Tag: CPI

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Market In A Snap! October 18th-October 22nd,2021

By Jeff Anderseron, CFA

This Week: The S&P 500 closed the week at 4,544.90, and the Dow climbed to all-time highs.  The S&P 500 is up 1.64% this week and 21% year-to-date.  The US 10 Yr Treasury Bond yield drifted higher, settling in at 1.64%.  Crude Oil continued its strength, closing at $84.18 per barrel, notching gains of nearly 2% on the week and gaining 74% year-to-date reminding us that near-term inflation is real.

This Issue:

  • Market Update
  • Fed Chairman Jerome Powell Says Supply-Side Constraints Are Creating Inflation Risk
  • The Chips That Make The World Go Round
  • There’s Money in The Banana Stand

Fed Chairman Jerome Powell Says Supply-Side Constraints Are Creating More Inflation Risk:

On Friday, Fed Governor Jay Powell stated that the “Supply-side constraints have gotten worse”.  The Fed had previously predicted that much of these constraints to have lessened by year-end.  Mr. Powell went on to add that the central bank will “need to make sure that our policy is positioned to stay flexible in the months ahead”.  We are witnessing the negative effects of shutting down a global economy.  Is the Fed moving away from its “inflation-is-transitory” stance?  Despite these constraints, the breakeven inflation rate going out 5 years is around 2.75% vs 2.5% for the 10-year rate, both well below the current inflation run rate.  Bond yields remain low and the velocity of money (which is a key gauge of inflation – higher velocity implies higher inflation) is yet to move higher, implying that long-term inflation is still not a foregone conclusion.  Looking at the chart from the St Louis Federal Reserve, despite the amount of liquidity provided by the Fed, velocity remains anemic.  Money has not flowed out into the real economy to support the belief that inflation is purely a monetary phenomenon.  Arguments can be made about the trajectory of inflation, but what we can be certain of is that money in the future will be worth less than it is worth today.

The Chips that make the world Go Round:

Taiwan has 63% market share of the global semiconductor industry.  Semiconductors are the new oil of the 21st century, a vital component in almost every product.  Martijn Rasser, a senior fellow at the Center for a New American Security was quoted saying, “Whoever controls the design and production of these microchips, they will set the course for the 21st century.”  Approximately 90% of the semiconductors used by US technology companies rely on Taiwanese manufacturing.   This concentration is likely to issue #1 when it comes to American and Chinese relations.

There’s Money in the Banana Stand:

There is no argument that the Pandemic has widened the wealth gap.  The stimulus provided by Governments around the world was necessary for many, and a boon for others.  American and European households are sitting on record amounts of savings.  Some of it will be used as security for future uncertainties, but much of it is just waiting to be spent.  This cash hoard is likely one reason by supply constraints is an issue as there is a lot of deferred consumption.

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Market In A Snap! September 28th-October 1st, 2021

By Jeff Anderson, CFA

US equities were lower in September, with the S&P 500 logging its first decline since January and its worst month since September 2020.  The S&P 500 declined 4.76% for the month.  The yield on the US Treasury 10-year note climbed 19.8% to 1.487% and is back to where it was just prior to the onset of the Global pandemic in early 2020.  Oil rallied 7.65% for the month to close at $75.12 per barrel. Bonds can perform well in a rising interest rate, low growth environment if the bond portfolio is laddered – portfolios of bonds with a fixed duration target.  Most bond mutual funds and ETFs construct their portfolios to maintain a fairly constant average duration which is accomplished by constantly reinvesting in longer-dated bonds from the proceeds of matured bonds.  The higher yields of those newly purchased bonds eventually will make up for the capital losses incurred by previously owned bonds.

Employment Data Delayed (no need to be alarmed)

The US monthly employment report typically comes out the first Friday of the month.  For October, it won’t be released until the 8th (next Friday).  Consensus for non-farm payrolls is looking for growth of 513,000 in September, while the unemployment rate will drop to 5.0% from 5.2%.  First Trust’s economists believe that the consensus may be overlooking the fact that the national system of overly generous unemployment benefits due to COVID-19 ran out on Labor Day weekend.  “Many unemployed who had previously been getting payments in excess of what they could have earned while working are no longer able to do so”.   Couple that with kids going back to in-school learning, the motivation for people to get back to work are the strongest in months.  With employers struggling to hire employees and/or pay more in wages, this may come as a nice surprise.

Prices to The Moon

Much of the increase in rents is attributable to the pandemic and the rental vacancy spike and eviction moratorium enacted by the federal government.  Regardless, the Dallas Federal Reserve predicts that the official rent index from the Bureau of Labor Statistics will increase 6.9% by year-end 20-23, which would be the highest in more than 30 years.  Despite the ongoing debate surrounding an increase in inflation being permanent or transitory, certain sectors of the economy continue to eat into the wallets of the US household.

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Market In A Snap! September 20th – September 24th, 2021

By Jeff Anderson, CFA

FedEx Delivers an Inflation Message

FedEx reported earnings this week that disappointed analysts, sending shares down over 10% for the week.  The earnings miss was attributable to a higher cost of labor and overall labor shortages. Packages were re-routed to distribution hubs that had sufficient labor availability.  The company stated, “The current labor environment is driving inefficiencies in the operation of our network and significantly impacting our financial results”.  FedEx’s President and COO also announced that shipping rates will increase 6 to 8% in January 2022 in addition to a fuel surcharge increase starting November 1, 2021.

The FOMC met this week

Fed Governor Jay Powell held his quarterly press conference Wednesday, where he delivered the Fed’s message re: the state of the economy, inflation expectations, interest rates and tapering.  The economy is continuing to grow and is still coping with the effects of the global pandemic economic shutdown in 2020.  Even though inflation expectations have been raised multiple times by the FOMC (now at 2.2%), the current pace of inflation is running much higher (see chart), yet the Fed is standing firm on their belief that it is still transitory.  Mr. Powell stated that the Fed will begin tapering their bond purchases later in the year by $10 billion per month. At the current pace of $120 billion per month, tapering should be completed within 12 months, at which time we can expect the Fed to begin raising interest rates.  Interestingly, the 5-year US inflation breakeven expectation is still below 2.5%, slightly above the FOMC’s upper range but well below the current run rate.  The UST 10-year note bumped up is a week from 1.3% to roughly 1.4%, still firmly in the negative real yield zone.

August Housing Starts increased 3.9% to a 1.615 million annual rate.

The gain was entirely due to multi-family starts.  Single-family starts declined 2.8% for the month.  First Trust’s senior economist wrote this week that, “While it’s too early to know for sure, there are signs developers may be shifting resources away from single-family home construction and toward larger apartment buildings in response to rapidly rising rents as some people move back into big cities and the eviction moratorium ends”.  First Trust’s Brian Wesbury went on to say “While the monthly pace of activity will ebb and flow as the recovery continues, we expect housing starts to remain in an upward trend.  A big reason for our confidence is that builders have a huge number of permitted projects sitting in the pipeline waiting to be started.  In fact, the backlog of projects that have been authorized but not yet started is currently the highest since the series began back in 1999” (emphasis added).

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.*******

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Market In A Snap! August 16th-August 20th, 2021

By Jeff Anderson, CFA

The S&P 500 opened down on Monday after news of a strained exit for American armed forces from Afghanistan as well as more news of increased cases of COVID-19’s delta variant.  By Tuesday afternoon, the index was making all-time highs. By Friday’s close, it was down 0.6% for the week.

On Thursday, the Labor Department reported jobless claims of 348,000 for the week ending August 14th which is a new pandemic low but well above the approximate 200,000 level that existed prior to the pandemic.

The Fed will be holding its annual Economic Policy Symposium in Jackson Hole, Wyoming August 26th.  Fed Governor Jay Powell will deliver his remarks on the 27th and Fed watchers will be looking for any signals about tapering its asset purchases as well as the economic outlook.  Inflation will likely be a key topic.

While on the topic of inflation, Krispy Kreme announced this week that they will consider increasing prices in September in response to rising costs for key commodities like sugar and edible oils that go into making their delicious donuts.  Whether the inflation in commodities is transitory or not, it’s a good reminder that prices for food, energy, clothing etc., will continue to rise and eat away (no pun intended) at your retirement savings.  

When Krispy Kreme opened in 1937 a dozen donuts cost $0.80.  Today, that same dozen costs $8.00. (1) Over time, prices rise. Period.  Add that to the other two certainties in life.

Yet despite this example of food inflation, the debate remains whether this sudden increase in inflation (“CPI”) is transitory. The 10- and 20-year US government treasury yields are still below 1.5% and 2% respectively.  If inflation truly takes hold, the bond market will send a clear signal in rising long-term yields.

Enjoy the weekend!

Jeff Anderson, CFA

Portfolio Manager.

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