The Weekend Edition # 104

Welcome to another issue of the Weekend Edition.

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here’s what we cover:

• Market Recap - September not so hot!

• Macro - Retail Sales in the wrong categories

• The Week Ahead - Economic & Earnings Calendars

• Closing Thoughts - Below-trend growth

Let’s dive in ⬇️

Market Recap - 11 Sep - 15 Sep 2023 📉📈

It looks like September is living up to its reputation for being a tough month. Last week was mostly red across the board even after we had a positive reaction to the CPI numbers that came out on Wednesday. We had stronger Retail Sales numbers on Thursday, followed by stronger PPI numbers. Finally, we saw Consumer Sentiment numbers come in lower than expected.

Rates have been floating higher, even on the longer end of the curve despite a strong auction on Wednesday for the 30-year bond. Usually, when we have a strong auction, it tends to push bond yields down and it did temporarily. But, inflation fears continue, particularly worldwide and we’re getting reports from all over the world that inflation is coming back.

We even got numbers from China this week that showed they are no longer in deflation. This does not bode well for global inflation if this trend continues. Just as everyone thought that China would be exporting deflation, we may now end up with a situation where China is actually exporting inflation.

Commodities

The big news for the week and for several weeks has been oil. WTI Crude Oil prices crossed $90/bbl. Continuing with our story, this is yet another ugly sign for inflation. But, that’s not all. Unfortunately, we’re seeing general commodity prices increase across the board and this obviously feeds into food prices.

We thought that headline inflation remained conquered but with Energy and Food prices going up, we’re likely to see a resurgence of inflation.

We have the Fed Rate Decision next week and most analysts have pencilled in a pause. We also have the Bank of England, Norges Bank (Norway) and Riksbank (Sweden) delivering rate decisions in this coming week.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - Retail Sales

We had several releases this week in terms of US economic data. While none of them were shocking, we don’t see a particularly healthy pattern for the fight against inflation.

The Retail Sales numbers seem to be bucking the trend of challenging macro data that’s being released. We’re seeing CPI and PPI head higher. We’ve seen PMIs, Industrial Production and Sentiment numbers deteriorate. Yet, Retail Sales numbers seem to be hanging in there for a while.

While we can see that the numbers have declined from the last two years the monthly numbers (in red and green) have been positive for since May 2023, leading the yearly number (blue line) higher.

A look below the surface however, doesn’t reveal the most comforting story. We see that the biggest jump in the monthly numbers came from Gasoline Stations at 5.2% MoM. While the we’re still far from peak levels that we saw last year (YoY -10.3%) we’re not really headed in the right direction.

Food sales remain stable but, still positive at 0.3% MoM. But, here the yearly numbers tell us a completely different story. Restaurant sales have continued to increase and YoY the change is +8.5%. Much of this has to do with the fact that food prices at restaurants have not declined.

Over the last couple of months, we saw a boost in purchasing for furniture and building materials. Those two categories saw a decline in July. We’re also seeing auto parts normalize to a certain extent but, still remaining quite elevated on a YoY basis.

The higher yearly change is in Health and Personal Care stores. We’re ve seen the pharmaceutical numbers increase drastically in the CPI data over the last several month and it would seem that the trend has not subsidided.

The takeaway from the numbers this month:

• Energy prices are increasing

• Food prices still remain elevated

• Basic necessities are seeing the largest increases

We have several factors that should lead these numbers down in the coming months including student debt repayments, and the roll off of SNAP and other benefits. But, the increases in gasoline and food prices may just mean that retail sales continues to remain strong, but in the wrong categories.

The Week Ahead 📅

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

Closing Thoughts - Below-trend Growth

We’ve been talking about cracks beneath the surface. We don’t necessarily see a credit event but the “higher for longer” would continue working on those cracks to erode demand, employment and growth. We see longer rates rising on fears of inflation and decline in treasury demand + increase in treasury supply.

The ECB hiked rates this past week and seem to signal a pause. This is because their economy has weakened significantly from the effect of the aggressive rate hikes. The Eurozone is far more sensitive to interest rates and energy prices, which is showing in their economic data and GDP.

On the other hand, the strength of the US Economy means that the Fed may just have to hike again. The Fed Chair did allude to this at Jackson Hole saying getting inflation down to 2% will require below-trend growth.

So, we can’t expect GDP to keep growing at over 2% and now 4-5% according to the Atlanta Fed and imagine that monetary policy will not be restrictive.

We’re seeing the character of the inflation and unemployment data change and the Fed could push the next hike to November because that will give them more time to review the incoming data. But we’re unlikely to cross the end of the year, since the next year is an election year in the US.

Here’s wishing you safe investing.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.