The week in review includes good news for
manufacturing, employment and also housing but very little good news on
inflation. Wages did show spurts of life in July and September but
fell back in October and have yet to provide much lift for overall
prices. In this report we'll look at consumer inflation and also
inflation at the wholesale and import levels. For policy makers,
getting inflation to move higher continues to be this year's economic
struggle.
The economy
Very
slight improvement is the message from October's consumer price report
where all key readings, except for one, did no better than meet what
were subdued expectations. The CPI managed only a 0.1 percent rise in
the month while the core rate, which excludes food and energy, came in
at a 0.2 percent gain. Stubborn areas of weakness continue to be new
vehicles, down 0.2 percent in October, and prescription drugs, also
down 0.2 percent. Deep declines in wireless services prices had been
holding down consumer prices most of the year but not the last two
months as this closely watched sub-component has now put together
back-to-back gains of 0.4 percent. Also improving in the month were
housing costs, up 0.3 percent, and medical costs, also up 0.3 percent.
And
the annual core rate is moving, however slowly, in the right direction
toward the Fed's 2 percent goal, rising 1 tenth to a slightly
better-than-expected 1.8 percent. The traction in wireless services is
helping as is perhaps, at least to a limited extent, pass-through from
the isolated glimmers of wage strength we've seen in recent employment
reports and also personal income data. Nevertheless, the overall CPI
rate, sinking 2 tenths in October. has been struggling to hold the 2.0
percent line. The overall rate was held down in October by a
post-hurricane reversal in energy prices and another flat month for
food where prices are up only 1.3 percent on the year.
Service
prices, which offer a steady barometer for inflation, have not been
adding much boost to consumer prices though there are some welcome signs
of service life at the wholesale level. The year-on-year rate for the
services component in the producer price report rose 4 tenths in
October to 2.5 percent for the best showing in 5-1/2 years. Gains here
hint at widening price traction in the wholesale economy in what
perhaps is a harbinger for price gains at the consumer level. Legal
services and health care showed special traction in the month.
Not
adding much lift to inflation are import prices where upward momentum
tied to this year's nearly double digit decline in the dollar has yet to
take hold. Year-on-year import prices fell 2 tenths in October to 2.5
percent reflecting contraction for both imported consumer goods, down
0.1 percent on the year, and motor vehicles, down 0.5 percent. The
lower dollar makes foreign goods more expensive though price
discounting by foreign sellers may be blunting the currency effect.
Export prices are likewise not showing much push, down 2 tenths in the
month to an annual 2.7 percent in a reminder that lack of inflation is
not just a U.S. issue but a global one.
Let's
end the week's run of inflation news on an up note. Inflation
expectations remain low but are improving, up 2 tenths in November to a
year-on-year 2.0 percent for the Atlanta Fed's business measure. This
is the best reading since June. The prior week's consumer sentiment
report also showed improvement with this year-ahead reading also up 2
tenths to 2.6 percent. These improvements aren't enough to lift the
outlook for inflation but they are steps in the right direction and to
at least some degree are tied to expectations for emerging strength in
wages. These expectations are tangible, at the highest level in a
decade for the consumer sentiment report.
The
no show for inflation has been this year's economic mystery as has the
lack of strength in the manufacturing component of the industrial
production report, a reading that had not been confirming the enormous
strength of regional and private surveys nor recent acceleration in
factory orders data. But this mystery has been resolved with a 1.3
percent surge in October and a 3 tenths upward revision to September
which is now at 0.4 percent. Motor vehicles are a major positive for
manufacturing production, putting together a string of sharp gains
including a 1.0 percent October increase. And recent gains in auto
sales point to extending strength for production. Hi-tech is another
positive, also showing a string of gains including 1.1 percent in the
latest month. The yearly gain for manufacturing is still moderate at
2.5 percent but all the indications from the factory sector are
pointing to acceleration going into year end, an upward pivot that
should give a special boost to the fourth-quarter economy.
Hurricane
effects have been hard to pinpoint in manufacturing but they're easy
to spot in the retail sector. Hurricanes Harvey and Irma have driven up
replacement demand for vehicles and, when pump prices spiked, briefly
lifted sales at gasoline stations. An upward revision to September puts
the monthly retail sales jump at 1.9 percent and a 2-1/2 year high.
Sales in October understandably slowed but did remain in the plus
column at 0.2 percent. Vehicle sales also remained positive in October.
Building materials are another hurricane-sensitive component and
sales, after jumping in September, fell into contraction. Looking at
less volatile components, electronics & appliance stores rose 0.7
percent in October with health & personal care stores up 0.8
percent in what are very solid results. Yet October, for retail sales,
is always anti-climatic, a month that pales in importance to the
holiday months of November and December going into which expectations
are very positive.
Full
employment is the reason to be optimistic for holiday sales and
nowhere is the strength of the labor market more evident than in jobless
data where both initital and continuing claims are at historic lows.
Initial claims are back under 250,000 after jumping toward 280,000 in
what proved, compared to past hurricanes, to be a limited combined
effect from Harvey, Irma and Maria. And continuing claims never showed
any effect at all, edging steadiy lower toward 1.850 million. The
unemployment rate for insured workers (which excludes job leavers and
re-entrants) is down 1 tenth to only 1.3 percent. A fading risk is
Puerto Rico where initial claims are still elevated but are finally
coming down.
Rounding
out the week was a very strong housing starts and permits report that
points to momentum for a new home market that has had a mostly subpar
year. Housing starts jumped 13.7 percent in October to a 1.290 million
annualized rate and rose 5.9 percent for permits to 1.297 million. All
readings show strength including single-family homes, up 5.3 percent
for starts to an 877,000 rate and up 1.9 percent for permits to 839,000
with multi-family starts at 413,000 with permits at 458,000.
Completions are a special positive in the report, up 12.6 percent
overall to 1.232 million and adding a bulk of immediate supply to a
very thin new home market. This is the highest level of completions
since February 2008. Homes under construction are also on the rise, up
0.9 percent to 1.096 million. Housing started the year off strongly and
stumbled through a weak spring season and a flat summer. Hurricane
effects in housing data have been limited though starts in the South
did swing lower in September and then swung back higher in October.
Markets: 2-year Treasury leads curve flattening
The
stock market has been taking all the year's big headlines with the
drop in the dollar also major news. Less in the press is a flattening
underway in the yield curve which is raising recession whispers among
the bears. The 2-year yield, ending the week at 1.73 percent for a
year-to-date climb of 52 basis points, has risen sharply the past
several months in a move tied to expectations for continuing Federal
Reserve rate hikes. The lack of inflation has probably limited this
move and should wage pressures clearly kick in, a quick spike over 2
percent should be no surprise. The movement for the 10-year yield has
been flat, not up, holding steadily under 2.50 percent despite the rise
in the 2-year. Low long yields betray a lack of optimism, at least
among bond holders, for long-term economic growth and may also reflect
demand for safety This is the sobering side of the financial markets
compared to the stampede underway in stocks.
Markets at a Glance | Year-End | Week Ended | Week Ended | Year-To-Date | Weekly |
2016 | 10-Nov-17 | 17-Nov-17 | Change | Change | |
DJIA | 19,762.60 | 23,422.21 | 23,358.24 | 18.2% | -0.3% |
S&P 500 | 2,238.83 | 2,582.30 | 2,578.85 | 15.2% | -0.1% |
Nasdaq Composite | 5,383.12 | 6,750.94 | 6,782.79 | 26.0% | 0.5% |
Crude Oil, WTI ($/barrel) | $53.71 | $56.75 | $56.58 | 5.3% | -0.3% |
Gold (COMEX) ($/ounce) | $1,152.50 | $1,284.30 | $1,294.10 | 12.3% | 0.8% |
Fed Funds Target | 0.50 to 0.75% | 1.00 to 1.25% | 1.00 to 1.25% | 50 bp | 0 bp |
2-Year Treasury Yield | 1.21% | 1.64% | 1.73% | 52 bp | 9 bp |
10-Year Treasury Yield | 2.45% | 2.40% | 2.35% | –10 bp | –5 bp |
Dollar Index | 102.26 | 95.01 | 93.67 | -8.4% | 0.6% |
The bottom line
A steady and moderate rate of inflation gives a
boost to total demand as rising prices pull forward spending plans (buy
now before prices go up further). A moderate rate of inflation also
widens the policy scope for the Federal Reserve which has more leeway
to raise interest rates without risking a downturn in prices. Yes,
there have been glimmers of wage pressures in recent months but this
week's inflation readings clearly re-establish the expansion's anomaly
-- that full employment is not resulting in wage-push inflation ... at
least yet.
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