NEW$ & VIEW$ (17 JULY 2013)

Consumer Inflation Climbs 0.5%

Consumer prices are up 1.8% from a year earlier. Excluding the volatile food and energy categories, prices rose a milder 1.6% over the past year.

Much of June’s gain in overall prices came from a 6.3% increase in seasonally adjusted gasoline costs. Actual prices at the pump rose only slightly, but they failed to follow the expected pattern of declining in the weeks after Memorial Day, causing the adjusted number to rise.

From the Cleveland Fed:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in June. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.2% annualized rate) during the month.

The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.5% (5.9% annualized rate) in June. The CPI less food and energy increased 0.2% (2.0% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.7%, the CPI rose 1.8%, and the CPI less food and energy rose 1.6%


Haver Analytics offers the salient details:

Prices for goods less food and energy gained 0.2% (-0.2% y/y) following several months of having been unchanged. Apparel prices led the way higher with a 0.9% jump (0.7% y/y) while medical care goods prices rebounded 0.5% (-0.1% y/y). New car and truck prices gained 0.3% (1.2% y/y). Furniture and bedding costs rose 0.2% (-0.5% y/y) and home appliance prices also increased 0.2% (-1.9% y/y). Recreation goods prices were off 0.6% (-1.8% y/y).

Core services prices increased 0.2% (2.3% y/y). Medical care service prices rose 0.4% (2.8% y/y). Shelter costs (32% of the CPI) gained 0.2% (2.3% y/y) while owners equivalent rent of primary residences increased 0.2% (2.2% y/y). Public transportation prices fell 0.9% (+3.6% y/y) and transportation services costs slipped 0.1% (+2.5% y/y).

But Doug Short has the best tables:



Note the sharp acceleration in Housing costs which accounts for 41% of CPI. It has been rising at a 4.5% annualized rate in Q2, +5.5% in the last 2 months.

So, the inflation jury is still out. Core inflation, however you measure it, continues to rise around a 2% annualized rate, in spite of tepid demand and a rising dollar.

For the Rule of 20, June’s 1.8% inflation rate reduces the Fair P/E to 18.2, from 18.6 in May and 18.9 in April. Based on trailing EPS of $98.35 after Q1’13 results, fair value for the S&P 500 Index is 1790, +6.8% from current levels. This is the lowest level of undervaluation since April 2010. Note how the big rise in equity prices since May 2012 (blue line on chart) has occurred against stalled fair value readings (yellow line) due to flat earnings, resulting in the big decline in equity undervaluation (black line rising towards “20”).



Either earnings, or investors sentiment (QE?) rise smartly, for inflation does not seem about to break down given recent trends in energy prices and shelter costs.

Downside? Fundamentally, renewed fears could take the rule of 20 P/E to 16 which, assuming inflation at +1.8%, would mean a trailing P/E of 14.2. Times $98.35 (?), equals 1400 or –16.5%. technically, the 100 day m.a is at 1598 (-4.6%) and the 200 day m.a. is at 1522 (-9.2%).

U.S. equity markets have not traded at the Rule of 20 fair value since September 2008 (on the down trip) or July 2007 on the uptrend. Are current conditions such that investors have  become fearless?

If Q2 earnings fail to grow…

Real Wages Still Below June 2009 Level

Average hourly wages were unchanged from May to June after adjusting for inflation, the latest sign of households struggling to gain purchasing power in the aftermath of the Great Recession.

Average hourly wages were unchanged from May to June after adjusting for inflation, the latest sign of households struggling to gain purchasing power in the aftermath of the Great Recession.

The flat result stemmed from a 0.4% increase in average hourly earnings being offset by a rise in the consumer price index. Over the last 12 months, inflation-adjusted hourly wages have risen by just 0.4%.

Speaking of shelter costs:


Bay Area Rally Sends Rents Soaring

Rents in the Bay area are getting juiced by a healthy tech sector, exciting investors but riling some tenants.

San Francisco led the top-50 U.S. metropolitan areas in average rent growth during the second quarter, jumping 7.8% to $2,498, while Oakland was No. 2 at a 6.9% increase, and San Jose was in fifth place at 5%. The 6.8% increase for the combined San Francisco Bay area was more than double the nation’s 3.1% increase, according to preliminary estimates by MPF Research, a market-research firm in Carrollton, Texas.

Coke’s Growth Stalled Globally

North American volume slipped for the first time in 13 quarters amid a steep drop in soda consumption (…).

Coke also estimated a stronger dollar will shave 4% off of operating profit this year, up from an earlier 2% forecast.

Coke’s sales volume grew only 1%, slowing from 4% in the first quarter and below Wall Street forecasts of 3% to 4% growth. Revenue dropped 3% to $12.75 billion from $13.09 billion, hurt by the dollar and the sale of its bottling operations in the Philippines.

North American volume slid 1% as a 4% fall in soda sales offset a 5% rise in still beverages. Coke blamed unusually wet and chilly weather in the U.S., including the wettest June in more than 50 years, for the steeper-than-usual drop in soda consumption.

Soda consumption has fallen in North America for eight straight years amid growing obesity and health concerns.

It said tough weather conditions in Europe, including floods and Germany’s coldest spring in four decades, pushed volumes down 4% on that continent, where demand also was hurt by the poor economy and high unemployment.

Elsewhere, in India volumes rose a mere 1% as monsoon rains arrived early, washing out roads and reversing 20% growth in the year-earlier quarter, when the monsoon arrived late.

Weather wasn’t always a factor in certain emerging markets. In Brazil, a source of strong growth in recent years, consumption was flat amid slackening consumer spending and social unrest. Volumes were up just 1% in Mexico, which consumes more Coke products per capita than any other country.

For China, Coke reported flat volume.



NAHB Sentiment Index Hits 7.5 Year High

For the month of July, the NAHB Sentiment survey rose from 51 up to 57.  Even more impressive is the fact that the homebuilder sentiment index has now risen by 13 points in the last two months.  The last time the index saw that big a jump in a two month period was back in February 1992!

The Traffic diffusion Index, though rising, remains below 50.





This morning:

Pointing up  U.S. Housing Starts Fall by 9.9%

Home construction fell sharply in June, highlighting turbulence in the sector as mortgage rates threaten to restrain new activity.

Housing starts declined 9.9% in June from a month earlier to a seasonally adjusted annual rate of 836,000 units, led by a 26% fall in the volatile multi-unit category.

In a report released Wednesday, the Commerce Department said building permits, a measure of future construction activity, fell by 7.5%. That was the sharpest drop in more than two years and was led by a 21% decline in permits for multi-unit buildings.

U.S. Factories Show Pickup in Output U.S. industrial production rose in June as factories built more autos and electronics, a sign that businesses and consumers may be ready to start pulling the economy out of a second-quarter soft patch.

Industrial output increased a seasonally adjusted 0.3% last month and the use of available production capacity inched up 0.1 percentage point to 77.8%, the Federal Reserve said Tuesday.

Manufacturing, the biggest component of industrial production, rose 0.3% in June. Output of automotive products, machinery and home electronics all saw big gains.

The fact is that total output was flat in Q2. (table from Haver Analytics)



China Won’t Have Large Stimulus This Year, Finance Minister Says

Chinese Finance Minister Lou Jiwei said the nation won’t use “large-scale fiscal stimulus” measures this year, adding to signals that the government will tolerate a slowdown in the economy.

China will promote growth and boost employment while fine-tuning policies and keeping the fiscal deficit unchanged, and will also avoid big adjustments to short-term macroeconomic policies, Lou said in July 11 comments in meetings with U.S. officials in Washington. The remarks were posted yesterday on the Finance Ministry’s website.

Lou said in a press briefing at the Washington meetings last week that growth as low as 6.5 percent may be tolerable in the future. While the government in March set a 2013 growth goal of 7.5 percent, Lou said he’s confident 7 percent can be achieved this year.

The official Xinhua News Agency later amended its English-language report on Lou to say there’s no doubt that China can achieve this year’s growth target of 7.5 percent.

Wait, wait:

China’s premier holds the line on reforming economy

China’s Premier Li Keqiang urged caution about rushing to change economic policy to try to revive the country’s sputtering growth, but he also signaled Beijing was prepared to take action if the economy slips too far.

Li was quoted by state television saying late on Tuesday that the government is able to achieve key economic tasks for this year, reinforcing the official view that a 7.5 percent annual economic growth target remains achievable.

“Neither should we change policy orientation due to temporary economic fluctuations, which may affect the hard-won restructuring opportunity, nor should we lack vigilance and preparations when the economy might slide below the reasonable range,” Li was quoted as saying.

Pointing up  FT Alphaville has a great post today:When does a Chinese growth deceleration become a crisis? 

(…) Does that mean an imminent crisis? Does it mean, for example, a financial crisis, outright GDP contraction, or an overthrow of the regime?

We’re not sure.

What is very difficult about China right now is to see past the signs of slowdown and change (liquidity, property markets, precarious WMPs, etc) and connect them to the underlying shifts: the decline of growth led by exports, demographics and most recently, credit-fuelled investment.

If you like, it’s a question of differentiating between symptoms and the cause.

It’s even harder to predict how this will all play out and in what kind of time frame. What we’ve seen recently appears to be the beginnings of the undoings of the most important current tool for both driving growth and creating imbalance — liquidity and credit. (…)

The Q2 GDP number and the associated data suggest the worst of both worlds. Growth is slowing — the number itself looks particularly questionable this quarter — but the rebalancing is not taking place. (…)

The liquidity problems, WMP managers scrambling to cover redemptions, Ordoshaving to borrow money to pay wages — these are symptoms.

They’re serious symptoms. Reuters has a great exploration of how much more volatile and unsettling things could get if/as the authorities pursue the kinds of financial reforms that they’ve already outlined. Jim Chanos argues property price falls could spark middle class unrest and allowing banks more freedom to set lending and deposit rates could mean a scramble to gain deposits. Quartz’s Matt Phillips also looks at the scary implications of China’s capital inflows reversing. Likewise, WMP failures could spark bank runs. (…)

There are of course real constraints on how much longer China’s central government can perpetuate the unbalanced, fast-growth model. Employment is an obvious mechanism for economic slowdown to result in unrest. Yet the ageing population demographic seems to be taking care of that a little earlier than anyone expected. Again, it could change. The ‘employment’ segment of the manufacturing PMIs have been weak for some time. Consumer prices are another — although price controls,strategic pork reserves and the like can probably be deployed to some extent.

Essentially, the point is not so much that ‘China is different’. China can handle many things differently, as its unique approach to growth has already demonstrated. But ultimately, it all ends up being another form of can-kicking. Which, in itself, is not so ‘different’.


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