Signs of inflation are rising unabated as evidenced by the the consumer and producer price indexes released this week (more below). Prices are rising 6-8% depending on which measure you analyze and most economists think this wave of higher prices will continue into the middle of next year which means this trend may get worse but it stabilizes. The path to normalcy will come in steps as we first need to see the 10+mm job openings fall significantly and then the supply chains can begin to find equilibrium. It seems as though this first step just started this month so every payroll number we see now should provide a clearer read on how long it will take to get companies firing on all pistons. The pandemic assistance expired in September so hopefully we see some strong payroll numbers for November and December.
If the job gains continue to be very strong, the Fed is likely to pull forward interest rate hikes and further reduce expanding its balance sheet. The next meeting is in January but with inflation running this high they could make a change in the coming weeks. So, the market will have to weigh the potential for a hawkish Fed which we have not seen since the early 2000s and the growth outlook for the economy. Once it all comes together, we should have clarity on what a post-pandemic normalcy looks like.
In the present, we can look at the stock and bond markets for signs of what the market is signaling. To the right, is a chart of the yield on a 10Yr Treasury bond which has largely been rangebound this year but you can see there have been wide swings. The large movements are a visualization of the bond market wrestling with growth, Fed policy and inflation.
Too much inflation can create a stagnant economy and the Fed has been slow to react so this range could easily be broken to the upside if the Fed pivots to a more aggressive hawkish policy. A break of 1.764% in the chart could bring an upside yield target as high as 2.159% – stay tuned.
The S&P looks to have finished a week-long pullback and is now poised to make new highs in the coming sessions. For now, the Fed is still expanding their balance sheet and earnings reports over the last few weeks show signs of improvement which is a good set-up for Q4 and the holiday shopping season.
Chart of the Week!
Economic & Central Banking Snippets
- Initial jobless claims are improving and fell to a post pandemic low of 267K this week.
- The September job openings data (JOLTS) showed 10.44mm jobs available. There are plenty of jobs to choose from as evidenced by the quit rate which rose to a new high of 3%.
- China said its exports rose 27.1% in October compared to last year as shipments of household appliances, lightings, clothing, plastics, furniture and electrical products are surging.
- U.S. inflation hit a three-decade high in October, delivering widespread and sizable price increases to households for everything from groceries to cars due to persistent supply shortages and strong consumer demand. The Labor Department said the consumer-price index—which measures what consumers pay for goods and services—increased in October by 6.2% from a year ago. That was the fastest 12-month pace since 1990 and the fifth straight month of inflation above 5%. The core price index, which excludes the often-volatile categories of food and energy, climbed 4.6% in October from a year earlier, the largest increase since 1991. (WSJ)
- The October Producer Price Index rose 0.6% and is now 8.6% higher compared to last year. Over the past 6 months, this PPI is running at an annualized rate of 13.4%.
- The UoM consumer confidence index in November fell again and is down to 66.8 from 71.7 in October and below the estimate of 72.5. It’s also at the weakest level since November 2011. (Boockvar)
- Americans are cutting back on steak as rising grocery prices squeeze spending. Supermarkets say shoppers are buying more store-brand meat products and trading down from beef to less-expensive alternatives such as chicken or pork, after prices for products such as rib-eye climbed about 40% from a year ago, according to research firm IRI. Food makers ranging from Mondelez International to Kraft Heinz have been raising prices in recent months to offset escalating costs in labor, raw materials and transportation. (WSJ)
- Sony reportedly cut its Playstation 5 production outlook due to the computer chip shortage. The company cut the number of PS5 units assembled for the fiscal year to about 15 million from its previous target of 16 million units.
- Zillow is selling 2,000 homes as it exits its money losing house-flipping business. The digital real estate company plans to sell about 9,800 homes, plus over 8,000 it was in the process of buying. The company expect to lose as much as 7% on the sales.
- Facebook has allowed plagiarized and recycled content to flourish on its platform despite having policies against it, its researchers warned in internal memos. They also wrote that Facebook has been slow to crack down on copyright infringement for fear of opening itself to legal liability.
- Virgin Galactic says it is selling its $450,000 space-tourism seats faster than expected. The company also posted a $48 million loss in the third quarter but said it was on track to launch its commercial private-astronaut service in late 2022.
That is all for now and thank you for being a subscriber!
President – Kisco Capital