Shelter inflation is nearing 8% for the first time since 1983

The Daily Shot: 15-Feb-23
The United States
The United Kingdom
The Eurozone
Europe
Asia – Pacific
China
Emerging Markets
Energy
Equities
Alternatives
Credit
Global Developments
Food for Thought



 

The United States

1. The January CPI report was roughly in line with expectations, signaling persistent inflationary pressures.
 
Headline CPI:
 

 
Core CPI:
 

 
Housing continues to drive core inflation, …
 

 
… with monthly rent CPI holding near multi-decade highs.
 

 
On a year-over-year basis, shelter inflation is nearing 8% for the first time since 1983, …
 

 
… pushing up services inflation. This chart shows the core goods and core services CPI (year-over-year).
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
But leading indicators continue to signal softer housing-related inflation ahead.
 
Source: Pantheon Macroeconomics  
 
The core services CPI ex-shelter eased last month.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Here are the CPI indices on a year-over-year basis.
 

 
We will have more data on inflation tomorrow.

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2. Treasury yields jumped in response to persistent inflationary pressures.
 

 
The Treasury curve inversion deepened further.
 

 

 
Stocks have been remarkably resilient in the face of rising yields.
 

 
Short-term market-based inflation expectations have been rebounding.
 

 
3. The terminal rate is nearing 5.3%.
 

 

 
This chart shows various forecasts for the overnight rate trajectory.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Here are the market expectations for rate changes at each of the upcoming FOMC meetings.
 

 
The market is much less certain about rate cuts in the second half of this year.
 

 
The probability of a rate hike in June is nearing 60%.
 

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4. The NFIB small business sentiment index remains depressed …
 

 
… and is now lagging behind consumer confidence.
 
Source: Oxford Economics  
 
The hiring plans index edged higher, …
 

 
… and more firms reported difficulties filling job openings. The labor market remains tight.
 

 
More companies have been boosting employee compensation.
 

 
But the compensation plans index is falling, …
 

 
… which signals slower wage growth ahead.
 
Source: Oxford Economics  
 
More companies plan to boost prices than in December.
 

 
Nonetheless, the price plans index still signals lower inflation ahead.
 
Source: Chart and data provided by Macrobond  
 
CapEx plans are sagging …
 

 
… which bodes poorly for business investment.
 
Source: Oxford Economics  
 
Tight inventories are no longer a concern.
 

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5. What are the drivers of the recent sharp decline in the Conference Board’s leading economic indicator?
 
Source: BCA Research  
 
6. Are unemployment claims about to jump?
 
Source: Pantheon Macroeconomics  


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The United Kingdom

1. We finally got some good news on the inflation front. Core inflation came in well below forecasts.
 
Headline CPI:
 

 
Core CPI:
 

 
Core services inflation unexpectedly eased last month.
 
Source: ING  
 
Retail inflation remains very high.
 

 
Producer price inflation continues to moderate.
 

 
2. The pound and gilt yields declined in response to the downside CPI surprise.
 

 

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3. January payrolls topped expectations.
 

 
The unemployment rate is still below pre-COVID levels.
 

 
Wage growth remains elevated.
 

 
Source: ING  
 
Source: @PhilAldrick, @economics   Read full article  
 
Job vacancies continue to ease.
 

 
Recruiting has become somewhat easier.
 
Source: ING  

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4. Labor productivity growth has been slow.
 
Source: @economics   Read full article  
 
5. Work stoppages surged last year.
 
Source: @OpenAxisHQ  
 
6. UK debt servicing costs are approaching that of Italy.
 
Source: @DanielKral1, @OxfordEconomics  


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The Eurozone

1. Germany’s wholesale price inflation continues to fall.
 

 
Economists have been lowering their Eurozone CPI forecasts for this year as energy prices ease.
 

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2. Euro-area employment growth has been robust.
 

 
Source: Reuters   Read full article  
 
French unemployment is nearing multi-year lows.
 

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3. Dutch Q4 economic growth topped forecasts.
 

 
4. The share of European bonds in domestic mutual funds has collapsed. Most flows have diverted to the US.
 
Source: Deutsche Bank Research  
 
However, European bond outflows have stopped as yields turned higher.
 
Source: Deutsche Bank Research  


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Europe

1. Equity investors are concerned about central banks’ hawkish stance.
 
Source: BofA Global Research  
 
2. Norway’s consumer confidence plunged last quarter.
 


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Asia – Pacific

1. Asian currencies are rolling over. This chart shows Bloomberg’s Asia currency index, the Taiwan dollar, and the Korean won.
 

 
2. Next, we have some updates on South Korea.
 
The Kospi index is about to test support at the 200-day moving average.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Export prices are falling.
 

 
The unemployment rate unexpectedly declined in January.
 

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3. The IMF’s estimates of commodity terms of trade suggest that Australia has had a much larger increase in terms of trade than other DM commodity producers such as Canada or New Zealand.
 
Source: Codera Analytics   Read full article  


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China

1. Capital outflows have slowed.
 
Source: Simon White, Bloomberg Markets Live Blog  
 
2. Investors now view “long China stocks” as the most overcrowded trade.
 
Source: BofA Global Research  
 
3. Loan growth has been driven by business credit.
 
Source: Capital Economics  
 
4. China is becoming a major global EV supplier.
 
Source: Gavekal Research  


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Emerging Markets

1. India’s wholesale price gains continue to slow, but the January report was above expectations.
 

 
2. Turkish stocks jumped as the market reopened.
 

 
3. Colombia’s economic activity continues to slow, with retail sales and manufacturing output missing expectations.
 

 
4. Argentina’s inflation is nearing 100%.
 

 
5. China has become an important trading partner for LatAm countries.
 
Source: Gavekal Research  
 
6. Fund managers sharply increased allocations to EM equities over the past three months.
 
Source: BofA Global Research  


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Energy

1. Has OPEC been too optimistic about global oil demand? This chart includes a forecast from Capital Economics.
 
Source: Capital Economics  
 
2. According to Pantheon Macroeconomics, China’s oil demand will surpass pre-COVID levels this year.
 
Source: Pantheon Macroeconomics  
 
3. Next, we have US natural gas production by play.
 
Source: @EIAgov  
 
The US dominated global LNG capacity additions in recent years.
 
Source: @EIAgov  
 
China reduced LNG imports last year, helping Europe through its energy crisis.
 
Source: @JKempEnergy  


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Equities

1. Stocks have been remarkably resilient in the face of rising bond yields and higher Fed rate hike expectations.
 
Source: @themarketear  
 
2. Fund managers see persistent inflation as the main tail risk.
 
Source: BofA Global Research  
 
3. S&P Global’s investment manager survey shows concerns about the market’s near-term performance.
 
Source: S&P Global Market Intelligence  
 
4. How much have share buybacks contributed to the S&P 500 returns?
 
Source: BofA Global Research; @SamRo  
 
5. Companies with high free cash-flow yields have been underperforming lately.
 

 
6. Next, we have some sector updates.
 
Vulnerability to a recession:
 
Source: MarketDesk Research  
 
Vulnerability to the 15% minimum tax rate:
 
Source: Oxford Economics  
 
Correlation to real yields (TIPS) and high-yield bond spreads:
 
Source: Capital Economics  
 
Share buybacks by sector:
 
Source: Deutsche Bank Research  
 
Fund managers’ positioning by sector:
 
Source: BofA Global Research  
 
Sector outlook based on a survey from S&P Global:
 
Source: S&P Global Market Intelligence  
 
Fund flows by sector in recent weeks:
 
Source: Deutsche Bank Research  


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Alternatives

1. Equity long/short hedge funds remain very cautious.
 
Source: Deutsche Bank Research  
 
2. This chart shows the indices of post-IPO companies backed by VC and PE funds.
 
Source: PitchBook   Read full article  
 
US venture capital valuations are down about 60% from the peak.
 
Source: Torsten Slok, Apollo  

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3. Strategic buyers accounted for roughly 38% of all middle-market private equity exits in Q3 2022.
 
Source: PitchBook  
 
4. Despite the market headwinds, AI-related deal activity was strong last year.
 
Source: Opto   Read full article  


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Credit

1. During periods of poor returns for high-yield, the correlation between the S&P 500 and investment-grade rose, while stocks’ link with high-yield weakened.
 
Source: PGM Global  
 
2. Roughly 87% of the US investment-grade market is trading below par.
 
Source: Torsten Slok, Apollo  
 
So far, credit spreads have not widened despite the Fed’s aggressive rate hike cycle.
 
Source: Torsten Slok, Apollo  

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3. How do corporate bonds perform in a recession?
 
Source: MarketDesk Research  
 
4. S&P downgrades were almost twice the number of upgrades in December.
 
Source: S&P Global Ratings  
 
December saw a notable jump in the number of “weakest link” credits, mostly in media and entertainment. The distress ratio also increased as companies faced higher labor costs and supply chain issues.
 
Source: S&P Global Ratings  
 
The US has the most potential downgrades relative to global peers, driven by weakness in consumer products, media/entertainment, and tech.
 
Source: S&P Global Ratings  

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5. The leveraged loan index default rate is starting to rise from low levels.
 
Source: Torsten Slok, Apollo  
 
More leveraged loans have been bought by banks.
 
Source: Torsten Slok, Apollo  


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Global Developments

1. This chart shows the US dollar decline attribution.
 
Source: Martin Ademmer, @TheTerminal, Bloomberg Finance L.P.  
 
Next, we have the dollar’s performance vs. US economic growth.
 
Source: MarketDesk Research  

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2. G4 government ‘free float’ debt (pension, insurance, etc. holdings/outstanding debt) has returned to 2013 levels, erasing nearly a decade of QE’s impact.
 
Source: Deutsche Bank Research  
 
3. China’s reopening will meaningfully boost global growth.
 
Source: Goldman Sachs  
 
4. Overall monetary conditions are not restrictive, which could support further upside in the global stock/bond ratio. MRB Partners also sees low risk of a US recession.
 
Source: MRB Partners  
 
5. Here is a look at trade openness since the late 1800s.
 
Source: IMF   Read full article  


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Food for Thought

1. Support for labor unions:
 
Source: BCA Research  
 
2. States regulating military-style assault weapons:
 
Source: Statista  
 
3. Are US primary elections increasingly dominated by smaller partisan groups as more voters identify as independent?
 
Source: Gallup   Read full article  
 
4. GOP presidential nomination probabilities in the betting markets:
 
Source: @PredictIt  
 
5. Share of successful legislative requests made in each State of the Union address:
 
Source: FiveThirtyEight   Read full article  
 
6. The ozone layer is healing.
 
Source: @chartrdaily  
 
7. Direct carbon capture:
 
Source: @WSJ   Read full article  
 
8. Estimated average distance run per game:
 
Source: @genuine_impact  

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