Category: Inflation (Page 1 of 2)

WCM Chart for June 10, 2022

June 10, 2022 / Mark Sloss

We have a new CPI print today which sent markets into a week-ending nosedive. 8.6% for May puts inflation for consumers near where it was in 1981 before the Volcker Fed cranked rates to an eye-watering 17+%. For as painful as rate increases are right now we have light years to travel before anything even remotely resembling the 80’s, nostalgia for Soviet conflict and striped shirts notwithstanding. This chart from the US Bureau of Labor Statistics compares CPI in total against two of the three components that seem ripe for a nasty mean reversion, the third being energy which we covered in the last chart and commentary. Shelter has broken out, rising to 5.5% which exceeds the lusty moments before the housing market imploded with the Financial Crisis. We have been pointing out repeatedly that there are two major moving parts driving increases in shelter — the speculative fervor over single family housing fueled by low rates, urban migration and non-human (e.g. investment fund) buyers, and the inevitable upward correction in rentals after ending pandemic moratoria on rent, rent increases and evictions. It seems likely that the single family bubble is nearing its bursting point especially as the Fed acts, but rent will continue to grind higher as the economy digests the rental disruptions of the pandemic.

New vehicles on the other hand appear perched on the precipice. Supply chain disruptions, particularly for microchips, have tightened supply and handed dealers tremendous pricing power even while makers have largely kept their price increases steady (but have been able to slow or suspend aggressive promotional programs). The rate of increase peaked at 13.2% in April and posted 12.6% for May. Other than playing demand catch-up after the market for new vehicles crashed in the depths of the Financial Crisis, the 12-month change over the last 20 years has stayed in a band of +/- 2%, and most of the time close to zero. There will come a moment when makers catch up and inventory will be abundant (and auto loan and lease rates will be higher), and the market may well punish the dealers for exploiting the situation, potentially severely. [Chart courtesy US BLS, CPI All Items, Shelter and New Vehicles, May 2002 to May 2022]

WCM Chart for June 2, 2022

June 2, 2022 / Mark Sloss

What’s up with gas? Inflation is everywhere, but it is hard to normalize when we are having the breakfast table conversations about how much prices have climbed. Our shopping carts are different from each other’s and aren’t always consistent from one trip to the next, but we get a general sense that the final tally is higher but the receipt isn’t any longer. One thing most of us, with the exception of certain urban dwellers and the small population of EV drivers, do have in common though is the price of gas. There is some geographic dispersion because of cost of delivery and local/state taxes, but we all buy the same three or four grades of gasoline, measure it in gallons, pay for it in dollars, and unless we change vehicles from one fill to the next, consume it at roughly the same rate per mile driven. This chart won’t reveal the mysteries of why prices are up, but there are a few interesting takeaways that show that there aren’t likely any easy answers. Maybe the most notable observation is that gasoline has gotten more expensive than the prior all-time peak in 2008 (about 11% higher right now). What isn’t on the graph is that oil (WTI Cushing) is about 21% cheaper than it was during the ’08 bubble.

Back to the chart, we can see that the spread between premium and regular gas has been steadily grinding higher for years, with few interruptions in the relationship outside of brief reactions to the Tech Bubble, 9/11, the Financial Crisis, etc. For those old enough to remember, it was bankable that mid-grade was 10 cents more than regular, and premium was ten cents more than that. Now that premium/regular spread hovers between 65 and 70 cents, today and two years ago when everyone was hunkered down at home. These figures would indicate that the petro industry still enjoys tremendous pricing power. When thinking about inflation it is important to consider what the drivers are and who gets hurt, but also who benefits. It was almost exactly 11 years ago when WTI was the same price it is today ($112/bbl). Regular was $3.91, and Premium was $4.15. Today at $112/bbl, Regular is $4.44 and Premium $5.12. [chart © WCM 2022, national data from US Energy Information Administration (EIA)]

WCM Chart of the Week for February 22, 2022

February 22, 2022 / Mark Sloss

This week we get to take a break from talking about inflation to talk about… inflation. Although, in this case, what effects Russia’s moves on Ukraine might have. Russia’s economy is the 11^th largest in the world as measured by nominal GDP, which seems significant until we realize it is smaller than Canada’s and 1/10 the size of China’s. Ukraine is 55^th. Where Russia is most consequential in terms of their economy on the world stage is energy – petroleum and natural gas. Europe is a net importer of natural gas, a significant portion but not all of which comes from Russia. They have been increasing LNG imports from the US and Qatar, but that is mostly offset by a steady decline in domestic production. Natural gas is not the only major piece of the European energy portfolio, but it is material. Prices have already been high, and the decision to delay certifying Nord Stream 2 in response to Russian aggression means little relief is on the way. Globally, “OPEC+” has been falling short of targets to increase production post-COVID wind-down and the Ukraine conflict will not help climbing prices for oil either. The West is putting the framework for a new sanctions regime in place but that will mostly be about deciding who takes what share of the economic pain to box out Russia. Rising oil prices have similar effects on the economy as rising interest rates, so we are interested to see how the Fed digests the changing macroeconomic environment and the need to be aggressive on policy rates later in the year. Looking longer term, assuming the priority does not become preventing total war as Putin tries to reassert the borders of the former Soviet Union, we see this moment as a tipping point for Europe to accelerate their transition to a low-carbon future because it is an undeniable security imperative for the EU member states. [Sources: US Energy Information Administration https://www.eia.gov/todayinenergy/detail.php?id=51258 and McWilliams, B., G. Sgaravatti, G. Zachmann (2021) ‘European natural gas imports’, Bruegel Datasets, first published 29 October, available at https://www.bruegel.org/publications/datasets/european-natural-gas-imports/]

WCM Chart of the Week for February 14, 2022

February 14, 2022 / Doug Wilde

The February 10^th inflation report for January was higher than expected. Key stock market gauges declined and were particularly weak toward the day’s close. Notably, all major inflation segments continue to rise — Services, Goods, and Food — with the exception of Energy, but oil and gas prices are up so far in February.

The benchmark 10Y UST yield rose above 2.0%, which has been an adverse trigger level for stocks in the recent past. The real yield on US Treasuries is more than -5%, a historic anomaly. Meanwhile, the US Federal Reserve will begin reducing its balance sheet in March. It currently stands at $8.9T, increasing over $5T since the pre-pandemic low of $3.75T, about a 134% increase since the Fall of 2019. Furthermore, the Fed is set to increase policy rates several times this year, perhaps as many as six times.

It is difficult to envision the Fed backing away from its intent to restrain monetary liquidity, especially considering that inflation trends appear to be gaining momentum. Consumer prices initially began to accelerate in March of last year, rising from 2% to about 4.5%, and had another upswing last Fall through the latest report. Headline inflation, now stands at 7.5%, a 40-year high level that very few, if any, at the Fed have had to deal with in a professional capacity.

Policy conditions are visibly changing, yet the equity market over the past couple of weeks attempted a rally from late January’s bottoms. The recent bid on US stocks could be value seekers, although the market is still fully valued if not overvalued considering a higher rate environment. It could be a response to more and more US states announcing a wind-down of COVID-era policies, or simply that capital needs a place to land and US stocks are more attractive than international equity markets or global bonds.

Absent a meaningful catalyst (we are still looking) we do not anticipate a sustained rally and expect the general trend of US equity prices to be range bound to downward. Investors must come to grips with a tighter monetary policy environment, higher interest rates and inflation. We note that other major central banks, notably the BOE, have increased policy rates, and the ECB is publicly debating the need to address inflationary trends on the European continent. And, many emerging market CBs have already embarked on a tightening cycle. [chart data from US BLS © 2022]

WCM Chart of the Week for January 18, 2022

January 19, 2022 / Doug Wilde

Evidence of consumer price pressure abound ranging from rising food to energy to consumer staples. Overall, US consumer prices rose over 7%, a growth rate the US has not faced since the 1980s. There are several well-documented reasons why prices have risen so rapidly, including the pandemic-forced economic shutdowns and supply chain disruptions of the past two years. How long will inflationary conditions persist, and will it become structural? Prior to the pandemic, the US was in a benign inflationary environment. Then, disinflation resulting from government-mandated shutdowns across the country suppressed prices. The annual change in US CPI averaged 1.4% from April 2020 to April 2021. The current CPI reading on December 31, 2021 is based off pandemic nadir levels, and the base effect may lead to higher “headline” inflation in the months ahead. However, if annual gains in consumer prices fail to keep pace with the high inflation trends of 2021 [which include 2020’s low base effect], forward looking inflation could moderate. Capital markets will likely remain on edge, and the US Federal Reserve will be challenged balancing appropriate monetary policy against inflationary trends that may prove temporary, but also may not. (chart © 2022 Wilde Capital Management, data from Bureau of Labor Statistics)

WCM Charting the Way to 2022

December 20, 2021 / Doug Wilde

Since March 2020 the US federal government has injected an enormous amount of stimulus into the economy. There have been seven stimulus and reliefpackages ranging from the original Coronavirus Preparedness and Response Supplemental Appropriations Act to The Families First Act to the CARES Act to The Consolidated Appropriations Act and the most recent American Rescue Plan. Even without Build Back Better, this fiscal expenditure legislation amounts to nearly $15 trillion over the life of the legislation with more on the way with the new infrastructure plan. The Federal Reserve has also injected a tremendous amount of liquidity in the system by expanding its balance sheet by $4.5 trillion since March 2020 while maintaining a benign interest rate and regulatory environment. The combined government stimulus over the past twenty months amounts to over 83% of current US GDP (as of end Q3 2021). Compared to the recessionary bottom in 2020, the same stimulus is nearly 100%. By contrast, the 2009 TARP expenditure amounted to about 5% of US GDP at the time. We do not have to look far to see from where upward pressure on asset prices and inflation comes.

WCM Chart of the Week for November 29, 2021

November 30, 2021 / Doug Wilde

Consumer prices in the US are observably on the rise across a broad array of products and services. The Federal Reserve’s preferred inflation gauge, the PCE, last week registered a 4.1% annual increase, well above the Fed’s target. The causes of higher prices are well known, ranging from supply chain bottlenecks to raw material scarcity to higher energy costs to a shortage of transportation personnel. Adding to the inflationary mix is strength in the US dollar which has recovered over 6% according to the Bloomberg US Dollar index, comprised of a basket of major currencies. The dollar has recovered to pre-pandemic levels and could strengthen further as the Fed begins to reign in liquidity towards the end of 2022 if not earlier. Continued dollar strength could provide some inflationary relief in the form of lower import prices and could be justified given strong US economic growth and the interest rate differential between the US bonds and the rest of the world. As this week’s chart illustrates though, currency movements are notoriously difficult to predict. [chart courtesy Bloomberg LP © 2021]

A WCM Seasonal Chart for October 15, 2021

October 16, 2021 / Doug Wilde

The total return of the S&P 500 tends to be positive in the final quarter of the year, averaging nearly 5.2% since Q4 of 1989. The worst final quarters of the year occurred during the technology bubble, the financial crisis and most recently 2018. Let’s look at today’s headwinds. Inflation, which is near universal across the economy, works like a broad tax on everyone. Price increases in many segments of the economy are outpacing wage growth, and that is impacting consumption which makes up about 70% of GDP. Supply chain issues will likely persist into next year and perhaps beyond, continuing to pressure prices. Next, the Fed. Their actions or inactions will be scrutinized and probably criticized for years. Tapering will start soon, but liquidity and monetary support will still be positive, just less so. It is doubtful, even with so many Fed seats open, that President Biden will appoint hawks in this environment, so we expect that will keep the Fed accommodative for longer and rate hikes pushed out further. In the Fall of 2018, our last “bad” Q4, the Fed was in balance sheet reduction mode and in the midst of raising policy rates when Powell remarked that they were “not near interest rate neutrality” causing a rout in equities worldwide. Three years and a more seasoned Powell later means we do not expect the same rhetorical mistake will be repeated. We also need to watch the ECB. Inflation could be here for longer and that would fuel ongoing volatility. Bad for bonds but not necessarily stocks. For us, even with additional volatility, equities remain the default asset class at least over the next few quarters. [chart WCM © 2021, data from Bloomberg LP]

WCM Chart of the Week for October 8, 2021

October 8, 2021 / Doug Wilde

The US Federal Reserve balance sheet currently stands at $8.51 trillion, doubling in size since the pandemic began. The Fed has recently suggested that it may begin to taper the current $120 billion monthly purchases of Treasuries and mortgages as soon as the November 2^nd-3^rd meeting. Progress in employment is a potential trigger cited by Chairman Powell for tapering, even considering September’s lackluster jobs report. It is important to note that the Fed will likely continue to expand the balance sheet. What they are talking about is lowering the amounts of new monthly purchases over time, so expanding less fast. Still, a reduction in monetary liquidity. Of bigger concern are the inflationary trends that may force the Fed to introduce less accommodative or even restrictive monetary policy. Prices seem to be increasing nearly everywhere, from energy to food to wages, and the Fed’s preferred inflation gauge, the PCE Deflator, is up 4.3% year-over-year as of August. A combination of higher policy rates and lower liquidity would pose a serious challenge for capital markets. [chart courtesy Bloomberg LP © 2021]

WCM Chart of the Week for September 13, 2021

September 13, 2021 / Doug Wilde

We are back, but maybe China is not. China’s purchasing manager index for exports has signaled a decline since April’s reading of 50.4 (a reading below 50 suggests a deterioration in conditions). This data series is interesting in the current inflation debate because it is a barometer of global trade and aggregate demand. If demand is weakening while headline consumer and industrial prices remain elevated, that suggests that the supply/demand balance is being dominated by supply-related issues. This could make sense given the numerous instances of supply chain bottlenecks, transportation issues, etc. that we have discussed and that continue to make headlines. Consequence for the markets — this may be another reason why the Fed may be dovish for longer. [chart courtesy Bloomberg LP (c) 2021]