December 2022 CPI Print

18 Jan December 2022 CPI Print

Market Indexes:

We entered the week patiently awaiting the December CPI print which consensus had estimated at +6.5% year-over-year. Indexes rallied on the hopes of a deflationary number which would support the Fed to take the stance to pause on hiking rates. Friday kicked off Q4 earnings season with the banks leading the way. Fourth quarter earnings will be decent, but their guidance is where we should get a clearer picture of what is to come. The Russell 2000 small-caps and the Nasdaq 100, indexes comprised mainly of smaller, less profitable companies led the way for the week as the CPI number was in-line with consensus estimates (+6.5%) which gave hope to investors that we may only see one to two more rate hikes from the Fed.

Macro Data for the Week:

1. CRB Commodities Index was up +4.2%
2. Oil (WTI) bounced higher +8.3%
3. Copper rallied +7.8%
4. Natural Gas crashed another -7.8% for a total loss of -49.2% in the last MONTH
5. Coffee continued down another -4.2%, crashing -22.6% in the last 3 months
6. Lumber squeezed higher +17.2% last week for a return of -14.5% in the last 3 months
7. Gold was up another +2.8% last week to +5.3% in the last month
8. Silver was up another +1.6% last week to +27.4% in the last 3 months

Economic Data:

• The Manehim Used Car Index increased 0.8% M/M in December but was down -14.9% Y/Y – the largest decline in the history of the time series

• U.S. Redbook Weekly Retails Sales came to a screeching halt to +5.7% Y/Y for the week ending Jan 7^th

  • This compares to +10.2% Y/Y in the last week of 2022 and is the lowest level in more than a year

• The NFIB Small Business Index continued to make new lows with December coming in at 89.8, versus 91.9 in November

  • This is the 12^th consecutive month below the 49-year average of 98.
  • Owners expecting better business conditions over the next six months worsened by 8 points from November to a net negative -51%
    • The only other time this report has been lower in the last 40 years was during the depths of the Great Financials Crisis and every other time it has hit these levels, it was coincident with a recession.

• According to Bankrate, as of December, around 46% of credit cardholders are continuing to hold a balance each month. This is up 7% from a year ago
  • This obviously speaks to the more challenging economic environment for the average consumer

• Consensus estimates got one right – with Headline CPI decelerating to +6.5% Y/Y and Core CPI coming in at +5.7%

  • Of the major components that make up CPI, only gasoline (down -1.5% Y/Y) and used vehicles were down (-8% Y/Y)

    • Fuel Oil had a -16.6% decline M/M
  • The categories that are still seeing double digit Y/Y inflation include: food at home +10.4%, food away from home +11.8%, fuel oil +41.5%, electricity +14.3%, utility gas service +19.3% and transportation servies +14.6%
  • At roughly 1/3 of CPI, Shelter accelerating to +7.5% Y/Y was the biggest positive net contributor
  • All the while, the headline and core numbers are decelerating – this report is unlikely to alter the current fed path of continued rate hikes

• Weekly jobless claims improved to +205k from +206k
  • Generally speaking, the labor market remains strong…..
    • with the labor market remaining historically tight and inflation running at >3x above target, there isn’t much to change the Fed’s near-term policy calculus.

• We got a decent uptick in January’s Michigan Consumer Sentiment (a survey of Consumer Confidence in the US) at 64.6, which was up +8.2% from December’s 59.7

  • The biggest jump came in Current conditions which came in at 69.9, versus 59.4 in December -> this was up 15.5% M/M

  • 5-year inflation expectations ticked up to 3.0% from 2.9%, while 1-year inflation expectations dropped to 4.0% from 4.4%
  • This general rate of change improvement is overall positive, but it is also important to note that Michigan Consumer Sentiment remains near the lowest levels since the Great Financial Crisis and is below pandemic levels

Company Data:

We are at the beginning of earnings season in which we’ll start to get an idea of what the coming economic slowdown may entail. Earnings kicked off on Friday with four of the major banks reporting: Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC). Consensus estimates were beaten,  but a couple takeaways from underneath the numbers is the bank CEO’s are seeing a mild recession occurring in the next 6-9 months and that the Fed may need to hike interest rates above 5% (we’re currently at 4.25%). JPMorgan and Bank of America are also posting provisions for credit losses in the amount of $2.3B (JPM) and $1.1B (BAC), which coincides with the increase in consumers keeping a balance on their credit cards month-to-month.

Earnings may be the catalyst that really jump starts the third phase of this bear market. In that case, you’ll begin to see the flight to quality in which fixed income, gold and the defensive sectors (i.e. consumer staples, healthcare, utilities) begin to outperform the overall market as they have historically.