Again, the question today is to what extent does the continued increase in services inflation ex energy offset the disinflation being seen in core goods prices. Rent growth is slowing but will yet to be captured in CPI and CPI never fully reflected its increases anyway. We’ll also see health insurance prices, for the quirks mentioned last month, fall.
As for the Fed’s reaction function I believe it’s important to again look at a chart of CPI in the late 1960’s into the 1970’s because it’s instructive on what Jay Powell wants to avoid and that’s a premature let down in its fight against inflation. In other words, he wants it knocked out, to use the boxing reference rather than just weakened. He wants the success by 1972 not to be followed by the inflation that spiked again in 1973. That means that even when the fed funds rate stops going up, it’s going to stay up. And that QT will continue on. It’s this realization that explains the deep yield curve inversion. Now that said, when the unemployment rate has a 5 handle it will likely result in knees buckling I believe.
CPI y/o/y 1967-1980
The November NY Fed’s consumer inflation expectations survey seen yesterday where the one yr inflation estimate fell 7 tenths to 5.2% comes after the 5 tenths increase in October. The 3 yr expected rate of 3% was down one tenth with both decreases “broad based across education and income groups.” Expectations for lower home prices, gasoline and food drove the response. There was little change in rent expectations, a slight increase for education and no change for medical care, with all three a key part of services inflation.
There was improvement in expectations for employment and for income expectations but the latter “was driven by respondents with no more than a high school education” and gets to where the wage gains are mostly being seen, for those jobs were people need to physically be on site.
Spending growth expectations fell one tenth and of note, “Perceptions of credit access compared to a year ago deteriorated in November, with the share of households reporting it is harder to obtain credit than one year ago increasing to a new series high.”
The NFIB November small business optimism index rose .6 pts m/o/m to 91.9. For perspective, the 49 yr average is 98. The internals were mixed though. The labor market responses all weakened. Plans to Hire fell 2 pts to 18%, the lowest since January 2021. Job openings dropped by 2 pts to the weakest since March 2021 but still is high and “is particularly acute in the transportation, wholesale and construction sectors.” Again, people needed on site. The compensation figures, both current and planned, each fell 4 pts m/o/m. Capital spending plans rose 1 pt after falling by 1 pt in October but those that Plan to Increase Inventory went negative. Those that Expect a Better Economy, Expect Higher Sales and think it’s a Good Time to Expand all rose. Higher Selling Prices were up 1 pt after declining 1 pt last month. Earnings trends after the recent weakness did improve by 8 pts to -22%. Easing of Credit Conditions rose 2 pts, also after recent weakness.
The NFIB said “Going into the holiday season, small business owners are seeing a slight ease in inflation pressures, but prices remain high. The small business economy is recovering as owners manage an ongoing labor shortage, supply chain disruptions, and historic inflation.” Inflation remains the biggest small business challenge, “with 32% of owners reporting it as their single most important problem in operating their business, five points lower than July’s highest reading since the fourth quarter of 1979.”
My bottom line, with this survey still about 6 pts below its long term average, we are essentially straddling the line between expansion and contraction. And, inflation pressure pain points are calming but still a big concern.
NFIB
Plans to Hire
More steps to ease the Covid restrictions was seen in Hong Kong as international arrivals can head right out to bars and restaurants upon arrival and don’t have to scan a QR code when entering. The Hang Seng rallied by .7% and the Chinese H shares were higher by .4%. The full China reopening will be a major story of 2023 as the Chinese consumer is unleashed again on the world thankfully. In particular, while Macau casino stocks have had a nice rally, they are nowhere close to where they were pre covid and we remain positive on them.
Sands China
Investor confidence in the German economy improved again in December with the ZEW index rising to -23.3 from -36.7 and that was about 3 pts better than estimated. The Current Situation rose too but not as much as forecasted. The ZEW said succinctly, “The economic outlook for Germany has thus become considerably more optimistic in the last two months.” We can site lower energy prices, hopes for getting thru the winter without incident and maybe the China reopening steps as China is their biggest customer. The DAX is rallying by .8% but the euro is little changed as are bund yields. Expect a 50 bps hike Thursday from the ECB.
German ZEW
While more jobs were created than expected in the UK in the 3 months ended October, the November jobless claims figure showed a jump in 30.5k, the most since February 2021 and points to upcoming jobs weakness. Wage growth did accelerate which is certainly a positive but at 6.1%, it still is about 400 bps below the rate of inflation. UK stocks are rallying too with the pound up a touch with gilt yields higher. Expect a 50 bps rate increase from the BoE on Thursday.
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.