14 Sep IS THE RISE IN THE CPI A ONE-OFF EVENT?
Core consumer prices rose considerably more than expected in August, a rise principally due to a 5.4% surge in used car prices. Such an increase is unusual this early in the recovery cycle, a rise that reflects problems with dwindling supply. As noted several times, goods production is continuing to lag behind the rebound in spending, problems that I think are only going to become more acute over the next few months given the disruptions in the supply chain.
The data clearly indicates durable good prices are rising faster than expected, as evidenced in the CPI by the greatest price gain in household furnishings since 1991.
In my view, perhaps the greatest surprise in the CPI data was the anemic reading for Owners Equivalent Rent (OER), or the how much someone thinks they can rent their house if it was indeed rental. OER is about 32% of the CPI, dropped precipitously in 2008-09 and has not rebounded. Historically OER is tied to home prices.
As discussed, home prices are now rising in the secondary and tertiary cities, an increase that was anemic since 2010. Is OER about to rebound? The answer to this question is pivotal in determining potential inflationary pressures.
This is FOMC meeting week. Will the post meeting statement mention the unexpected pressure on prices, an environment few had anticipated given the complete collapse of the economy?
The annual inflation rates are still lower than the Fed’s speed limit but this is the result of the sharp drop off in prices in the early stages of the pandemic, an event that is perhaps unlikely to be repeated.
Radically changing topics, it is well documented that one of the hallmarks of the five-month equity rally is the lack of breadth. Stock index gains were led by a fairly narrow cohort of names. Bloomberg opines this sort of price action is characteristic of major market peak utilizing the 2000 dot com bubble as reference.
Bloomberg stated there were four occasions between August 18 and August 26 where the S & P 500 rallied but the number of losing stocks outpaced the winners by at least 100. Bloomberg writes this matches the total for the entirety of 2019 and indeed exceeds the count for most years since the end of the dot-com bubble.
Many are perplexed about the current 11% selloff since September 2 given the lack of an accepted catalyst. I will continue to argue it is the result of ambiguous Fed policy, a policy which will tolerate an above average inflation rate for a period of time. The issue at hand that neither a rate nor period has been identified.
In my view there is a correlation back to the pre-Labor Day dovish comments made by FRB Chair Powell, comments that were first viewed as bullish for the NASDAQ 100. As indicated above, these open-ended inflation statements might be now viewed as bearish for interest rates and inflation are a primary determinate of equity valuations.
Moreover, and quoting First Trust because of COVID the NASDAQ 100—or should I say the NASDAQ 5—has already experienced six years of revenue growth in six months and the handful of equities are priced that such growth will continue into eternity and that interest rates/inflation will remain benign. Obviously, this is unrealistic and perhaps the NASDAQ 100 is beginning to acknowledge this environment.
What will happen this week? As noted there is a Fed meeting. Economic statistics released include Industrial Production and Capacity Utilization, several regional manufacturing indices, retail sales and various housing statistics. How will all be interpreted?
Last night the foreign markets were mixed. London was down 0.21%, Paris up 0.11% and Frankfurt down 0.13%. China was up 0.57%, Japan up 0.65% and Hang Sang up 0.56%.
The Dow should open nominally higher amid a flurry of deal activity and signs of progress toward a vaccine. The 10-year is off 3/32 to yield 0.68%.