Weekly Update 12/13/2024: US November CPI Comes in as Expected
- Adobe releases earnings beating profit and revenue expectations
- Boeing restarts 737 Max production
- Stryker raises dividend 5%
- Amgen raises dividend 6%
- Dow partners with Macquarie Asset Management to launch Diamond Infrastructure Solutions
- Omnicom announces plans to acquire Interpublic to create world’s largest ad agency
Domestic Economic News
US consumer prices rose at a firm pace in November that was in line with expectations, solidifying expectations for the Federal Reserve to cut interest rates next week. The so-called core consumer price index — which excludes food and energy costs — increased 0.3% for a fourth straight month, Bureau of Labor Statistics figures showed Wednesday. From a year ago, it rose 3.3%. Economists see the core gauge as a better indicator of the underlying inflation trend than the overall CPI that includes often-volatile food and energy costs. The headline measure rose 0.3% from the prior month and 2.7% from a year before. The S&P 500 opened higher and Treasury yields declined after the CPI figures. Shelter costs, one of the most persistent sources of inflation in recent years, cooled from the previous month, but the category still accounted for nearly 40% of the overall advance. “Especially given the slowing in shelter, this should be very comfortable for the Fed to lower policy rates 25 basis points in December and continue cutting in 2025,” Citigroup Inc. economists Veronica Clark and Andrew Hollenhorst said in a note. While price pressures have subsided from a peak seen during the pandemic recovery, progress has leveled off more recently, prompting several central bankers to call for a more gradual pace of cuts going forward.
The CPI report showed goods costs excluding food and energy climbed 0.3%, the most since May 2023, fueled by household furnishings and apparel. That category had been a large driver of disinflation over the past year and a half. Prices for hotel stays increased by the most in two years, while car prices picked up as well, possibly reflecting a temporary boost in demand after two hurricanes. Grocery prices jumped 0.5%, the biggest advance since the start of last year. Shelter prices, the largest category within services, advanced 0.3% in November after a 0.4% gain in the prior month. Owners’ equivalent rent as well as rent of primary residence — subsets of shelter — both edged up 0.2%, the smallest gains since 2021. Excluding housing and energy, service prices rose 0.3% for a second month, according to Bloomberg calculations. While central bankers have stressed the importance of looking at such a metric when assessing the overall inflation trajectory, they compute it based on a separate index. That measure — known as the personal consumption expenditures price index — doesn’t put as much weight on shelter as the CPI, which is one reason why it’s trending closer to the Fed’s 2% target. Here’s what Bloomberg Economics had to say after the report: “November’s CPI report won’t do much to assuage growing anxiety within the FOMC that inflation’s progress back toward the 2% target has stalled somewhat. But the worried parties are a minority, and the majority likely see the past few months of elevated readings as a road bump.” — Anna Wong and Stuart Paul
US wholesale inflation unexpectedly accelerated in November on a surge in egg prices, while other categories suggested a muted increase in the Federal Reserve’s preferred price gauge. The producer price index for final demand rose 0.4% from a month earlier, the most since June, according to a Bureau of Labor Statistics report released Thursday. The median forecast in a Bloomberg survey of economists called for a 0.2% gain. Compared with a year ago, the PPI increased 3% — the largest advance since early 2023. A measure excluding food and energy, meanwhile, rose 0.2% on the month and 3.4% from a year earlier. The wholesale inflation data follows the more closely watched consumer price index, which showed Wednesday that underlying inflation remained firm for a fourth month. The string of hotter numbers follows a rapid moderation earlier in 2024, and has added to uncertainty over the trajectory for prices and interest rates as the incoming Trump administration threatens higher tariffs on imported goods. Economists pay close attention to the PPI report because several of its components feed into the Fed’s preferred inflation measure — the personal consumption expenditures price index. Those were favorable across the board as health care categories like hospitals, physician services, nursing home services and home health care were little changed. Portfolio management services — a category that captures fees paid to investment advisers and generally tracks movements in the stock market — fell along with airfares. While the PCE data won’t be published by the time of the Fed’s policy meeting next week, central bankers will have a good idea of what it will show based on the CPI and PPI reports. They are widely expected to cut their benchmark rate by a quarter percentage point, though forecasters generally see a slower pace of reductions next year after closing out 2024 with rate cuts at three straight meetings. Goods prices jumped 0.7%, the most since February. The BLS said more than 80% of the advance could be traced to food. Egg prices surged 55% from a month earlier. Overall services costs in the PPI report edged up 0.2%, the least in four months. Goods prices, excluding food and energy, rose by a similar amount.
Applications for US unemployment benefits rose to a two-month high last week, at a time around the end-of- year holidays when data is volatile. Initial claims increased by 17,000 to 242,000 in the week ended Dec. 7. The median forecast in a Bloomberg survey of economists called for 220,000 applications. A metric that helps smooth out volatility, the four-week moving average, rose as well. Continuing claims, a proxy for the number of people receiving benefits, increased to 1.89 million in the previous week — which included the Thanksgiving holiday — according to Labor Department data released Thursday. Weekly data tends to be choppy around the holiday season. But the November jobs report released last week showed an increase in the jobless rate, to 4.2%, and in the number of workers who are unemployed for three months or more. On an unadjusted level, initial claims also rose, to the highest since January. California saw the largest increase by far, followed by Texas and New York. Only four states saw small declines, suggesting the jump in new applications was widespread across the country.
Interest Rate Insight and the Fed
This is an interesting excerpt from a piece we read on Bloomberg this week we thought we would share. It effectively sums up some of the reasons for the volatility we have witnessed in the bond market here in 2024. -- On Wall Street’s bond desks, everyone, it seems, has an opinion on the neutral rate. It’s 3.3%. No, it’s 4.5%. Actually, it’s 2.4%. And on and on, all day long, five days a week. The truth is, as the bond veteran Greg Peters puts it, “no one knows what neutral is.” Of course, they know what it is. That’s fairly straightforward: the level of benchmark interest rates that neither boosts nor slows the US economy. They just can’t quite figure out, though, how to calculate it with any precision in an economy that’s still adjusting to all the shocks it got on both the supply and demand side during the pandemic. Which is why those estimates on Wall Street — and inside the halls of the Federal Reserve itself — are all over the place. And it means, in turn, that investors have wildly different takes on whether the Fed’s three-month-old easing cycle — designed to bring the benchmark rate back down to neutral as inflation cools — is just beginning or getting close to the end. All of this has made bond-yield swings violent of late, especially in the wake of data releases suggesting a surprisingly resilient or weak economy. “Absolutely schizophrenic,” says Peters, who helps manage more than $800 billion as co-CIO at PGIM Fixed Income. “It’s really, really volatile.” On days, for instance, when the monthly jobs report is released, the move, up or down, in two-year Treasury yields is now six times greater on average than it was prior to 2022. In other words, the stakes are raised in the bond market. Stay tuned!
Impactful International News
The European Central Bank lowered interest rates for a third consecutive meeting, signaling more reductions next year as inflation nears 2% and the economy struggles. The deposit rate was cut by a quarter-point to 3% — as predicted by all but one analyst in a Bloomberg survey. That brings total easing since June to 100 basis points. Indicating its shifting stance, the ECB’s statement dropped wording saying policy will remain “sufficiently restrictive” for as long as necessary. “The Governing Council is determined to ensure that inflation stabilizes sustainably at its 2% medium-term target,” the ECB said Thursday. “It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary-policy stance.” The euro fell 0.2% to a session low $1.0470, with investors focusing on the omitted reference to keeping rates “restrictive.” Traders are betting on about 125 basis points more of easing next year, broadly in line with pricing before the announcement. Despite no firm commitment, back-to-back decreases in borrowing costs are widely expected to continue through mid-2025 as Europe’s already sluggish economy endures political upheaval in Germany and France, plus a potential jolt to global trade from Donald Trump’s return to the US presidency. The fear is that sub-par growth drags inflation — currently 2.3% — below target, recalling the pre-Covid era when the focus was more on perking up prices than restraining them. New quarterly projections from the ECB, published Thursday, reflect the fragile backdrop, revising down the outlook for economic expansion and inflation next year. President Christine Lagarde will field questions on the ECB’s decision at a press conference at 2:45 p.m. in Frankfurt.
China signaled more public borrowing and spending in 2025 with a shift of policy focus to consumption, stepping up stimulus to recharge growth ahead of looming US tariffs. Top officials led by President Xi Jinping vowed to raise the fiscal deficit target next year in an announcement made following a two-day huddle of the Central Economic Work Conference in Beijing, according to China Central Television. Policymakers will also deliver cuts to interest rates and the reserve requirement ratio for banks “at an appropriate time,” it said. China will make “lifting consumption vigorously” the top priority in 2025, along with other goals meant to stimulate overall domestic demand, the state broadcaster reported after the meeting that sets the economic agenda for the coming year. While the tone of the meeting is very supportive of growth, it lacks specific steps to raise consumption, said Larry Hu, head of China economics at Macquarie Group Ltd. “I don’t think the government will hand out money to consumers directly,” he added. “It’s more likely the government will be spending more. China will leverage up central government and increase public spending, so that overall demand can be lifted. That’s the big strategy.” The language used at the meeting was unusually direct, punctuated by references to specific policy tools like the deficit ratio. It confirms a commitment made at the December huddle of the decision-making Politburo earlier this week to pump more stimulus into the economy, by shifting the monetary policy stance for the first time in 14 years to a “moderately loose” strategy. Officials also made a rare — albeit indirect — acknowledgment of the prolonged deflation plaguing China, vowing to “ensure the overall stability of employment and prices.” Prices across the economy have been falling for six straight quarters, the longest streak this century. “Top leaders are now prioritizing boosting consumption and investment in 2025, shifting focus from the industrial upgrading and innovation that dominated the communique for 2024,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. That “pivot underscores the pressing need to enhance domestic demand to better navigate external uncertainties.”
Mexico’s headline inflation slowed slightly more than expected in November, boosting the odds of a fourth straight interest rate cut at the central bank’s meeting next week. Official data released Monday showed consumer prices rose 4.55% from a year prior, under both the 4.6% median estimate of economists surveyed by Bloomberg and the 4.76% reading in October. Monthly inflation stood at 0.44%. Core inflation, which is closely watched by the central bank and excludes volatile items such as food and fuel, eased to 3.58% compared to the year prior, just under the 3.6% median estimate. The central bank, which holds its next rate-decision meeting Dec. 19, targets cost-of-living increases of 3%, plus or minus 1 percentage point. While sticky headline inflation has vexed Banxico, as the central bank is known, policymakers have paid more attention to the uninterrupted downward trend in core measures. Board members led by bank Governor Victoria Rodriguez have also expressed concern about the recent slowdown in the Mexican economy.
Company Events
SGK writes additional weekly commentary for clients of the firm detailing recent events and earnings of core equity holdings.
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Steigerwald, Gordon & Koch, Inc. [“SGK”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from SGK. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. SGK is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the SGK’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.sgkwealthadvisors.com. Please Note: SGK does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to SGK’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a SGK client, please contact SGK, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.