2019 levels.”
“Travel outbound from the US to all geographies continue to be strong…Travel inbound to the US approached 2019 levels.”
In their guidance “we had assumed no recession. As you can see, business trends have been remarkably stable…At this point, we’re not changing any expectations for the second half.”
As for AXP which does take credit risk and whose stock is up sharply pre-market, they said this in their release on provisioning:
“Consolidated provisions for credit losses were $1 billion, compared with $53 million a year ago. The increase reflected a reserve build of $492 million, compared with a net reserve release of $168 million a year ago, as well as higher net write-offs in the current quarter. Credit metrics remain strong in the current quarter and below pre-pandemic levels.”
The heat on the Bank of Japan is only intensifying after Tokyo said January CPI rose 4.4% y/o/y headline, 4 tenths more than expected and up from 3.9% last month. Inflation ex food and energy was higher by 3%, one tenth above the forecast and up from 2.7% in December. While the 10 yr is pinned at .50%, the 9 yr yield jumped almost 7 bps to .54% and the 40 yr yield was higher by 5 bps to 1.84%. The 10 yr inflation breakeven jumped 8.4 bps to .74%. The yen is higher as well.
The Japanese bond selling drove higher yields across Asia, Europe and also in the US where the US 10 yr yield of 3.55% is at a 2 1/2 week high. I cannot emphasize enough again the importance of how this plays out this year in the Japanese bond market and BoJ policy as it will ripple through other markets I believe.
Core/Core Tokyo CPI y/o/y
French consumer confidence continues to plumb the lows, falling 1 pt m/o/m to 80. The multi year low was 79 last July. The higher cost of living makes it really tough for many.