Real wage growth is rebounding as inflation moderates

The Daily Shot: 13-Jul-23
The United States
Canada
The United Kingdom
Europe
Asia-Pacific
China
Emerging Markets
Commodities
Energy
Equities
Rates
Food for Thought



 

The United States

1. The June CPI report surprised to the downside, pointing to a broad slowdown in consumer inflation.
 

 
Source: CNBC   Read full article  
 
The core CPI increase was the lowest since early 2021.
 

 
These charts show the contributions to the headline and core CPI indices.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Below are the year-over-year CPI changes.
 

 

 
The core goods CPI declined in June.
 

 
The supercore CPI (services less housing) was flat on the month, a welcome development for the Fed.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Here is the supercore CPI year-over-year chart.
 
Source: Piper Sandler¬†  
 
This chart shows 3-month rolling changes in various core inflation indices.
 
Source: Mizuho Securities USA  
 
Pantheon Macroeconomics expects further moderation in the core CPI.
 
Source: Pantheon Macroeconomics  
 
We will have more updates on the CPI report tomorrow.

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2. Despite the positive inflation news, the market still expects the Fed to raise rates this month.
 

 
But the July hike could mark the end of the hiking cycle.
 

 
Treasury yields declined sharply.
 

 
The dollar tumbled (3 charts).
 

 

 

 
The dollar’s weakness boosted commodities (2 charts).
 

 

 
Stocks climbed, with the S&P 500 hitting the highest level since early 2022.
 

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3. Real wage growth is rebounding as inflation moderates.
 

 
4. Freight costs continue to fall.
 
Source: Cass Information Systems  
 
Rail traffic remains soft.
 
Source: Association of American Railroads  
 
Is the truckload cycle bottoming?
 
Source: Cass Information Systems  

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5. The Fed’s Beige Book signaled slow growth but no recession for now.
 
Source: @apgmonteiro, @economics   Read full article  
 
Here is the Oxford Economics Beige Book sentiment index.
 
Source: Oxford Economics  
 
Inflation is becoming less of a concern.
 
Source: Oxford Economics  
 
The Beige Book report suggests that labor market imbalances are easing.

Labor demand remained healthy, though some contacts reported that hiring was getting more targeted and selective. Employers continued to have difficulty finding workers, particularly in health care, transportation, and hospitality, and for high-skilled positions in general. However, many Districts reported that labor availability had improved and that some employers were having an easier time hiring than they were having previously. Employers also reported that the  unusually high turnover rates in recent years appear to be returning to pre-pandemic norms. Wages continued to rise, but more moderately. Contacts in multiple Districts reported that wage increases were returning to or nearing pre-pandemic levels.

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6. The stock market is signaling a stabilization in US manufacturing activity.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
7. The Earnest Analytics Spend Index doesn’t bode well for retail sales (as of June).
 
Source: Earnest Analytics  
 
8. Mortgage applications remain depressed.
 

 
Here is the rate lock count.
 
Source: AEI Housing Center  


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Canada

1. The BoC hiked rates as expected.
 

 
The market is leaning toward this rate increase being the last one in this cycle.
 

 
Bond yields declined, pulled lower by the US downside CPI surprise.
 

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2. Oxford Economics sees Canadian economic growth well below the BoC’s forecasts.
 
Source: Oxford Economics  


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The United Kingdom

1. The May GDP decline was smaller than expected.
 

 
Source: @LucyGJWhite, @economics   Read full article  
 
We will have more data on May’s economic activity tomorrow.

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2. The RICS report shows the housing market struggling, …
 

 
Source: Reuters   Read full article  
 
… as mortgage rates keep climbing.
 
Source: @financialtimes   Read full article  

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3. This chart shows the spread between the 10-year Treasury and gilts.
 

 
4. Canary Wharf vacancies surge as financial firms reduce their office footprint.
 
Source: @WSJ   Read full article  
 
5. Finally, here are the latest voting intentions polls.
 
Source: @financialtimes   Read full article  


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Europe

1. Two measures of Germany’s unemployment have diverged sharply.
 
Source: Gavekal Research  
 
2. Demand for European bond ETFs has been rising.
 
Source: @financialtimes   Read full article  
 
3. Here is the population of EU member states.
 
Source: Eurostat   Read full article  


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Asia-Pacific

1. Let’s begin with South Korea.
 
The central bank left rates unchanged but signaled a hawkish stance.
 
Source: @economics   Read full article  
 
ING is forecasting modest growth over the next few quarters.
 
Source: ING  
 
Export prices have been tumbling.
 

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2. New Zealand’s home sales were well above 2022 levels in June.
 

 
Source: Times   Read full article  
 
The market is putting very low odds on additional RBNZ rate hikes in this cycle.
 

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3. Australia’s consumer sentiment edged higher this month.
 

 
Inflation expectations remain elevated.
 


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China

1. Exports were lower than expected last month (well below 2022 levels).
 

 
Source: @markets   Read full article  
 
Imports softened as well.
 

 
Here is the trade balance (2 charts).
 

 

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2. Growth in broad money supply is running substantially above nominal GDP growth. Where will this extra money go?
 
Source: Gavekal Research  
 
3. The renminbi is undervalued on a purchasing-parity basis.
 
Source: Gavekal Research  
 
4. This chart shows residential and nonresidential construction investment.
 
Source: Longview Economics  


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Emerging Markets

1. Let’s begin with India.
 
Industrial production is holding up well.
 

 
The CPI was a bit higher than expected, boosted by some food items.
 

 
Here is the core CPI.
 
Source: ING  
 
India’s infrastructure stocks have outperformed amid robust investment.
 
Source: TS Lombard  

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2. EM’s growth/value ratio has significantly underperformed DM’s this year.
 
Source: Variant Perception  
 
3. EM local-currency bond yields have declined relative to DM bonds.
 
Source: @financialtimes   Read full article  
 
4. Variant Perception’s regime indicator still favors developed markets over EM.
 
Source: Variant Perception  


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Commodities

1. Wheat has reversed the recent bounce.
 

 
Source: barchart.com   Read full article  

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2. Gold is entering a seasonally strong period.
 
Source: Aazan Habib, Paradigm Capital  
 
3. Copper has been consolidating.
 
h/t Longview Economics  


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Energy

1. US oil inventories jumped last week.
 

 
Here is the inventory measured in days of supply.
 

 
Nonetheless, Brent managed to climb above $80/bbl.
 

 
2. Gasoline inventories were flat last week, but distillate stockpiles rose sharply.
 

 

 
Here are the inventory levels for crude oil, gasoline, and distillates.
 

 
3. US refinery runs jumped last week.
 


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Equities

1. Analysts expect earnings growth to reaccelerate.
 
Source: MRB Partners  
 
The relative earnings momentum of US growth stocks has improved.
 
Source: MRB Partners  

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2. Discretionary investors’ positioning has diverged from the ISM Manufacturing PMI.
 
Source: Deutsche Bank Research  
 
3. Retail investors remain bullish.
 
Source: Yardeni Research  
 
4. The gap between the S&P 500 and Fed liquidity continues to widen.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
5. Companies with high levels of free cash flow have underperformed sharply.
 

 
Relative to the Russell 1000 Index (large caps), companies with high levels of free cash flow exhibit greater levels of return-on-equity and earnings growth while trading at historically low valuations.
 
Source: Global X ETFs   Read full article  

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6. VIX has been running below realized volatility.
 
Source: Variant Perception  
 
7. US growth stocks appear overvalued relative to interest rates.
 
Source: MRB Partners  
 
8. Oxford Economics expects a pullback in stocks over the near term.
 
Source: Oxford Economics  


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Rates

1. The Treasury curve continues to steepen.
 

 
2. Real rate increases have outpaced nominal rates, lowering inflation expectations.
 
Source: TS Lombard  
 
3. Here is a forecast for Treasury yields from Oxford Economics.
 
Source: Oxford Economics  


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Food for Thought

1. Views on the impact of K-12 schools on the US:
 
Source: Pew Research Center   Read full article  
 
2. Americans’ confidence in higher education:
 
Source: Gallup   Read full article  
 
3. Views on federal agencies:
 
Source: Pew Research Center   Read full article  
 
4. How will AI adoption impact productivity?
 
Source: Goldman Sachs; @ericwallerstein  
 
5. Countries with an increase in nuclear warheads
 
Source: Statista  
 
6. Amazon’s revenues on Prime Day:
 
Source: Statista  
 
7. Views on tipping:
 
Source: Bankrate   Read full article  
 
8. Inflation-adjusted wholesale sales of alcoholic beverages (year-over-year):
 
Source: Quill Intelligence  

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