Weekly Update 08/11/2023: Subdued CPI Data Helps Markets
- Productivity boost
- Disney raised prices
- Fed likely on hold
Inflation Data
The consumer price index (CPI) was released today by the Bureau of Labor Statistics (BLS). It showed the smallest back-to-back increase in the past two years in the core measure which excludes the more volatile food and energy categories. Core CPI rose 4.7% year-over-year which matched the median estimate of a survey of economists by Bloomberg. That was below the 6.6% pace seen in September of last year. The headline year-over-year pace was a 3.2% increase, slightly below the 3.3% median. Used-car prices fell, and airfares posted the biggest back-to-back declines since 2020. Moving in the other direction, grocery prices rose the most since early this year. Service prices overall rose 0.2% from a month earlier and 4.1% higher compared to last year. Shelter costs, which comprise the biggest service component and about a third of the overall index, rose 0.4% for a second month. Slowing housing costs have been a key ingredient in the sustained downward trend in core inflation. Clearly, the highest interest rates in 22 years are playing a part in bringing down the inflation rate closer to the Federal Reserve’s goal of 2%.
The producer price index (PPI) will be released tomorrow, and the expectation is for the headline number to be higher by 0.2% month-over-month. On a yearly basis, that translates into a 0.7% increase. Excluding food and energy, the latest twelve months are anticipated to have seen wholesale prices rise 2.3%. These numbers are much tamer than what we saw last year and are evidence that disinflation is in the chain of goods in addition to final goods sold to consumers. There will be one more CPI and PPI report released before the Fed meets on September 20.
Employment and Productivity
The Labor Department reported that initial unemployment claims for the week ending August 5 ticked up by 21,000 to 248,000. The median estimate in a Bloomberg survey of economists called for 230,000 applications. The four-week average of claims which smooths out the week-to-week volatility rose to 231,000. In a separate report, the BLS reported productivity, or nonfarm business employee output per hour, logged its biggest increase in the second quarter in nearly three years. The 3.7% figure reported was much higher than the 2.2% rate expected by economists.
These figures are related and telling. As companies either reducing hiring or trim payrolls, the remaining staff has to make up the difference in order to maintain the same level of service/output. That leads to a boost in productivity as those who remain have to do more with less. This is a further sign that the labor market has definitely begun to downshift. Higher productivity is an offset to inflationary forces which is why firms often adopt new technologies or invest in software to improve efficiency. A reduction in the labor force has the same effect and lessens the impact of paying workers higher wages. The manufacturing sector showed the first drop in hours worked since 2020. This data supports the quarterly employment cost index released last month which covers a broad range of wages and benefits. It rose at the slowest pace since 2021.
Market Reaction
Bond yields fell immediately after the CPI data was released. Shorter-term maturities fell further than longer-dated instruments. This means that the inverted yield curve, which is normally upward sloping, is slowly but surely returning to “normal.” Thus, the Fed has got to be encouraged and, if these trends continue, the chance of a rate hike next month at the Federal Open Market Committee meeting will approach zero. That does not mean the job is done. The so-called supercore price gauge, which measures core non-housing services, remains stubbornly high because these categories are the stickiest. Pet services, wedding photographers, college tuition, hospital care, motor vehicle maintenance. These categories simply don’t go “on sale.” In September of last year, according to Bloomberg calculations, this gauge was rising at a 6.5% pace. The current 4.1% trend is an improvement but still more than double the 2% target. Meanwhile, non-core categories are not simply going to stand still because they are influenced by supply and demand just like everything else. Commodity prices are increasing again and eventually the housing market will bottom and start to rise again. Therefore, the trend towards the goal is unlikely to be smooth and uneventful. While the equity markets in particular have priced in the end of the Fed rate hike cycle and potential future cuts as well, there are likely to be many hiccups. We see higher-for-longer as a major theme concerning rates heading into 2024. As always, keep reading these reports to get our latest thoughts and insights.
Company Events
The earnings reporting season carries on with nearly half a dozen SGK Core names reporting. So far, in the S&P 500 80% of companies have reported an upside surprise compared to Wall Street consensus. This is up from the 78% rate during the first quarter of the year. Only 15% have reported a downside surprise compared to 25% in the fourth quarter of last year. Additionally, 255 firms have communicated positive revisions for 12-month forward earnings per share and 323 have mentioned positive revisions to 12-month forward sales. The current 0.35 positive net revision momentum in earnings per share is a huge improvement from the -0.30 rate from late June and -0.51 in late May. Based on the 456 firms that have reported so far, it appears that the second quarter of 2023 will mark the overall low mark for earnings on a year-over-year basis. The 6.2% decline is better than the 8.1% decline expected back on July 1. This is the same trend we saw in the first quarter where “better than feared” results helped boost the final report versus expectations. SGK Clients are provided a summary of earnings reports for each of our core equity holdings.
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