I actually think today’s FOMC statement and Yellen press conference will end up being a non event. Assuming they still want to stick to 3 hikes this year (their current definition of gradual), the next press conference meeting is not until June, and we still await details about what the Trump tax reform plan will look like, they really don’t need to commit to anything right now with talk leaning in one direction or another. As for the shrinking of their balance sheet which I hope Yellen gets asked about again, she sort of answered that question last month and said it will happen after further hikes but we don’t know how many more. Rate hike odds for the June meeting are at 64% assuming the mid point of the new range to be established today of .75-1%. I think there is a level of delusion on the part of many who think the process of exiting the monetary extremism seen over the past 10 years will somehow go smoothly the more gradual it is. Whether quick or gradual, I just don’t believe it because of the level of debt created, the market valuations built and the level of economic growth pulled forward during this period.
The February CPI index rose .1% headline and .2% core vs the estimates of flat and up .2% respectively. The y/o/y gains for both were 2.7% and 2.2%. That 2.7% print is the most in 5 years with energy prices up 15.2% y/o/y. At the core level, rents continue to drive services inflation as Rent of Primary Residence continued its steady .3% monthly gains and is up 3.9% y/o/y. The faux measure of rents titled Owners’ Equivalent Rent was up by .3% m/o/m and 3.5% y/o/y. While NY and San Fran have seen rent moderation, there are plenty of other markets that rent growth is persistent in the mid single digits. New supply though in many markets should start to tame that this year. Medical care rose .1% m/o/m and 3.5% y/o/y and is the other main factor driving the 3.1% y/o/y rise in services ex energy inflation. Goods prices though remain tame as they were flat m/o/m and fell .5% y/o/y but that’s overwhelmed by the 60% weighting of services ex energy. Of note, used car prices fell .6% m/o/m and 4.3% y/o/y. That has huge potential negative implications for the new car market if it persists which it likely will with the large amount of auto’s coming off lease this year and next. Apparel prices were up by .6% m/o/m but only up .4% vs last year. Food prices were flat y/o/y but up .2% vs January.
Bottom line, at the core level the same differential persists with services inflation overtaking goods disinflation and why core inflation is running 2%+ for 16 straight months now. I’d call that a trend and remember the days when the fed funds rate used to be 100-200 bps above the rate of inflation.
Since the Fed lowered rates to zero back in December 2008, both the headline and the core CPI indices are up about 16%. This compares with the pace of hourly earnings rising by about 19% so REAL wages are barely positive but at least positive. We can call that running to stand still. See chart overlaying the core CPI index with average hourly earnings. Where cash has really bled relative to inflation is the $11.4 Trillion of money sitting in savings and checking accounts and money market funds. Before today’s rate hike which may actually move the needle on consumer savings rates, a one year CD from Bank of America yielded .05%.
Core retail sales in February which takes out auto’s, gasoline and building materials rose .1% m/o/m vs the estimate of up .2% but January was revised up by four tenths so it’s coming off a higher than forecasted base. The y/o/y increase for this important component of GDP is 4% nominal which compares with the CPI print above (not apples to apples I know). The average since 2010 is 3.7% for perspective. Auto sales fell for a 2nd month and are up just 1.7% y/o/y pointing to the peak auto’s theme. Building materials were solid likely due to the warm weather as sales grew 1.8% m/o/m and 3.7% y/o/y. As seen with reported lower restaurant traffic from many companies, sales in the ‘eating, drinking’ category were up just .6% y/o/y. Online retailing remains solid with an 8.2% y/o/y rise. Department stores remain a melting ice cube with a nearly 9% y/o/y sales drop. Versus last year, sales also fell sharply for sporting goods and electronics while rising for furniture and health/personal care products.
Bottom line, Q1 GDP estimates should get a modest lift off the core number because of the January revision higher but overall retail sales remain just ok. Nothing great and not reflective yet of the big increase in the consumer confidence data.
The March NY manufacturing index, the 1st March industrial number out, was 16.4 vs 18.7 in February but that was a hair above the estimate of 15. This number printed -5.5 in the month before the election. While the headline number moderated, we saw an almost 8 pt rise in new orders, a 6 pt jump in backlogs, a nearly 7 pt rise in employment and an 11 pt spike in the average workweek. Inventories though went negative and the 6 month overall outlook fell 4.3 pts to a 4 month low. Capital spending plans rose 1.5 pts but only after falling by 2.8 pts last month. Prices paid and received both fell from February.
Bottom line, the NY Fed referred to business activity in March as growing “at a solid clip.” Optimism with changes in regulations and taxes continues to lift enthusiasm but it will most likely be Q2 that we start to see the benefits because Q1 growth will still have a one handle on it. Also, these sentiment numbers are only measuring the direction of business change, not the degree.
Stock market bullishness cooled for a 2nd straight week according to II. Bulls fell to 53.4 from 57.7 last week and vs the 30 yr high seen two weeks ago at 63.1. II repeated that “the contraction in bulls is a sign the peak for the current rally may have occurred.” Again, almost all of the bulls went to the Correction side which rose by 4.1 pts to 29.1. Bears have barely budged at 17.5 vs 17.3 last week and vs 16.5 in the week prior. Bears have certainly been steamrolled so its not a surprise that they remain hidden but if history is any guide, a rate hike cycle eventually leads to a bear market. The timing of ‘eventually’ of course is the $64k question.
The 10 bps move higher in the average 30 yr mortgage rate to 4.46%, the highest since April 2014 did not impact mortgage applications as maybe people rushed to lock in. Mortgage applications to buy a home rose 2.3% w/o/w and are higher by 6.1% y/o/y. Affordability still remains tight though with persistent 5-6% home price increases and this rise in rates. Refi apps were up by 4.1% w/o/w but remain down by 27% y/o/y. The Fed has given everyone and their mother an opportunity to refi at historically low rates over the last 10 years so there should be no excuses for those that haven’t yet taken advantage.
The pound is getting a lift off a two month low after slightly more jobs were created in the UK for the 3 months ended January than expected and February saw another decline in jobless claims. The job gain totaled 92k, 5k above the estimate and jobless claims were lower for a 3rd month by 11.3k. The unemployment rate fell one tenth to 4.7% which matches the lowest since 1975. Yes, 1975 at the same time the BoE has interest rates at just .25% and is deep into QE again. What is wrong with this picture? Mark Carney and the BoE will get a chance to explain at their meeting tomorrow. They’ll hang their hat on mediocre wage growth as it rose just 2.3% y/o/y ex bonus’, down from 2.6% in the prior month and below the estimate of 2.5% but with inflation flaring due to the weak pound, real wages are getting squeezed and the BoE should move to tame this inflation. Consumer spending should continue to soften due to this drop in purchasing power so BoE policy is now actually slowing economic growth.