Trend watch and what’s new this week
Moderating early spring temperatures are helping some of the activity-based data recover (slides 5 and 6). For instance, air passenger counts climbed above 14 million for the first time since the first week of the year. Air travel continues to track in-line with 2019 patterns.
Similarly, dining reservations swung back to positive (compared to pre-pandemic levels), hotel occupancy jumped to a nine-week high, and the back-to-office index reached its third-highest reading since the pandemic.
Inflation uptick in January
On slide 7, we show the Consumer Price Index (CPI), which jumped 0.5% in January. It was driven by a rebound in food and energy prices. Yet the year-over-year pace for CPI slipped to 6.4% from 9.1% in June.
On slide 8, core CPI, which excludes food & energy, rose 0.4% month-over-month and increased 5.6% from a year ago. Among the biggest decliners were used vehicles, which dropped for the seventh straight month. However, prices for services rose by 0.6%, propelled by shelter (rents), which rose 0.7% during the month. (The CPI rental data takes a weighted-average approach for rents because the change only impacts new or renewals since most residential leases are typically for one-year or longer.)
On slide 9, we show some possible inflation scenarios. While there are a wide range of potential outcomes, we expect CPI to trend toward 3% to 4% by year-end 2023. That would be considerably lower than the peak this past June, but above pre-pandemic levels. Of course, a recession would accelerate the cooling of prices.
On slide 10, the monthly pace of wholesale prices, as measured by the Producer Price Index (PPI), rose 0.7% in January. That’s a big swing from -0.2% in December as energy jumped 5.0% during the month. Yet, the year-over-year pace slipped to 6.0% from 11.7% in March. Core CPI, which excludes food & energy, also reaccelerated month over month, but continued to slide from a year ago.
Private rental data continued to soften in January
On slide 11, we show rents from private rental sources for new leases. Rents spiked during 2021, including a jump of 2.2% during July ’21. That continued in 2022, growing 0.9% per month on average through September ’22, but has cooled considerably since then. Rental prices in January ’23 fell 0.1% month over month, the fourth decline in a row.
Retail sales jump in January
Retail & food service sales in January jumped 3.0% (slide 12). That’s the largest monthly increase since March ’21, which lines-up with the third stimulus checks. Auto sales were a big driver along with an outsized jump in department stores sales. Excluding both autos and gasoline, retail sales rose a solid 2.6% during the month.
New housing activity
On slide 13, we updated several of the new housing metrics. Single-family permits fell for 11th month in a row, while housing starts declined for the 8th time in 12 months. Both are obviously being impacted by the dramatic increase in mortgage rates, which are up 2.6 percentage points from a year ago.
Also on slide 13, new buyer traffic has shown signs of life, increasing for the past two months from extremely depressed levels. That helped boost the NAHB Market Index, which is the builder sentiment survey, see its biggest MoM increase since the reopening months two and a half years ago. However, we suspect that enthusiasm will fade in February given a 0.5 percentage point increase in mortgage rates in the past few weeks
We reiterate our warning to temper the “no landing” fervor that has seemed to permeate the consensus in recent weeks, essentially discounting the chances of a recession. Indeed, we are encouraged by some of the recent data, which could be green shoots. Yet, as illustrated by the hotter than expected January inflation data, those green shoots can get frozen.
We may be in an environment where the economy remains solid, perhaps triggering more inflation (like energy in February), forcing the Federal Reserve (Fed) and other central banks to continue hiking interest rates. Or, the economy weakens further, taming inflation but also dinging corporate profits, spurring more layoffs and challenging asset prices. Our Co-Chief Investment Officer Keith Lerner has dubbed this as the “reverse Tepper trade,” a nod to the opposition scenario hedge-fund titan David Tepper outlined in September 2010.
Accordingly, several more Fed officials have publicly floated the possibility of reaccelerating the size of rate hikes to further tamp down inflation, perhaps increasing rates by 0.50% at next month’s meeting. Markets have quickly adjusted, pushing expectations and rates higher, with the yield on the 10-year U.S. Treasury approaching 4% once again.
In our view, higher interest rates have dramatically increased borrowing costs for consumers and businesses alike, which is referred to as tightening financial conditions. For instance, credit card rates for many consumers are hovering near 20%, which crimps a lot of economic activity, especially as card balances ramp higher. Moreover, there’s a cumulative affect of higher card rates month after month as the months progress.
Furthermore, credit cards are the only financing for many of the smallest businesses, which aren’t big enough to get credit to finance inventory or other short-term business expenses. Thus, higher interest rates are a tremendous headwind for the U.S. economy.
While the possibility for “no landing” have grown, a recession in the coming 12 months remains our base case due to those tighter financial conditions.
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