While the October CPI and PPI reports have certainly given comfort, deservingly so, that the high levels of inflation have peaked out and a slowdown is ahead, I’m sticking to my belief that we’re not going back to the pre-covid benign levels for a while. Instructive I believe was the Chipotle CEO interview by CNBC’s Sara Eisen yesterday. Brian Niccol said “We anticipate, probably roughly still, 10% inflation in the fourth quarter and we continue to see elevated pricing as it relates to beef, dairy, tortilla’s, oil (mostly sunflower oil). So, the good news is that its plateaued but is still at a fairly elevated level and that’s going to continue to put pressure throughout our supply chain…We continue to see these price pressures which I think is predominantly driven by labor inflation that people have experienced over the last 18-24 months.” To Sara’s question on the labor market, the challenges of retaining workers and whether anything has changed, Brian said “It’s still really tight, and still really tough…continues to be a real difficult environment.”
He also had interesting comments on the consumer, but something we’ve heard from others, “The consumer, from the data we track, is still very much worried about the inflationary environment and the impact on their budget, and obviously influences how often they buy things.” They continue to see strength though from the higher income consumer.”
The tale of two labor markets between what Brian expressed that his company is dealing with, as are many in parts of the service sector, and the tech sector was made clear too yesterday by Challenger, Gray and Christmas who quantified the lost jobs in tech. They said “As layoffs begin to pick up, the bulk of them are occurring in the technology space…Technology companies have announced plans to cut 31,200 jobs in November. This more than doubles the 28,207 cuts the industry has announced from January to October of this year.”
On the day Walmart and Home Depot got everyone excited in retail but before what Target said today, Capital One Financial’s stock was lower by 7.2% yesterday on growing concerns with rising credit delinquencies and a downgrade by BoA. Charge offs and delinquency rates rose and the BoA analyst said that the October stats make clear that credit is “normalizing faster than expected.” Charge offs rose to 2.93% vs 2.23% in September and up from 1.04% y/o/y.
With respect to what Target said that was notable, “In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty. This resulted in a third quarter profit performance well below our expectations.” This definitely equates with the 54.7 UoM consumer confidence print we saw last Friday which is near a record low.
On Home Depot, we saw that while sales were higher, it was all due to inflation, aka higher average ticket prices, while the number of transactions fell by 4.3% y/o/y.
Here are some quotes from the Walmart call yesterday:
“Living with high prices through this year has a accumulative impact on our customers, especially for those that are most budget conscious, and so we’re focused on bringing costs and prices down as quickly as possible by item and category. Regardless of income levels, families are more price conscious now.”
“We observed incremental trade down in categories, including proteins, baking goods, baby and dog food.”
“We’ve been very targeted in reducing certain categories of inventory in our system and our actions included canceling orders and increasing the level of markdowns.”
“Food sales continue to lead with mid-teens growth…Inflation remained high up mid-teens percentage in food categories, reflecting an 80 bps step up compared to levels at the end of Q2. We’ve seen incremental levels of inflation m/o/m be less significant, but it’s not clear if this represents a sustainable trend.”
“Despite a good start to Q4, our guidance assumes that the consumer could slow spending, especially in general merchandise categories given persistent inflationary pressures in food and consumables.”
“As it relates to customers shopping with us more frequently, this share gain with people making more than $100,000 household income is what I was referring to…And during a period of time when people are more sensitive to price, it makes sense that they would increase the amount of their wallet that would be coming to Walmart because of value.”
With the 25 bps drop in the average 30 yr mortgage to 6.90% coincident with the Treasury market rally, purchase applications rose 4.4% w/o/w though still down 46% y/o/y. Refi’s weren’t helped though as most people have under a 5% mortgage and they declined 1.6% w/o/w and by 88% y/o/y.
Reflecting the continued challenges in the Chinese residential real estate market, home price there in October fell for the 14th straight month m/o/m and the drop this past month was the biggest of them all, down by .37%. Of the 70 cities surveyed, prices fell in 58 cities m/o/m for new homes and in 62 for existing homes. As this is the well known new reality, there wasn’t a market response of note. Iron ore prices are up for the 11th day in the past 12 on hopes that the recent steps Chinese officials have taken to facilitate the finishing of projects will work, that along with hopes for a full reopening in the spring. Copper though is down for a 3rd day after last week’s jump.
The October CPI in the UK was up 11.1% y/o/y, 4 tenths more than expected as electricity/gas prices continue to reset higher (offset by subsidies though for the consumer and many businesses). The ONS said inflation would have been 13.8% without the energy price guarantee. The core rate was up by 6.5%, one tenth above the forecast. The retail price index, which is used to mark the price of linkers, was up by 14.2% y/o/y. Wholesale input prices jumped more than anticipated while output charges were about as expected. On hopes that we’re seeing peak inflation too in the UK, the 10 yr inflation breakeven is little changed at 4.00%. Gilt yields are down a touch and the pound is rallying again to the best level vs the dollar since mid August. We still like the pound and UK stocks.
UK 10 yr Inflation Breakeven