Tag: price indices

The Fed’s got inflation dead wrong. That’s why a 2024 recession is likely, says Duke professor.

Campbell Harvey, a Duke University finance professor best known for developing the yield-curve recession indicator, says the Federal Reserve’s read on inflation is out of whack. And, as a result, the likelihood that the U.S. slips into a recession is increasing.

The big question now is the severity of the economic downturn to come, if the central bank continues unabated on its high-interest-rate path.

On Wednesday, the Fed, which began raising rates from near zero last year, held them at a range of 5.25% to 5.5%, a 22-year high, in its effort to get inflation under control.

“The [inflation gauge] that the Fed uses makes no sense whatsoever, and it’s totally disconnected from market conditions,” Harvey told MarketWatch in a phone interview.

The Fed’s measures of inflation are heavily weighted toward shelter costs, which reflect the rising price of rental and owner-occupied housing. For example, shelter inflation has been running at 7.3% over the past 12 months, and also as of the most recent consumer-price index, for August. Shelter represents around 40% of the core CPI reading.

Harvey says that’s a problem because shelter’s retreat loosely follows the broader trend lower for headline inflation but at a lag, and the Fed wouldn’t be properly accounting for that lag if it decided to keep its target interest rates restrictively high.

Separately, MarketWatch’s economics reporter, Jeff Bartash, notes that CPI also fails to capture the millions of Americans who locked in low mortgage rates before or during the pandemic and who are now paying less for housing than they had previously.

“The Fed is … using inflation, in what I call a false narrative,” Harvey said.

Opinion: Fed’s ‘golden handcuffs’: Homeowners locked into low mortgage rates don’t want to sell

Also see: U.S. mortgage rates ‘linger’ over 7%, Freddie Mac says, slowing the housing market further

Harvey said that if shelter inflation were normalized at around 1% or 1.5%, overall core inflation would measure closer to 1.5% or 2%. In other words, at — or substantially below — the Fed’s 2% target.

Consumer prices ex-shelter were up 1.9% on a year-over-year basis in August, up from 1% in July, according to the Labor Department.

The Canadian-born Duke professor says that the Fed risks driving the U.S. economy into recession because it has achieved its goal of taming inflation, which peaked at around 9% in 2022, and isn’t making it clear that its rate-hike cycle is complete.

“Now, the higher those rates go, the worse [the recession] is,” he said.

Harvey pioneered the idea that an inverted yield curve is a recession indicator, with the curve’s inversion depicting the yield on three-month Treasurys rising above the rate on the 10-year Treasury note
BX:TMUBMUSD10Y.
Longer-term Treasurys typically have higher yields than shorter-term U.S. government debt, and the inversion of that relationship historically has predicted economic contractions.

Harvey says that that his yield-curve-inversion model has an unblemished track record — 8-out-of-8 — for predicting recessions over the past 70 years. A recent inversion of U.S. yield curves implies that a U.S. recession is still a possibility.

Opinion: The U.S. could be in a recession and we just don’t know it yet

Also see: Are markets getting more worried about a recession? Invesco says a Fed pivot is coming.

On Thursday, the Dow Jones Industrial Average
DJIA
fell 1.1%, while the S&P 500
SPX
tumbled1.6% and the Nasdaq Composite
COMP
slumped 1.8%, marking one of the worst days for stocks in months.

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September 22, 2023
U.K. inflation surprisingly slips, making Bank of England decision a close call

Inflation in the U.K. surprisingly eased in August against expectations it would accelerate, a welcome showing for central bankers just a day ahead of an interest-rate decision.

The U.K. consumer price index fell a touch to 6.7% year-over-year in August from 6.8%, the Office for National Statistics said Wednesday.

CPI was expected by economists…

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September 19, 2023
Why higher oil prices aren’t likely to make it into Fed’s inflation or rate outlook

With the Federal Reserve preparing to release updated inflation and interest-rate forecasts on Wednesday, the proverbial elephant in the room will probably be missing from the equation: The full impact of rising oil prices, according to investors, traders and strategists.

Oil prices touched fresh 2023 highs on Tuesday and settled above $90 a barrel, a byproduct of this month’s decision by Russia and Saudi Arabia to extend production cuts into year-end. Just a day ago, Mike Wirth, chief executive of Chevron
CVX,
-0.01%,
put the prospect of oil crossing $100 a barrel on the map and the price at the gas pump went above $6 a gallon in Southern California — reigniting fears about a revival of inflation.

It’s too soon to say whether the run-up in energy prices will spill over into the narrower core inflation gauges that the Fed cares most about, TD Securities strategist Gennadiy Goldberg said via phone. As a result, policy makers may look past the impact of higher energy prices on their longer-term inflation and rate outlook Wednesday, he said. Fed officials are hesitant to place too much weight on energy or food as components of inflation, anyway, because of their volatile natures.

In One Chart: Why crude-oil rally can’t be ignored by investors — or the Fed

However, some traders are worried that such an omission could be a mistake considering all the other price pressures playing out, such as strikes against the three major U.S. automakers.

UAW strike: Union sets Friday deadline for further possible strikes

“Is it a mistake to not factor in oil? I personally think it is, but I’m probably in the minority on that,” said Gang Hu, an inflation trader at New York-based hedge fund WinShore Capital. “The combination of oil and strikes by the United Auto Workers presents a structurally unstable inflation picture.”

“If the Fed is the one that provides insurance against inflation and is not doing anything, the market will seek inflation protection by itself and it will look like inflation expectations are unanchored. This is the risk,” Hu said via phone.

Nervousness around the prospect of a higher-for-longer message on rates from the Fed helped send the 2-
BX:TMUBMUSD02Y
and 10-year Treasury rates
BX:TMUBMUSD10Y
to their highest levels in more than a decade on Tuesday. The ICE U.S. Dollar Index was off by less than 0.1%.

Read: How Fed’s higher-for-longer theme may play out in Treasurys and the dollar on Wednesday

U.S. stock indexes
DXY

SPX

COMP
finished lower on Tuesday, led by a 0.3% drop in Dow industrials.

Investors and traders are expected to zero in on the part of the Fed’s Summary of Economic Projections that reflects where the fed-funds rate target, currently between 5.25%-5.5%, could go in 2024. As of June, policy makers penciled in the likelihood of four 25-basis-point rate cuts next year after factoring in more tightening this year, and they saw inflation creeping down toward 2% in 2024 and 2025, as well as over the longer run.

See: Why Fed’s response to this key question could spark 5% stock-market pullback or ‘solid rally’

Many in financial markets are clinging to the likelihood of no Fed rate hike on Wednesday, and see some possibility of just one more increase in November or December before rate cuts begin in the middle or final half of next year. But inflation traders now foresee seven straight months of 3%-plus readings on the annual headline CPI rate, from September through next March; that’s up from five consecutive months seen as of last Wednesday and complicates the question of where the Fed will go from here.

“The Fed’s rate decision on Wednesday was already decided a while ago, when officials started to communicate that a pause would be the likely outcome,” said Mark Heppenstall, chief investment officer of Penn Mutual Asset Management in Horsham, Pa., which oversaw $32 billion as of August.

“On the margin, we might see higher oil prices make a modest impact on rate projections,” he said via phone. However, “it’s too early for the story to change on disinflation and all the progress made so far.”

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September 19, 2023
Rising health costs could make it harder for the Fed to get inflation down to 2%

The rate of U.S. inflation has slowed considerably from a 40-year peak of 9.1% in mid-2022 and it’s gotten an assist from a surprising source: falling medical costs.

But that’s about to end — to a large degree because of the complex way the federal government tries to figure the rise of medical costs. And a re-acceleration in health-care costs could complicate the Federal Reserve’s job to get inflation back down to pre-pandemic levels of 2% or less.

“Unfortunately, the bill is about to become due” said economist Omair Sharif, founder of research firm Inflation Insights. “It’s going to be more of a headache for the Fed.”

Ever-rising medical costs

Rising medical costs have long been one of the biggest sources of inflation, even in times when overall U.S. prices were growing slowly. Medical costs rose an average of 3% a year in the decade prior to the pandemic and even faster in the early 2000s.

Expensive health care was one the chief drivers of former President Barack Obama’s attempt to create a national health care system more than a decade ago.

Yet medical costs began to decelerate sharply about one year ago, and in July, they turned negative for the first time since Word War Two. At least according to the complicated formula by which the federal government measures these expenses.

The consumer price index, the nation’s main inflation gauge, showed that the annual cost of medical care fell by 1% in the 12 months ended in August. Less than a year before, they were rising at a 6% pace.

Now, no one really believes medical costs are falling. Historically prices rise every year. And just this week The Wall Street Journal reported that health insurance could post the biggest price increase in 2024 in more than a decade.

So what’s going on?

Well, the government’s method for determining health-care prices has always been flawed — and the pandemic only made the problem worse. Far worse.

The cost of health care is almost impossible to measure accurately, economists say. It’s easy to determine the price of gas or a loaf of bread. Not so the cost of a trip to the emergency room or even a routine visit to one’s doctor.

Prices charged by doctors and hospitals are opaque, for one thing, and differ sharply even in the same city. It’s also difficult to gauge patient outcomes. And payments for services rendered are split by businesses, consumers and government (Medicare and Medicaid).

“How do you measure outcomes? Is it an hour in the hospital? Is it making a patient healthy,” said Stephen Stanley, chief economist at Santander Capital Markets. “How do you measure any of this?”

Then came the pandemic

The government had to come up with a workaround, and it did.

Basically the CPI formula subtracts the cost of benefits paid by health insurers on behalf of customers from the amount of premiums they pay. Whatever profits are leftover each year — known as retained earnings — are used to determine how much health-care prices are rising.

The formula works all right in normal times, but the coronavirus threw a huge curve ball.

Americans stopped going to the hospital or doctor’s office during Covid for fear of catching the virus. Health insurers paid out far less in benefits and profits soared.

As the pandemic faded and Americans went back to their doctors, health insurers had to pay much more in benefits and profits sank.

The result: Health-care costs as measured by the CPI have shown unprecedented ups and downs since the pandemic, especially since the government only updates its math for the medical index once a year in October.

Just how big are these swings?

The annual cost of health insurance in the CPI soared by a reported 28% as of September 2022, only to sink by 33% as of August.

Now here comes another swing. Health insurance costs are set to rise sharply starting in October after the government’s next update to its CPI formula.

That could spell trouble for the Fed.

The ‘core’ of the problem

The goal of the central bank is to get inflation back down to 2%, especially the core rate that strips out volatile food and energy costs.

The core rate of the CPI already slowed considerably in the past year, decelerating to a yearly pace of 4.3% last month from a four-decade peak of 6.6% in mid-2022.

The supposed plunge in health-insurance costs helped pave the way.

At Inflation Insights, Shariff estimates the core CPI would have slowed to only 5.1% — not 4.3% — if health-care costs had risen in the past 11 months as fast as they were rising in September 2022.

What about in the year ahead, when health insurance costs accelerate in the CPI? Medical care is the third biggest category in the index after housing and groceries.

Economists are split how much it could impede the Fed in its effort to get inflation down to 2%.

Shariff, for his part, thinks rising medical costs could add three-tenths or more to core CPI by next spring.

“It’s going to start adding back to core inflation,” he said.

At Santander Capital Markets, Stanley was one of the first Wall Street
DJIA
economists to warn about high inflation a few years ago. He is less sure rising medical costs will undermine the Fed’s inflation fight. “It is a really important category, but it’s probably not getting worked up about.”

Other economists believe inflation is likely to continue to slow toward 2% largely because of easing price pressures in many other major categories such as food and especially shelter.

Rents have come off a boil, for example, and housing prices aren’t rising rapidly anymore. Shelter accounts for more than one-third of the CPI versus a little over 8% for medical costs.

“CPI only barely starting to show the slowdown in shelter costs,” said Simona Mocuta, chief economist at State Street Global Advisors.

An alternative approach

Senior economist Aichi Amemiya at Nomura said it’s better to focus on a separate measure of health-care costs preferred by the Fed that shows more stability.

The health-service gauge found in the so-called PCE index shows that costs are rising about about 2.5% a year.

“The PCE is the best measure to look at,” Amemiya said. “It’s designed to capture the total cost of health care.”

The PCE tries to take into account total health-care spending, including business contributions to employee health insurance as well as Medicaid and Medicare reimbursement rates.

As of July, the core PCE was up at an annual rate of 4.2%, almost the same as core CPI.

Whatever the case, the cost of health care and its impact on inflation still bear watching.

The massive ups and downs in the CPI health-insurers index has even forced the Bureau of Labor Statistics to rejigger its once-a-year formula to try to be more timely and accurate.

Whether it can truly capture the changes in medical costs is still an open question.

“I don’t think there is an easy answer on this,” Stanley said.

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September 17, 2023
A 1-liter stein of beer at Munich’s famed Oktoberfest will cost nearly $15 this year

When merry revelers from around the world lift their beer steins to mark the start of Oktoberfest in the Bavarian capital Munich, they might want to sip slowly, given they will now be paying €13.75 ($14.67) per liter.

That’s based on an analysis from a team at Berenberg, who provided this chart showing the soaring cost of beer at the Munich Oktoberfest compared with other consumer and food inflation measures:

The globally famed festival is due to kick off this Saturday. And while the cost keeps rising, the celebratory large glass of Bavarian beer —- served in a stoneware mug known as a Maß, or stein — often doesn’t seem to reach the required 1-liter mark once the foam has settled, notes Holger Schmieding, chief economist, who led the report.

“Do not even try to compare the price per liter to the cheap beer cans available at the discount retailers nearby. The difference might make some crave a stiffer drink to drown the financial pain,” he and his team said.

Citing data from German price statistics dating back to 1991, Berenberg’s economists said the price of an Oktoberfest beer has soared at an annual average rate of 3.9%, well above the annual 2% rise in inflation and the 1.8% rise paid for beer sold by retailers.

However, more recently the pain may have eased some. Schmieding said the price of that beer rise versus 2022 is just 4.2%, which is below the average food price rise of 9%. And German wages rose 6.6% on an annual basis in the second quarter of this year, meaning some might this year find those steins slightly little more affordable, once they get past the sticker shock.

The country has felt the fallout from Russia’s invasion of Ukraine and soaring energy and food prices, which propelled inflation to a postwar high of 7.9% in 2022. Wage earners are currently recouping some of lost purchasing power, but Schmieding and his team warn this won’t last.

“In a lagged response to lower headline inflation and the modest rise in unemployment that we project for the next two quarters, German wage gains will likely slow down to 4% yoy by the time of the next Oktoberfest in September
2024, and the less volatile rise in beer prices at the party will likely outpace inflation and wages again,” they wrote.

The European Commission recently forecast that Germany, the bloc’s biggest economy, will be the only major one to see growth contract this year, with a forecast for gross domestic product to fall 0.4% in 2023. Weak industrial output has been a major factor in sluggish growth. Inflation for the EU bloc is expected to fall to 2.9% next year, slightly under the 2.8% previously forecast.

The European Central Bank on Thursday hiked its deposit rate by 25 basis points to an all-time high of 4% as it battles inflation for the region which it expects will average 5.6% this year, well above its 2% target.

Schmieding and the team say Germany, however, does not deserve the “sick man of Europe” title, which it last held in the 1990s, that some have slapped on it.

The country is, though, “nursing a collective hangover” after celebrating its “golden decade” between the global financial crisis and the pandemic onset too hard, with early retirement plans, expanded welfare benefits and too much dependence on Russian energy, they say.

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September 15, 2023
When will inflation cool to the Fed’s 2% target? By late next year, says JP Morgan strategist.

Inflation is likely to fall below the Federal Reserve’s 2% annual target by late next year, according to David Kelly, chief global strategist at JP Morgan Asset Management.

Consumer prices rose again in August to reach a 3.7% yearly rate, based on Wednesday’s release of the monthly consumer-price index. That marked its biggest jump in 14 months and a higher reading than the recent 3% low set in June (see chart) as the toll of the Fed’s rate hikes kicked in.

U.S. consumer prices rose in August, after touching a recent low of 3% yearly in June, as energy prices shot up.

AllianceBernstein

The catalyst for increased price pressures in August was a roughly 30% surge in energy prices
CL00,
+1.32%
this quarter, according to Eric Winograd, director of developed market economic research at AllianceBernstein.

West Texas Intermediate Crude, the U.S. benchmark, settled at $88.52 a barrel on Wednesday, as traders focused on supply concerns following decisions by Saudi Arabia and Russia to cut crude supplies through year-end. WTI was trading at a low for the year below $65 a barrel in May.

“I don’t think that today’s upside surprise is sufficient to trigger a rate hike next week and I continue to expect the Fed to stay on hold,” Winograd said, in emailed commentary. “But with inflation sticky and growth resilient, the committee is likely to maintain a clear tightening bias—the dot plot may even continue to reflect expectations of an additional hike later this year.”

Federal Reserve officials increased the central bank’s policy rate to a 5.25%-5.5% range in July, the highest in 22 years.

Higher gasoline prices, however, also could act as a counterweight to inflation, according to JP Morgan’s Kelly. “Indeed, to the extent that higher gasoline prices cool other consumer spending, the recent energy price surge could contribute to slower growth and lower inflation entering 2024,” Kelly wrote in a Wednesday client note.

“We still believe that, barring some further shock, year-over-year headline consumption deflator inflation will be below the Fed’s 2% target by the fourth quarter of 2024.”

Kelly isn’t expecting the Fed to raise rates again in this cycle.

U.S. stocks ended mixed Wednesday following the CPI update, with the Dow Jones Industrial Average
DJIA
down 0.2%, the S&P 500 index
SPX
up 0.1% and the Nasdaq Composite Index
COMP
up 0.3%, according to FactSet.

But with oil prices well off their lows for 2023, Winograd said further progress on cooling headline inflation is unlikely this year, even though he expects core inflation to gradually decelerate, a process that will “keep the Fed on high alert.”

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September 13, 2023
‘Complicated’ inflation report produces wavering U.S. stocks, keeps higher-for-longer theme in rates intact

Investors were evaluating a less-than-straightforward take on U.S. inflation Wednesday, with August’s consumer price index coming in close to or in line with expectations while providing reasons for the Federal Reserve to hike again by year-end.

U.S. stocks
DJIA

SPX

COMP
were higher, though wavering, in New York afternoon trading as traders weighed the chances of another rate hike in November. Three-month through 1-year T-bill rates were up slightly, though 2- through 30-year Treasury yields slipped. And the ICE U.S. Dollar Index
DXY,
which moves according to the market’s expectations for U.S. rates relative to the rest of the world, swung between gains and losses.

Rising gas prices in August had Wall Street anticipating higher headline inflation figures of 0.6% for last month and either 3.6% or 3.7% year-on-year ahead of Wednesday’s session, and on that score August’s CPI report met expectations. The as-expected headline readings appeared to offer some comfort to many investors, even though the monthly gain was the biggest increase in 14 months and the annual rate jumped versus the prior two months.

Still, Ed Moya, a senior market analyst for the Americas at OANDA Corp. in New York, said “this was a complicated inflation report” and price gains are failing to ease by enough for the central bank to abandon its hawkish stance. Core readings which matter most to Fed policy makers came in a bit above expectations at 0.3% for last month, driven partly by a jump in airline fares, as the annual core rate dipped to 4.3% from 4.7% previously. According to Moya, “inflation will likely still be running well above the Fed’s 2% target for the rest of the year.”

“Today’s uptick in CPI could slightly increase the likelihood of a November interest rate hike and potentially delay the timing of any rate cuts until deeper into 2024,” said Joe Tuckey, head of FX analysis at London-based Argentex Group, a provider of currency risk-management and payment services.

As of Wednesday afternoon, however, August’s CPI wasn’t putting much of a dent in expectations for fed funds futures traders. They see a 97% likelihood of no rate hike next Wednesday, which would keep the fed funds rate at between 5.25%-5.5%, and a more-than-50% chance of the same in November and December, according to the CME Fed Tool. They also continued to price in the likelihood of no rate cuts through the early part of 2024.

While August’s CPI report failed to move the needle in stocks, the dollar, or fed funds futures, there was one corner of the financial market where the data did make more a difference: Traders of derivatives-like instruments known as fixings now foresee five more 3%-plus annual headline CPI readings starting in September, after adjusting their expectations to include January.

If those expectations play out, that would bring the total number of 3%-plus readings to six months, including August’s data, and produce a scenario that investors may not be entirely prepared for — the possibility that headline inflation doesn’t meaningfully budge from current levels soon.

Read: Why financial markets may be unprepared for a fourth-quarter ‘inflation surprise’

Central bankers care more about less-volatile core readings, but pay attention to headline CPI figures because of their potential to affect household expectations.

“While these numbers do not change our, and the market’s, expectations that the Fed will hold the target fed funds rate unchanged at the September meeting, the slightly stronger number can influence the tone of the press conference and Summary of Economic Projections,” said Greg Wilensky, head of U.S. fixed income at Denver-based Janus Henderson Investors, which manages $322.1 billion in assets.

“We continue to expect some reduction in the number of participants projecting further hikes, but probably not enough to move the median projection of one more rate hike,” Wilensky said in an email. “That said, we believe that we have likely seen the last rate hike for this cycle, as the economic data that the Fed will see over the coming months will keep them on hold and allow the impact of 5.25% of prior hikes to slow the economy and inflation.”

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September 13, 2023

The economy is doing better than anyone thinks, but these troubles are in the pipeline, says Bill Ackman

Stock investors are showing some hesitancy for Tuesday, with big signals on the economy coming this week via consumer prices and retail sales. Ahead of that, Apple is expected to tempt consumers with yet another new iPhone on Tuesday.

How much should investors be worrying right now? Our call of the day from Pershing Square Capital Management manager Bill Ackman says that in the near term, we can relax a little, but it isn’t all roses.

Read: Hedge funds have bailed on the U.S. consumer in a big way, Goldman Sachs data finds

He told the Julia La Roche Show in an interview where he felt like he had a “crystal ball of what was going to happen,” starting in January 2020 with the COVID-19 outbreak, and that carried on through interest rates and the economy. Indeed, the manager reportedly made nearly $4 billion on a couple of pandemic-related bets.

“I would say the crystal ball has clouded a bit in the last period. I think these are unusual economic times and perhaps we always say that, but I don’t think this is a pattern that has been repeated…or it hasn’t been for more than 100 years,” he said.

But he remains near-term upbeat. “For two years, people have been saying that recession’s around the corner and you know we’ve had a very different view, and continue to have this view that I think people are coming around to, that the economy is actually still quite strong,” he said.

And while those on lower-income rungs have burned through a lot of COVID savings, he thinks the economy has yet to really see impact from the big fiscal stimulus seen in recent years.

Looking down the road though, Ackman has got a stack of concerns over the economy. He sees about a third of federal debt due to get repriced meaning that over a relatively short period of time, “interest expense will become a much bigger part of the deficit that is not going to be a contributor to the economy.”

And while higher interest rates do help savers, ultimately that will be a big drag on the economy, he said, adding that rising inflation, mortgage rates, car payments and credit card rates, are all set to slow the economy.

“We’re still in the midst of a war and there’s political uncertainty you know with an upcoming election,” he said. That partly explains Pershing Square’s hedge via a short position on the 30-year Treasury bond
BX:TMUBMUSD30Y
that he laid out in a tweet in early August.

For roughly a year, long-term Treasury yields have been trading below short-dated ones, which is known as an inverted yield curve, a phenomenon that’s often seen as a precursor to recession.

“I don’t see inflation getting back to 2% so quickly, if at all, and if in fact we’re in a world of persistent 3% inflation, you know it doesn’t make sense to have a 4.3%, 4.25% Treasury yield,” he said.

Other risks? Ackman remains worried about regional banks following the spring crisis, as many have big fixed-rate portfolios of assets that have gotten less and less valuable as rates rise. “I would say the commercial real estate picture has not gotten better, if anything, you know, you’re going to start seeing real defaults, particularly with office assets,” he said.

“Regional banks have the most exposure to construction loans so they are going to be a lot of construction loans that won’t be able to repaid. There will be a lot of restructurings, so either the investors groups are gonna have to put in a lot more equity or the banks are going to start taking some losses,” he said.

Ackman says investors also face a presidential campaign that could add some stress. The hedge-fund manager said he’s surprised there have not been “more and better alternative candidates” for the 2024 campaign over President Joe Biden and former President Donald Trump.

He’d like to see JPMorgan Chase & Co. CEO Jamie Dimon toss his hat in the ring and believes Biden is “beatable,” by a strong candidate.

Ackman himself said it’s “possible,” he himself could run someday, but he’s more focused on having a better investment track record over Berkshire Hathaway Chairman and CEO Warren Buffett — and needs some 30 years to match the Oracle of Omaha.

Read: Here’s an easy way to make a more concentrated play on the ‘Magnificent Seven’ stocks

The markets

Stock futures
ES00,
-0.36%

NQ00,
-0.45%
are tilting south, led by tech, with Treasury yields
BX:TMUBMUSD02Y

BX:TMUBMUSD10Y
steady to a touch lower and the dollar
DXY
recovering some ground.

Read: Watch this ‘canary in the coal mine’ for signs of trouble in markets, Neuberger Berman CIO says

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Oracle shares
ORCL,
+0.31%
are down 10% in premarket trading after disappointing guidance from the cloud database group.

Apple’s
AAPL,
+0.66%
big event kicks off at 1 p.m. Eastern, with the launch of the pricier iPhone 15 expected to be on the agenda.

Hot ticket. Arm Holdings’ IPO is already 10 times oversubscribed and bankers will stop taking orders by Tuesday afternoon, Bloomberg reports, citing sources.

Tech’s wild week: How Apple, Google, AI, Arm’s mega IPO could set the agenda for years

Upbeat results are boosting shares of convenience-store operator Casey’s General Stores
CASY,
-1.02%.

Packaging giant WestRock
WRK,
-1.48%
and rival Smurfit Kappa
SK3,
-8.87%
have announced a stock and cash tie up. WestRock shares are up 8% in premarket.

Read: U.S. budget deficit will double this year to $2 trillion, excluding student loans

Best of the web

No better than gambling? Amateur investors are piling into 24-hour options.

Demand for oil, coal, gas to peak this decade, IEA chief says

U.S. takes on tech giant Google in landmark case.

The chart

Bank of America’s global fund manager survey for September sees investors still bearish, but no longer on the extreme side. Here’s the chart:

Read: Fund managers just made their biggest shift ever into U.S. stocks — and out of emerging markets

The tickers

These were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern:

Ticker	Security name
TSLA, +10.09%	Tesla
AMC, +2.23%	AMC Entertainment
CGC, +81.37%	Canopy Growth
NVDA, -0.86%	Nvidia
GME, -3.90%	GameStop
AAPL, +0.66%	Apple
ACB, +72.17%	Aurora Cannabis
NIO, +2.89%	Nio
MULN, +5.77%	Mullen Automotive
AMZN, +3.52%	Amazon

Random reads

“Worst investment ever.” Brady Bunch fan buys original house for cut-price $3.2 million.

And the house from the “Halloween” slasher films just sold for $1.8 million.

China may ban clothes that hurt people’s feelings.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Listen to the Best New Ideas in Money podcast with MarketWatch financial columnist James Rogers and economist Stephanie Kelton.

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September 12, 2023

Stock market’s 2023 run may hit roadblock after August’s energy-led boost to U.S. CPI

August was a hot month and it wasn’t just about the weather. Financial markets are now bracing for what’s likely to be a rebound in headline U.S. inflation next week, fueled by higher energy prices.

Barclays
BARC,
+0.18%,
BofA Securities
BAC,
+0.62%,
and TD Securities expect August’s consumer price index to reflect a 0.6% monthly rise, up from the 0.2% monthly readings seen in July and in June. In addition, they put the annual CPI inflation rate at 3.6% or 3.7% for last month, which compares with the 3.2% and 3% figures reported respectively for the prior two months.

While Federal Reserve policy makers and analysts are loath to read too much into one report, August’s CPI has the potential to disrupt expectations that getting back to the central bank’s 2% target will be easy. Inflation has instead been nudging back up since June, with the likely rebound in August being regarded as primarily driven by the energy sector. What now remains to be seen is how much longer energy prices will remain elevated and whether they’ll begin to feed into narrower measures of inflation that matter most to the Fed.

Read: Stock-market investors just got reminded that the inflation fight isn’t over

“We’re going to see a spike in gas prices and other commodity prices driven by supply cuts, which means headline CPI goes back up,” said Alex Pelle, a U.S. economist for Mizuho Securities in New York. Via phone on Friday, Pelle said that prospects for a hotter August CPI report have already been factored in by financial markets, with all three major U.S. stock indexes heading for weekly losses.

How investors react to next Wednesday’s data will likely come down to whether the rebound in headline figures is seen as “a one-off” or something that gets repeated, and “what that means for the bottoming off of inflation,” Pelle said. “The equity market is going to have some trouble in the fourth quarter after a pretty impressive first half. Earnings expectations are still pretty high, but the macro-driven backdrop is challenging.”

Rising energy prices in August have already spilled into the month of September, with gasoline reaching the highest seasonal level in more than a decade this week. Voluntary production cuts by Saudi Arabia and Russia are a major contributing factor curtailing the supply of crude oil into year-end, and Goldman Sachs has warned that oil could climb above $100 a barrel.

In financial markets, there’s one group of traders which is telegraphing that the final mile of the road toward 2% inflation won’t be smooth.

Traders of derivatives-like instruments known as fixings anticipate that the next five CPI reports, including August’s, will produce annual headline inflation rates above 3%. Though policy makers care more about core readings that strip out volatile food and energy prices, they’re aware of how much headline figures can impact the public’s expectations.

Source: Bloomberg. The maturity column reflects the month and year of upcoming CPI reports. The forwards column reflects the year-ago period from which the year-over-year rate is based.

At BofA Securities, U.S. economist Stephen Juneau said August’s CPI won’t necessarily change his firm’s view that inflation is likely to move lower next year and fall back to the Fed’s target without the need for a recession. BofA Securities expects just one more Fed rate hike in November and will maintain that view if August’s CPI report comes in as he expects, Juneau said via phone.

After stripping out volatile food and energy items, BofA Securities, along with Barclays and TD Securities, expects August’s core CPI readings to come in at 0.2% month-over-month — matching June and July’s levels — and to fall to 4.3% on an annual basis.

Based on core measures, August’s report wouldn’t “change the narrative all that much: Everything points to a moderation in price growth,” Pelle said. “There’s a reason why food and energy are typically excluded,” and “we don’t want to put too much stock into one month.”

As of Friday afternoon, all three major U.S. stock indexes were headed higher, with the S&P 500 attempting to snap a three-day losing streak. Dow industrials
DJIA,
the S&P 500
SPX
and Nasdaq Composite
COMP
were respectively on track for weekly losses of 0.7%, 1.2%, and 1.7%. They’re still up for the year by more than 4%, 16% and 31%.

Meanwhile, Treasury yields turned were little changed on Friday as fed funds futures traders priced in a 93% chance of no action by the Fed at its next policy meeting in less than two weeks, and a more-than-50% likelihood of the same for November and December — which would leave the Fed’s main policy rate target between 5.25%-5.5%.

“There is a risk that investors are too complacent about the inflation report,” said Brian Jacobsen, chief economist at Annex Wealth Management in Elm Grove, Wis. “We might not get to 2% inflation as quickly as many hope.”

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September 8, 2023
Republican debate: Why you may hear big numbers like 19% inflation, and how to make sense of it all

Economists don’t much like presidential-campaign seasons. For them, it’s a bit like seeing their manicured gardens getting trampled by schoolchildren having a water-balloon fight.

Robert Brusca, the president of consulting firm FAO Economics, predicted that the political discussion of the U.S. economy in the 2024 campaign would be “a farce.”

Talk of inflation is likely to dominate the Aug. 23 Republican debate, for example.

Republicans, eager to lay the blame for higher prices at the feet of President Joe Biden, are going to make the strongest case they can for that. For them, it is a happy coincidence that inflation started to pick up right when Biden was sworn into office.

Larry Kudlow, a former top economic adviser to President Donald Trump, put it succinctly. “I have numbers. The consumer-price index is up 16% since February 2021. Groceries are up 19%. Meat and poultry up 19%. New cars up 20%. Used cars up 34%,” Kudlow said in an interview on the Fox Business Network.

From last month: Mike Pence says inflation is 16%, but CPI is 3%. This is his logic.

Unlike Kudlow, the Federal Reserve doesn’t usually measure inflation over 29 months. Instead, the central bank favors using inflation data that looks at the past 12 months.

By that year-over-year measure, CPI is up 3.2%. Groceries are up 3.6%. Meat and poultry prices are up 0.5%. New-vehicle prices are up 3.5%, but prices of used cars and trucks are actually down 5.6%.

Economists, meanwhile, tend to like even shorter measures, such as the three-month annualized rate. They think the 12-month rate says more about the rate a year ago than it does about what is happening today.

“Looking at year-over-year [data], the only new piece of information is the current month. You are looking at 11 months that you already know,” said Omair Sharif, president and founder of research company Inflation Insights.

Using the shorter metric, headline CPI for the three months ending in July is up 1.9%, while food at home rose 1.1% and meat and poultry is down 4.5%, he said.

Trends have been favorable in recent months, but that might not last. “It’s been a good summer,” Sharif said. “But unfortunately, the winter data won’t be as pleasant.”

What caused the spike in inflation?

Economists tend not to blame one political party or the other for spikes in inflation.

In the 1970s, for example, the culprit was increases in oil prices by the Organization of Petroleum Exporting Countries.

This time, there was no one single factor. While the debate is not yet over, economists tend to focus on the pandemic, the war in Ukraine and the move to end reliance on fossil fuels in order to combat climate change.

Brian Bethune, an economics professor at Boston College, said prices started to rise when the healthcare industry had to adjust to a new, unforeseen risk. There were steep costs to dealing with the deadly coronavirus and developing vaccines.

People working in frontline industries were able to command higher wages. And demand outstripped supply for many things, as shelves were emptied by consumers and supply chains were strained.

Bethune also stressed recent moves toward renewable energy. The best way to explain inflation to your grandmother, he said, is to look at a chart of electricity prices.

Uncredited

The steady increase stems from efforts to move closer to a carbon-free economy, Bethune said. And those prices get passed along “right through the whole cost pressure of the economy,” including the price of refrigerated foods.

Inflation boomed and is now coming off its peak, said Brusca of FAO Economics. Prices are still rising, but not at the same rapid clip. And they won’t roll back to prepandemic levels.

“Consumers are caught in a trap,” he said. “If prices are going to come down, you have got to have deflation.”

Deflation comes with its own unique set of woes. It can make the cost of borrowed money, like mortgages, much more expensive. And it can lead to serious economic weakness.

“All of this is why the Fed targets price stability,” Brusca said.

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August 22, 2023
UK Inflation Rate Fell in July, But Core Rate Held Steady

The U.K.’s inflation rate fell a little more than expected in July, though with the key core rate holding steady, the pressure remains on the Bank of England as it considers another interest-rate hike next month.

Consumer prices were 6.8% higher in July than the same month a year earlier, easing from the 7.9% increase recorded in June, the Office for National Statistics said Wednesday.

Economists…

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August 15, 2023
Inflation could rebound later this year. And that might be a good thing.

U.S. inflation has slowed down significantly over the past few months, but it faces risks of reacceleration in the fourth quarter, or next year, some analysts are warning.

Data released Thursday showed U.S. consumer prices rose a mild 0.2% in July, while the 12-month rate of inflation edged up to 3.2% from 3% in the prior month, the first annual-rate increase in 13 months, the Labor Department said on Thursday. However, the so-called core rate of inflation, which omits food and energy prices, saw its yearly rate of increase slow to 4.7% from 4.8%, the slowest in almost two years.

On Friday the U.S. producer-price index showed a July rise of 0.3%, up from a revised flat reading in June, and the core PPI rose 0.2 in July, up from a 0.1% gain in the prior month.

“We could very easily see a reacceleration of inflation next year,” as base effects may soon work against inflation numbers, said Kathryn Rooney Vera, chief market analyst at StoneX.

If the inflation rate in the comparable period of the previous year was very low, even just a small monthly increase in CPI or PPI in the current year will render a high inflation rate now and vice-versa.

U.S. inflation accelerated aggressively in the first half of 2022, before price rises slowed in the second half. In June 2022, the annual consumer-price inflation rate peaked at 9.1%; it thereafter started to fall.

The most challenging part of combating inflation was not slowing the yearly consumer inflation rate from 9% to 3% but lowering the yearly inflation rate for core personal consumption expenditures, or core PCE, to 2% from 4.1% in June, noted Rooney Vera of StoneX.

PCE is said to be U.S. central bankers’ preferred inflation metric.

Julian Brigden, co-founder and president of Macro Intelligence 2 Partners, echoed the point. The idea that inflation is defeated is “ultimately wrong,” said Brigden. There are risks of upside surprise for inflation in the fourth quarter, noted Brigden.

“Goods inflation has fallen, food inflation has fallen, and energy inflation most materially has fallen. All of those [base] effects start to drop out in the not-too-distant future,” said Bridgden.

Meanwhile, the U.S. economy remains resilient, with unemployment numbers relatively low, supporting an elevated service-sector inflation rate. The Federal Reserve Bank of Atlanta’s real-time GDP tool forecasts the U.S. economy is growing at a 4.1% rate in the third quarter.

“In a service-based economy based on consumption, with a core PCE that’s overwhelmingly driven by service-sector inflation and this economy could potentially grow in the third quarter by 4%, with real wages positive and unemployment at 3.5%, how do we expect service-sector inflation to drop?” said Rooney Vera. “So the Fed has to make a tough choice: Are they targeting 2% inflation or are they not?”

See: Fed has ‘more work to do’ to get inflation back down, Daly says

Also read: Worker pay at center of Fed’s inflation fight

Federal Reserve chief Jerome Powell said in July that it appeared unlikely inflation would get back to the U.S. central bank’s long-term 2% target before 2025.

“I think it’s actually better off if we see some inflation,” according to Melissa Brown, global head of applied research at Qontigo. “Given the economic numbers and the employment numbers, I think to see inflation really come down, it probably is going to suggest a recession.”

Earlier this year an elevated inflation rate made it difficult for companies to raise prices enough to offset their own rising costs, especially while the Fed was raising borrowing rates. But “even if we see some inflation going into the fourth quarter, that actually could be good. We would switch from this being bad inflation to being good inflation, which just means that the economy is strong enough to sustain higher inflation,” said Brown.

U.S. stock indexes traded mixed on Friday. The Dow Jones Industrial Average
DJIA
gained 0.4%, and the S&P 500
SPX
was unchanged. The Nasdaq Composite
COMP
fell 0.5%.

Read on:

Want companies to lower their prices? Stop buying stuff from them.

‘Greedflation’ is replacing inflation as companies raise prices for bigger profits, report finds

Source link

August 13, 2023
Hate to spoil the party but there’s a new risk in town — a ‘no landing’ economy

For the last 18 months, all you’ve heard from the markets is that the U.S. economy is three months away from a recession. Now, the popular analysis is that that inflation is on a smooth glidepath down and the economy will never have a downturn again.

Worries about a recession have evaporated, and all the talk is about a “soft landing,” with the Federal Reserve not having to hike interest rates more than once more, at most.

But behind the scenes, in some economic circles, there is growing concern about another risk for the economy, dubbed a “no landing” scenario.

What does “no landing” mean? Essentially it’s marked by economic growth that’s too strong to allow inflation to fall all the way to 2%, where the Federal Reserve aims for it to be, and therefore an economy that will need more Fed rate hikes, according to Chris Low, chief economist at FHN Financial.

So instead of the U.S. central bank starting to cut rates early next year, there may be more rate hikes in store.

“There is still considerable work to do before the inflation beast is fully tamed,” Low said.

Former Fed Vice Chair Richard Clarida described the risk in crystal-clear terms. “If the Fed finds itself in March 2024 with an unemployment rate of 4% and an inflation rate of 4% with some of that temporary good news behind them, they are in a very tough spot,” Clarida said in a recent interview with Bloomberg News.

“It is a risk. It is not the base case. But if I was still there [at the Fed], I would be assessing it,” he added.

So why does this matter? Why would the Fed be in such a tough spot? Two words: presidential election.

A Fed that is dedicated to bringing inflation down might have to slam the brakes on the economy forcefully to get the job done. That gets tough during an election year, especially one that already seems poised to be filled with acrimony.

“The Fed does not play politics with monetary policy. The FOMC will do what is right for the economy, election year or not. Nevertheless, FOMC participants are already sensitive to triggering a recession. Doing it in an overt way when Congress, a third of the Senate, and the White House are up for grabs would be reckless,” Low said.

Andrew Levin, professor of economics at Dartmouth College and a former top Fed staffer, said “raising interest rates sharply in the midst of an election cycle could be a delicate matter. Even the vaunted inflation fighter, Paul Volcker [the Fed’s chairman from 1979 to 1987], decided to ease off the brakes midway through the 1980 presidential campaign.”

Ray Fair, a Yale economics professor, thinks that, whether or not the Fed successfully lowers consumer-price inflation to the vicinity of 2% will be what really matters for the 2024 presidential election. If inflation does not go gently and the Fed is still fighting next year, it would likely be negative for President Joe Biden and the Democratic Party, he said.

See: Inflation could rebound later this year. And that might be a good thing.

To avoid hiking rates next year, the Fed, in Low’s view, will raise interest rates to 6% by the end of this year. That is an out-of-consensus call. Financial markets think the Fed is done hiking with its benchmark policy interest rate in a range of 5.25% to 5.5%.

Many economist and the financial markets are talking more about prospective Fed rate cuts in early 2024 than any more hikes.

Asked during a recent radio interview if he thought a “no landing” scenario was taking shape, Philadelphia Fed President Patrick Harker replied: “I don’t think so.”

Harker said the economy was likely on track to return to the low-interest-rate and low-inflation environment of 2012-19.

“I think about this a lot, and I asked myself what’s different fundamentally about the U.S. economy now then the way it was before the pandemic,” Harker said. He concluded that there wasn’t much difference.

The big trend Harker mentioned was demographics, with baby boomers still moving in large numbers into retirement. “I don’t think we have to stay in a high-inflation regime. I think we can get back to where we were,” he said.

Steve Blitz, chief U.S. economist at research firm GlobalData.TSLombard, said he puts the probability of a “no landing” scenario at about 35%.

Blitz added it was a common mistake for economists, policy makers, traders and journalists “to presume that the expansion to come is going to look like the expansion that was.”

“At least in the United States, that was never the case,” he added.

Blitz said that if the U.S. economy were growing at a rate below 2% with an inflation rate higher than 3%, the Fed would have to raise the policy rate to about 6.5%. But if the economy is humming along with 3% growth and inflation over 3%, that would be a trickier spot. “Does the Fed really want to slow that down?” he asked.

See: The U.S. economy is aiming for a three-peat: 2% GDP growth

The range of possible outcomes for the economy remains wide. Some economists still believe that a recession early next is the most likely outcome.

Other economists, like Michelle Meyer, chief U.S. economist at Mastercard, think the economy will continue to grow, with inflation coming down. Meyer described that outcome as “a soft landing with bumps.”

Stephen Stanley, chief economist at Santander U.S., said he thinks the U.S. economy will “muddle through” next year with subpar growth in the range of 1% for several quarters and inflation slowing gradually.

“Obviously, that optimism melts away if we’re back to readings of 0.4% and 0.5% on core CPI in three months or six months,” Stanley said.

Economic calendar: See what’s on the U.S. economic-data docket in the coming week

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August 13, 2023
Inflation could rebound later this year. And that might be a good thing.

U.S. inflation has slowed down significantly over the past few months, but it faces risks of reacceleration in the fourth quarter, or next year, some analysts are warning.

Data released Thursday showed U.S. consumer prices rose a mild 0.2% in July, while the 12-month rate of inflation edged up to 3.2% from 3% in the prior month, the first annual-rate increase in 13 months, the Labor Department said on Thursday. However, the so-called core rate of inflation, which omits food and energy prices, saw its yearly rate of increase slow to 4.7% from 4.8%, the slowest in almost two years.

On Friday the U.S. producer-price index showed a July rise of 0.3%, up from a revised flat reading in June, and the core PPI rose 0.2 in July, up from a 0.1% gain in the prior month.

“We could very easily see a reacceleration of inflation next year,” as base effects may soon work against inflation numbers, said Kathryn Rooney Vera, chief market analyst at StoneX.

If the inflation rate in the comparable period of the previous year was very low, even just a small monthly increase in CPI or PPI in the current year will render a high inflation rate now and vice-versa.

U.S. inflation accelerated aggressively in the first half of 2022, before price rises slowed in the second half. In June 2022, the annual consumer-price inflation rate peaked at 9.1%; it thereafter started to fall.

The most challenging part of combating inflation was not slowing the yearly consumer inflation rate from 9% to 3% but lowering the yearly inflation rate for core personal consumption expenditures, or core PCE, to 2% from 4.1% in June, noted Rooney Vera of StoneX.

PCE is said to be U.S. central bankers’ preferred inflation metric.

Julian Brigden, co-founder and president of Macro Intelligence 2 Partners, echoed the point. The idea that inflation is defeated is “ultimately wrong,” said Brigden. There are risks of upside surprise for inflation in the fourth quarter, noted Brigden.

“Goods inflation has fallen, food inflation has fallen, and energy inflation most materially has fallen. All of those [base] effects start to drop out in the not-too-distant future,” said Bridgden.

Meanwhile, the U.S. economy remains resilient, with unemployment numbers relatively low, supporting an elevated service-sector inflation rate. The Federal Reserve Bank of Atlanta’s real-time GDP tool forecasts the U.S. economy is growing at a 4.1% rate in the third quarter.

“In a service-based economy based on consumption, with a core PCE that’s overwhelmingly driven by service-sector inflation and this economy could potentially grow in the third quarter by 4%, with real wages positive and unemployment at 3.5%, how do we expect service-sector inflation to drop?” said Rooney Vera. “So the Fed has to make a tough choice: Are they targeting 2% inflation or are they not?”

See: Fed has ‘more work to do’ to get inflation back down, Daly says

Also read: Worker pay at center of Fed’s inflation fight

Federal Reserve chief Jerome Powell said in July that it appeared unlikely inflation would get back to the U.S. central bank’s long-term 2% target before 2025.

“I think it’s actually better off if we see some inflation,” according to Melissa Brown, global head of applied research at Qontigo. “Given the economic numbers and the employment numbers, I think to see inflation really come down, it probably is going to suggest a recession.”

Earlier this year an elevated inflation rate made it difficult for companies to raise prices enough to offset their own rising costs, especially while the Fed was raising borrowing rates. But “even if we see some inflation going into the fourth quarter, that actually could be good. We would switch from this being bad inflation to being good inflation, which just means that the economy is strong enough to sustain higher inflation,” said Brown.

U.S. stock indexes traded mixed on Friday. The Dow Jones Industrial Average
DJIA
gained 0.4%, and the S&P 500
SPX
was unchanged. The Nasdaq Composite
COMP
fell 0.5%.

Read on:

Want companies to lower their prices? Stop buying stuff from them.

‘Greedflation’ is replacing inflation as companies raise prices for bigger profits, report finds

Source link

August 13, 2023
Why have frozen fruit and vegetable prices soared by almost 12% — but the cost of fresh produce has not?

What’s going on with frozen fruit and vegetables?

Food prices rose 0.2% on the month in July after remaining unchanged in June, and they rose 4.9% on the year, while the cost of food at home rose 3.6% on the year, government data released Thursday showed. Prices of fresh fruits and vegetables rose just 1.2% year over year.

However, there were some big — even alarming — outliers: Frozen fruit and vegetable prices increased by 11.8% in July over last year, frozen vegetable prices rose 17.1% and frozen noncarbonated juice and drink prices rose 16.3%.

Those price rises are at odds with overall inflation figures. U.S. consumer prices rose to 3.2% in July from 3% in the prior month, the Bureau of Labor Statistics said this week. It was the first increase in 13 months.

Why have the prices of frozen fruits and vegetables shot up over the past 12 months, while the cost of fresh fruits and vegetables has increased so little?

Climate change and extreme weather conditions — from heavy rainfall to drought, particularly in California — have led to big problems for farmers. This has been compounded by issues related to the war in Ukraine and an ongoing increase in the cost of labor, experts said.

As a result, a large proportion of the fruits and vegetables grown were destined to be sold as fresh produce — which led to a shortage of ingredients for frozen goods, said Brad Rubin, sector manager at Wells Fargo Agri-Food Institute. “Because of the late crop, lots of produce is being pushed to the fresh market to keep up with demand,” he said.

California weather

California has experienced some drastic weather conditions over the last 12 months. Some 78 trillion gallons of water fell in California during winter 2022 and early spring 2023, according to data from the National Weather Service, delaying planting. And all that snow and rain was followed by a months-long drought in the region.

What happens in California is felt by consumers across the country.

“California produces nearly half of U.S.-grown fruits, nuts and vegetables,” according to estimates from the Sciences College of Agriculture, Food & Environmental Sciences at California Polytechnic State University in San Luis Obispo. “California is the only state in the U.S. to export the following commodities: almonds, artichokes, dates, dried plums, figs, garlic, kiwifruit, olives, pistachios, raisins and walnuts,” it says.

The subsequent price rises hit ingredients like strawberries and raspberries especially hard, Rubin added. Inventories of frozen berries are “near five-year lows” after winter storms in Watsonville flooded agricultural fields, damaging and delaying the strawberry crop. Most of the strawberries in the U.S. are grown in California.

Labor costs

Frozen fruits and vegetables have a longer supply chain than fresh produce, which can make them more vulnerable to disruptions in inventory, experts say. Rising energy prices are also pushing up the cost of cold storage.

In addition to those issues, U.S. farmers are dealing with increased labor costs and fewer migrant workers, partly due to changes in government policies and the closure of borders during the COVID-19 pandemic, according to a February 2023 report from the Federal Reserve Bank of San Francisco.

“Immigration has traditionally provided an important contribution to the U.S. labor force,” the report said. “The flow of immigrants into the United States began to slow in 2017 due to various government policies, then declined further due to border closures in 2020-21 associated with the COVID-19 pandemic. This decline in immigration has had a notable effect on the share of immigrants in the U.S. labor force.”

Russia’s invasion of Ukraine also continues to affect agricultural production in the U.S., said Curt Covington, senior director of institutional business at AgAmerica Lending, a financial-services company providing agricultural loans. Because the war disrupted supplies of commodities like wheat and corn — also pushing up prices for those goods — farmers have been prioritizing planting those crops over vegetables.

“These escalating frozen-vegetable prices present a challenge for farmers as they grapple with increased production costs and labor pressures,” and that presents a long-term challenge for farmers, “potentially impacting their profitability,” Covington said.

All of these factors — from international supply chains to extreme weather conditions — will have an effect on the cost of frozen goods in U.S. supermarkets. Ultimately, experts said, consumers will end up paying the price.

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August 11, 2023
U.S. wholesale prices surprise to the upside in July, PPI shows

The numbers: The U.S. producer price index rose 0.3% in July, the Labor Department said Friday, up from a revised flat reading in June and the largest gain since January.

Economists polled by The Wall Street Journal had forecast a 0.2% advance.

The core producer price index, which excludes volatile food, energy prices, and trade services rose 0.2 in July, up from a 0.1% gain in the prior month. This is the largest increase since February.

Key details: Over the past year, headline producer price inflation was running at a 0.8% rate in July, up from 0.2% in the prior month.

Core prices are up 2.7% from a year earlier, matching the gain in June. Core PPI prices were running at a 5.8% rate in July 2022.

A big part of the increase in producer prices was in the services sector.

The cost of services rose 0.5% last month, up from a 0.1% drop in June. This is the largest increase in a year. The increase was led by a 7.6% gain for portfolio management.

The cost of goods rose 0.1% in July after a flat reading in the prior month.

Energy prices were flat in July, down sharply from a 0.7% gain in the prior month.

Wholesale food prices jumped 0.5% after a 0.2% fall in the prior month.

Further back on the production line, prices for intermediate goods fell 0.6%, the sixth straight monthly decline.

Big picture: Price pressures have been diminishing at the producer level much faster than at the consumer level. Economists are watching the inflation data closely to see if the July interest rate hike by the Federal Reserve was the last hike of the cycle.

What are they saying? “In short, PPI surprised to the upside in July. While we do not expect further rate hikes this year, if inflation surprises to the upside and the labor market and growth do not slow, another increase in interest rates cannot be ruled out in 2023,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

Market reaction: U.S. stocks
DJIA

SPX
were set to open lower on Friday after the stronger-than-expected PPI data. The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
rose to 4.12%.

Source link

August 11, 2023
Interactive: Search for the latest PCE inflation trends of almost 400 items

The personal consumption expenditures price index, which is released by the U.S. Department of Commerce, is the Federal Reserve’s preferred measure of inflation. It is released each month and measures the change in prices of goods and services in the United States.

The Fed uses core PCE, which excludes the volatile categories of food and energy, to help set monetary policy. The consumer-price index is another measure of inflation and is reported by the Bureau of Labor Statistics.

See more: MarketWatch’s breakdown of CPI inflation

PCE measures the expenses of both urban and rural consumers by United States residents. According to the Commerce Department, the index “consists of the purchase of new goods and services from private businesses.” Though additional purchases are included, such as those from the government and expenditures by third-party payers on behalf of households.

PCE by type of product is divided into three broad categories: durable goods, nondurable goods and services.

Use our searchable table to look up the most recent price data for almost 400 products reported by the the Commerce Department.

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July 28, 2023
U.S. inflation eases again, PCE shows. Prices rise at slowest pace in almost two years

The numbers: The cost of goods and services rose a mild 0.2% in June as inflation eased again, but another measure of prices favored by the Federal Reserve showed somewhat less progress.

Economists polled by The Wall Street Journal had forecast a 0.2% increase in the personal consumption expenditures index.

The increase in prices over the past year slowed to 3% from 3.8% and touched the lowest level since October 2021, the government said Friday.

The so-called core PCE rate of inflation, meanwhile, also rose 0.2% last month. The core rate omits volatile food and energy costs and is viewed by the Fed as a better predictor of future inflation trends.

The rate of core inflation over the past year slowed a bit less to 4.1% from 4.6% in the prior month, but that still puts it at a more than two-year low. It’s still far above the Fed’s 2% target, however.

Big picture: Inflation has slowed a lot this year due to falling energy and food prices, but the cost of living is still rising too fast to mollify the Fed or ease the financial pain of U.S. households.

The Fed is expected to keep interest rates high through next year to bring inflation down closer to its 2% target. The danger is that higher borrowing costs could also slow the economy enough to tip the U.S. into recession.

The latest PCE report is likely to give the Fed more reason for optimism, however.

Looking ahead: “Inflation cooled, but held well above 2%, meaning the Fed can’t declare mission accomplished,” said lead U.S. economist Oren Klatchkin of Oxford Economics.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.50%
and S&P 500
SPX,
+0.99%
rose in Friday trades. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.953%
slipped 3.96%.

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July 28, 2023
Mike Pence says inflation is 16%, but CPI is 3%. This is his logic.

Former Vice President Mike Pence is taking a long view when it comes to inflation — a very long view that isn’t commonly expressed when debating economic performance.

Pence — well behind former President Donald Trump and Florida Gov. Ron DeSantis in early polling for the Republican nomination — is trying to position himself as the true conservative alternative in the Republican presidential race, and used inflation as a key talking point.

Pence was interviewed by Larry Kudlow, another former Trump administration official, on Fox Business, and stated the following about inflation:

“We’ve got to end this scourge of inflation on families,” he said Monday. “We’re still 16% inflation in the last two and a half years and that also means another issue I’ve been willing to tackle, Larry, is we’ve got to bring common-sense and compassionate reforms to entitlements.”

The 16% figure cited by Pence seemed to be at odds with other measures of inflation. The Labor Department reported consumer prices rose 3% year-over-year in June. The peak for the CPI series was 9%. There’s no metric — core CPI, PCE, Cleveland Fed median CPI — that got close to 16%.

The Pence campaign told MarketWatch they were comparing June 2023 with Jan. 2021 — when President Joe Biden and Vice President Kamala Harris came into office, for a 16.6% rise.

They also provided a similar comparison for inflation during the Trump/Pence administration — over those four years, prices grew by a smaller 7.7%.

But then, if that’s the new way of calculating things, there’s all sorts of data that also should be compared to 29 months ago.

To name a few: there’s been a 9% increase in jobs compared to 29 months ago, compared to the 2% drop during the Trump administration.

Average hourly earnings compared to 29 months ago have climbed 12%.

Durable-goods orders are up by 23% compared to 29 months ago, and retail sales have grown by 21%.

Comparing inflation now to 29 months ago isn’t wrong, but is misleading when the overwhelming percentage of listeners assume that comparison to be done over 12 months.

It’s an adjustment of inflation data that landed President Biden in hot water last year, when he used month-by-month data — instead of the more commonly used year-over-year data — to say that inflation was zero.

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July 18, 2023
Stocks are riding a wave of optimism as U.S. inflation recedes, but there are dangers lurking

As U.S. inflation continues to cool, stocks are riding a wave of optimism.

During the past week, the S&P 500
SPX,
-0.10%
climbed above 4,500 for the first time in more than 15 months, after both the consumer price index and producer price index data showed cooler-than-expected inflation in June.

Some bulls expect an improved economic outlook to send the S&P 500 to an all-time high later this year. The large-cap equities gauge hit a record close of 4,796.56 in January, 2022, according to Dow Jones market data.

In that camp stands Scott Ladner, chief investment officer at Horizon Investments. “This is increasingly looking like an economy that just can’t get knocked off its footing,” said Ladner in a phone interview.

“We see the nominal GDP coming in the 5% to 7% range this year. And earnings are priced at 0% right now. So we think there’s some room for earnings to catch up,” Ladner said.

Meanwhile, the Federal Reserve may be be close to the end of its year-long campaign to raise interest rates to slow the economy and lower inflation and steady or lower borrowing costs add more fuel to the rally, noted Ladner.

The market consensus is that the Fed will raise its interest rate at least one more time before the year concludes. Future funds traders are pricing in an over 95% chance the U.S. central bank will raise its bench mark interest rate in July by 25 basis points to the range of 5.25% to 5.5% and a 23% likelihood that it will deliver one more hike after July, according to CME Fed Watch.

“We might have already seen the peak of interest rates. That’s actually some fuel for multiples to be able to expand,” said Ladner.

Greg Bassuk, chief executive at AXS Investments, echoed the point. “While we do anticipate at least one more rate hike, we think the ending of a two-year track of rate hikes is going to put more certainty into the market and very importantly, have the U.S. economy achieve a soft landing and avoid a recession.”

Adding to the tailwind for risky assets is a weakening U.S. dollar. The ICE U.S. Dollar Index
DXY,
+0.03%
fell to 99.96 as of 4 pm Eastern on Friday, the lowest close since April 2022, according to Dow Jones market data.

If the Fed is close to being done with increasing its benchmark interest rate, while other central banks are not, it would weigh on the greenback even further, noted Ladner.

Dangers lurking

Still, there are several challenges that may impede stocks from extending their rally.

Raymond Bridges, portfolio manager of the Bridges Capital Tactical ETF
BDGS,
-0.10%,
said he expects U.S. stocks to end the year lower, citing further tightening of credit conditions.

Read: The U.S. stock-market rally seems unstoppable, so why does bearishness still persist

The Fed’s balance sheet has been shrinking for the past few months, after the central bank again expanded it in March by setting up a new emergency loan program and lending more than $300 billion to provide liquidity when some regional banks failed during the first quarter of the year.

“Those bank term funding programs added a lot of liquidity into the marketplace to stave off a recession, or a credit crunch,” Bridges said. “It was a nice lifeline [for banks], but I think that’s what extended this bear market rally that we’ve had.”

As the Fed’s balance sheet declines to levels seen before March, some banks will have to pay back the emergency loans to the Fed which have a tenor of up to a year, “that’s actually a net liquidity draw,” according to Bridges.

“I see all of that occurring as well as another rate increase. We’re gonna need something to change policy-wise and some blow-out earnings to get a continuation in the [upward] trend in stocks,” Bridges said.

What’s more, if the Fed ends up delivering more interest rate hikes after July, it could significantly undermine the U.S. economy. The Fed’s dot-plot forecast in June showed that officials expected two more rate hikes by the end of the year.

Also read: Fed’s Waller, unimpressed by inflation data, calls for two more rate hikes this year

Philip Colmar, managing partner and global strategist at MRB Partners, said while he doesn’t think the credit conditions are tight enough for a recession to hit this year, if the Fed “is forced to do more than another 25 basis point hike before it pauses or if yields were to move meaningfully higher, then maybe we’re getting that catalyst [for a recession] in place.”

Check out: Why markets are misjudging the Fed’s ability to raise rates even though inflation is slowing

Analysts at Capital Economics are even more bearish, saying the U.S. economy is already heading into a mild recession.

“While we do think AI is a transformative technology that will give rise to a much stronger stock market in 2024 and 2025 as investors seek to crystallise its benefits upfront, we are sticking to our forecast that the S&P 500 will drop back a bit in H2 2023 as the US economy flags in the meantime,” John Higgins, Capital Economics’ chief markets economist, wrote in a recent note.

What’s more, while many analysts expect inflation to continue head downward, there might be bumps in the road, with prices rising more than expected for certain months, noted AXS’s Bassuk.

“A lot of factors contribute to the CPI, the PPI. And all it takes is a slight change in any one of these months,” Bassuk said.

U.S. stocks ended the past week higher, with the Dow Jones Industrial Average
DJIA,
+0.33%
up 2.3%. The S&P 500
SPX,
-0.10%
gained 2.4% and the Nasdaq Composite
COMP,
-0.18%
finished the week 3.3% higher.

For the coming week, investors will be expecting U.S. retail sales data on Tuesday, housing starts numbers on Wednesday, and initial jobless claims data on Thursday.

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July 16, 2023