The data was a bit warm on Thursday, as it had been on Wednesday. The fact is that after seeing August numbers for consumer level prices, for producer level prices and for retail sales, I can't help but think that while the FOMC will hold their fire this coming Wednesday, that they will have to send a hawkish message.
We already knew that headline consumer prices for August had been hot, We expected core consumer price gains to remain cooler, and they were. That said, they were just a touch warmer than expected.
On Thursday morning, August PPI hit the tape. Here too, the headline rate was hot to the touch, in fact at monthly growth of 0.7%, this growth was well more than the 0.4% print that economists were looking for. Not helping matters much was the revision to July's headline monthly growth from 0.3% to 0.4%. On a month over month basis, Core PPI remained subdued, showing growth of 0.2%, which was down from an also upwardly revised print of 0.4% for July.
On a year over year basis, headline PPI printed at 1.6%, doubling up the pace from July's 0.8% and well above the 1.2% growth expected by economists. Core PPI crossed at growth of 2.2%, in line with July and in line with expectations. Though rapidly rising energy costs have greatly impacted growth across both consumer and producer level prices, the fact is that core prices on both levels are not running out of control and on a year over year basis, continue to move toward the FOMC's 2% target.
While headline level growth in pricing hurts everyone, markets have looked past this, as energy was responsible for 60% of the headline move at the producer level and energy and shelter combined continue to impact consumer prices. We know that prices for shelter are both dated and incorrect, skewing headline consumer prices to the high side. That unwelcome bias is likely to flip in coming months, as the skew will suppress, not inflate consumer level headline inflation.
As I Mentioned Above...
Even with the obvious progress made in subduing core inflation at both levels (consumer + producer), with headline inflation running on the hot side, even if the FOMC "skips" making any changes to monetary policy at their meeting next week, my feeling is that if not in the official statement, at least in the press conference or in the economic projections/dot plot, the FOMC will have to altar market expectations for the November 1st decision in order to restore flexibility/optionality in decision making while not surprising markets should "they" have to act.
Hot, Hot, Hot
But no, not really. The Census Bureau posted August Retail Sales as well on Thursday. The final score... month over month growth of 0.6% both at the headline and ex-autos. This was a bit warmer than economists had expected on both levels. Now, go a little further... August Retail Sales ex-gasoline, was up just 0.2%. The good people of the United States spent a bit more at the retail level in August, but this spending was not discretionary in nature.
Did Joe and Jane Citizen spend money on what they like in August? The entry for Sporting Goods, Hobbies, Music & Books (The Fun Index) shows a month over month decrease of 1.6%. Did they fix up their homes? Furniture sales were -1.0%, while building materials saw growth of just 0.1%. Nonstore retailers (the internet) printed flat (0.0%) from July.
Where did our neighbors spend their hard earned dough? At their local gas stations. Sales at gasoline stations grew 5.2% month over month, absolutely dwarfing every other category. Other than gasoline, only clothing (+0.9%) and electronics (+0.7%) landed above the headline rate in August, both likely a function of "back to school" purchasing.
Still...
Both equities and commodities ran hot on Thursday. The S&P 500 gained 0.84% for the day, as the Nasdaq Composite ran 0.81%. Smaller cap equities finally had their day as the S&P 400 soared 1.23% and the Russell 2000 marched 1.4% higher. Front month WTI Crude futures raced above $90 per barrel as Brent Crude peaked above $94.
Even in the wake of an ECB rate hike that took rates to all-time highs in the Eurozone. The ECB had messaged this hike quite dovishly, implying that rates are nearing the end of their upward trajectory and now it becomes more about duration. Where have we heard that before? This dovish messaging put the whammy to the euro and forced the US Dollar Index higher, making surging prices for crude that much more stunning.
Why Were Risk Assets Stronger?
Does it really make sense with a stronger US Dollar? Does it really make sense as the yield for the US Ten Year Note moved up to 4.29% and the yield for the US Two Year Note moved back up to 5.02% on Thursday? Is it all about the potential for a soft landing? For now, I guess it is. Equities may be down for both August and September to date, but really have not come in all that far from their collective peaks.
On Thursday, the Atlanta Fed revised their GDPNow model for the third quarter down to growth of 4.9% q/q SAAR, from 5.6% as inputs for real personal consumption expenditures, real gross private investment and real government spending were all tweaked to the downside. The St. Louis Fed did not revise their Real GDP Nowcast model for the third quarter this week, but did take that model up to -0.25% last Friday from -0.7%.
Yes, there is still a chasm between the two models, but I would expect them to keep moving toward each other. I don't think very many credible economists think that Q3 GDP is actually running at growth of almost 5%, nor do they see contraction for the current quarter.
So, why?... We ask again... Why were risk assets stronger on Thursday? It was about the Fed Funds Futures markets, my friends. That market is still pricing in a 97% probability for no changes made to interest rates next Wednesday. This has not changed and the FOMC will not go there. The likelihood of a rate hike at the following meeting, on November 1st dropped on Thursday from 41% to 32%, and this set off the algos that determine price discovery, in this less than golden age for price discovery.
Now, overnight, these markets have repriced the potential for a rate hike on that day, back to 42%, but equity index futures are trading higher. As these markets have repriced that probability, the US Ten year Note is now paying 4.32% as the Two Year gives up 5.04%.
Does this mean that US equities will have trouble holding on to the gains made overnight? I would think that it would be difficult to trust these prices. That said, short-term pricing is capable of anything and this is a "Triple Witching" expiration event, meaning that trading volume will be elevated on Friday and the intersection of demand and supply over time will be impure as that time component becomes for now far less variable.
Count On...
Powell signaling the potential for future rate hikes next Wednesday in order to keep markets from assuming that the committee is done for the cycle. Higher prices for gasoline and fuel oil are not part of core inflation. That said, they do impact margin across most businesses and with a lag, will be an inflationary force that could slow or even reverse the progress made to this point at the core. Still too far from the target to be anything less than careful.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (Sept): Expecting -10, Last -19.
08:30 - Import Prices (Aug): Expecting 0.3% m/m, Last 0.4% m/m.
08:30 - Export Prices (Aug): Expecting 0.6% m/m, Last 0.7% m/m.
09:15 - Industrial Production (Aug): Expecting 0.1% m/m, Last 1.0% m/m.
09:15 - Capacity Utilization (Aug): Expecting 79.3%, Last 79.3%.
10:00 - U of M Consumer Sentiment (Sep-Adv): Expecting 69.2, Last 69.5
10:00 - U of M Consumer 1 Yr Inflation Expectations (Sep-Adv): Expecting 3.5%, Last 3.5%.
10:00 - U of M Consumer 5 Yr Inflation Expectations (Sep-Adv): Expecting 3.0%, Last 3.0%..
13:00 - Baker Hughes Total Rig Count (Weekly): Last 632.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 513.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled.
