CAMS Weekly View from the Corner – Week ending 11/11/2022
November 14, 2022
…..And before that – February 1982. This past Thursday the Bureau of Labor Statistics (BLS) released the price inflation data for the month of October. As a general statement the year-over-year results came in lower than what we have seen for the vast majority of 2022. That is the short story version. The longer version is less upbeat at least at this stage of the price inflation cycle.
Click For Larger View: https://fred.stlouisfed.org/graph/?g=WlQq
Above is the well recognized Consumer Price Index (CPI) which we can think of as the headline price inflation measure. This measure, on a year-over-year basis has been in the 8% range for the bulk of 2022. We dipped into the high 7% range with the October data released on Thursday. The newfound 7% range sent various markets notably upward with a celebratory feel. Were collective market participants getting ahead of themselves? Perhaps. Maybe. Probably. Does this assure markets will turn tail and go down a lot again? No. Does this mean markets are sure to continue running higher and higher? No. What it means is collective market participants ran, in a big way, with the narrative that price inflation has peaked, it is heading down and the Federal Reserve will wrap up their price inflation concerns soon. The problem with narratives when not backed by sound evidence supporting them is they can disappear quickly. Also, inherent beliefs within X narrative(s) can grow in intensity regardless of evidence. Welcome to markets – tell us they are not susceptible to collective emotion. To be certain, any progress is indeed welcomed but near hints if not suggestions that the above is evidence the price inflation fight has been won and with this Chairman Powell and friends at the Federal Reserve will be pulling back their concerns is premature at best and perhaps near lunacy at worst. (We’ll share some Powell thoughts below.) Regardless, per the chart our red circle denotes the progress made signifying the lowest price inflation rate we have seen since February of this year. Our red horizontal arrow signifies the last time we have seen the 7% range previous to 2022 which walks us back to February 1982. In other words, we remain very elevated when viewed through recent as well as longer term history. Enter Core CPI When the Consumer Price Index is stripped of its food and energy components it is known as “Core CPI.” The Core CPI measure is meant to show what the price inflation backdrop looks like when the more volatile components are taken out of the computation.
Click For Larger View: https://fred.stlouisfed.org/graph/?g=WlSb
Above is Core CPI taken back to the beginning of this century – year 2000. This gives us some broader perspective and yet allows us to focus in a bit on the most recent activity. In the upper right corner, via our red box, you can see, perhaps if you squint hard, the progress that has been achieved with this most recent update in the price inflation measures. To be precise this measure came in at 6.3% for October while the month previous registered 6.6% and the month before that – August – registered 6.3%. For the previous three months that is 6.3%, 6.6% and again 6.3%. We can see no progress has been made in this important, more drilled down measure. In addition, looking at the couple of decades cumulatively we can see we are miles away from the high points of this century let alone down in the Federal Reserve’s stated goal of 2% range. Cleveland Fed’s Median CPI If you are a consistent reader of our Weekly View’s this measure will ring familiar. The Federal Reserve Bank of Cleveland has a long-standing take on price inflation via their Median CPI. The Median CPI measure is designed to go deeper into the broad economic storyline in order to identify what is taking place on the price inflation front that is not typically captured with the well known, input weighted Consumer Price Index as well as its sidekick, the Core CPI. The key to its value as a price inflation measure is it offers more than just the traditional select basket of goods and services that are given a certain weighting such as is the case with CPI and Core CPI. Think of it as a deeper diagnostics machine such as for your vehicle’s engine or an MRI relative to an X-ray.
Click For Larger View: https://fred.stlouisfed.org/graph/?g=WlV8
Above we are taking the Cleveland Fed’s Median CPI back to the early 1980’s for a multi-decade perspective. Our red horizontal line denotes the previous high water mark throughout the depicted decades which registered in the high 4% range back in the early 1990’s. The multi-decade story of this measure gets little attention in that our current era readings dwarf any experience we had in the previous forty years unlike the more headline type CPI measure whereby 2022 readings consistently matched the era of forty years ago. Said differently, via this more drilled down measure, our price inflation current day is worse and more pervasive than that of the often referenced early 1980’s. In addition, speaking to the updated release, there has been no progress in this measure as it registered 7% with the most recent update which matches the previous month – both the highest we have seen in this measure in the decades depicted. With the above we are not convinced the existing and building narrative that price inflation has peaked (which simultaneously infers the price inflation fight has been won) stands up to a deeper look inside the price inflation backdrop. Just one bad update on the near-term timeline in the headline CPI could pop said narrative in a day. That is not meant as a prediction but rather as a reality check. Below we leave you with an excerpt of Chairman Powell during the Q&A session of his most recent post-rate hike press conference where he addresses the building thought that the Fed is close to wrapping up their price inflation fight via them pausing on additional rate hikes in light of the lag effect from all their previous rate increases. He seems to disagree with the premise. Cue Chairman Powell
CHAIR POWELL Let me say this, it is very premature to be thinking about pausing. So people, when they hear lags, they think about a pause. It’s very premature in my view to think about or be talking about pausing our rate hike. We have a ways to go, our policy, we need ongoing rate hikes to get to that level of sufficiently restrictive. https://www.federalreserve.gov/videos.htm
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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