Monday Morning Coffee: Indexes Advance as Inflation Runs High

Posted by Steve Graham on 12/13/21 11:29 AM

The major Wall Street indexes advanced broadly on Friday despite a report that showed inflation running at the highest level in 39 years. The Dow Jones Industrial Average rose 216.3 points, or 0.06% to 35,970.99, the S&P 500 gained 44.57 points, or 0.95% to 4,712.02 and the Nasdaq Composite added 113.23 points, or 0.73% to 15,630.60. The advance in the financial markets came as the CPI report showed inflation advanced 0.8% in November, up 6.8% from a year earlier and the biggest annual increase since 1982. The Fed’s next meeting of the Open Market Committee is this week and investors will be looking for clues to both the pace of the taper on its bond-buying program and hints for interest rate increases. Markets have priced in a potential lift-off for rates starting in Q3-2022 and another move by that year’s end, each move is expected to be by 25 basis points. With supply bottlenecks showing little signs of easing and companies raising wages as they compete for scarce workers, high inflation could persist well into 2022. Investors will be glued to the FMOC meeting looking for clues to a potential earlier lift-off and perhaps, more forceful Fed actions.

Last week was slow for economic data but inflation dominated the headlines. The CPI report showed that inflation is proving to be a persistent problem for businesses and consumers. The CPI index increased 0.8% in November, led by a 6.1% jump in gasoline prices, matching October’s gain. In the last 12 months, the CPI was up 6.8%. The core index advanced 0.5%, up 4.9% from a year earlier. Oil prices did fall in November and have shown signs of stabilization, suggesting that energy’s contribution to inflation will recede in December. There are a few signs that the supply chain problems may be easing, as the ISM manufacturing index saw both the prices paid and supply deliveries indexes fell over 3.5 points in November. The number of ships waiting to unload at Long Beach-Los Angeles is down, but a new methodology has clouded the counting and the actual backlog looks unchanged at a continued high level. This suggests that any relief from the supply side will be slow. We expect inflation to cool next year, but the probability that inflationary pressures may persist at a high rate well into 2022 is growing. Pressure is growing at the Fed to act earlier and perhaps, with more force than currently expected.

The price of gasoline and other commodity prices are not the only contributors to inflation. The labor market is tightening, and those increases get embedded in the economy. The JOLTS data showed 11 million job openings at the end of October and Americans quit their jobs at near-record rates. Hiring dropped by 82,000 to 6.5 million in October. Layoffs fell by 35,000 to 1.361 million. Quits decreased by 205,000 to a still-high 4 million number in October. There were roughly 1.5 job openings per unemployed worker in October. That kind of labor market numbers suggests that wage pressures will continue for the next few months.

Outside of labor, delays in transportation and bottlenecks in the nation’s largest ports remain an issue. As of Friday, 40 container ships were waiting for berths within 40 miles of the ports of Los Angles and Long Beach. But there were also 56 container ships further out to sea putting the actual tally to an all-time high of 96, according to the Marine Exchange of Southern California. The exchange unveiled its new methodology for counting ships awaiting outside the 4—mile “in port” zone. Due to changes in air quality standards, container ships are to wait outside of a specially designated zone that extends q50 miles to the west of the ports and 50 miles north and south. This did reduce the number of ships close to shore and hinted efforts to reduce congestions were bearing fruit. However, in addition to the 96 ships waiting offshore last Friday, there were 31 ships at terminal berths, bringing the total to an all-time high. The number of container ships either at berths or waiting offshore continues to rise. It is up 25% from November, 41% from the beginning of October and 79% from the beginning of October. The unloading rate is at peak levels in Southern California that pre-pandemic only happened once, or two months a year, but now the unloading rate has hit a plateau. There have been incremental improvements, such as some of the newer seaborne carriers that used to drop loads and speed back to Asia, are now cutting deals to stay a little later and return empty containers. Shortages of containers in Asia are a big problem and have contributed to costs and delays in transportation. With low inventories, demand for seaborne shipping will remain strong well into 2022. That has implications for inflation and monetary policy.

This next week will be decent for economic data. The NFIB small business optimism index, the PPI, retail sales, business inventories, import prices, and housing starts and permits reports will be featured.

Tags: Economy, Monday Coffee

Latest Data

The U.S. Economy:

The U.S. trade deficit narrowed sharply in October as exports soared to a record high, potentially setting up trade to contribute to economic growth for the first time in a year. The nominal trade deficit narrowed from $81.4 billion in September to $67.1 billion in October. Nominal exports shot up 8.1% in October, following a 3% decline in September. Exports were led by goods, which soared 11.1% to $158.7 billion, also a record high. Exports of industrial supplies and materials increased by $6.4 billion, with shipments of crude oil advancing $1.2 billion. Capital goods exports increased by $3.1 billion. Service exports rose by $1.0 billion, as overseas travel rebounded after borders were opened. Travel is likely to slow in the coming months as the emergence of the Omicron variant will cause some border restrictions to be re-imposed. Nominal imports increased by 0.9%. Goods imports rose by 0.7% to an all-time high of $242.7 billion. The rise was led by motor vehicles and parts and consumer goods. The outlook for trade is mostly optimistic, although continued COVID infections may slow the recovery.

U.S. job openings surged in October while hiring decreased, suggesting a worsening worker shortage, which could hamper overall economic growth. The Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS report also showed a steady trend in layoffs, another sign the labor market is tightening. Job openings increased by 431,000 to 11.0 million on the last day of October, the second-highest on record. The surge was led by the accommodation and foodservice industry, where job openings increased by 254,000. There were 45,000 job openings in the nondurable goods manufacturing industry, while vacancies increased by 115,000 in state and local government. Hiring dropped by 82,000 to 6.5 million in October. The finance and insurance industry accounted for the decline, with a 96,000 drop in payrolls. There were increases in educational services as well as state and local government education. The hiring rate was unchanged at 4.4%. There were roughly 1.5 job openings per unemployed worker in October. Layoffs fell by 35,000 to 1.361 million. The layoff rate was unchanged at 0.9% for a third straight month. Quits decreased by 205,000 to a still-high 4 million number in October. The decline was in several industries, with large drops in transportation, warehousing, and utilities, as well as finance and insurance and arts, entertainment, and recreation. The quits rate is viewed as a measure of confidence. A high quits rate suggests that inflation will remain at high levels for the next few months.

Wholesale inventories jumped 2.3% in October from September. The October reading followed a 1.4% advance in September. Wholesale inventories were up 14.4% from a year earlier. Motor vehicle inventories rebounded 2.3% after falling 1.5% in September. The auto industry continues to see production constrained because of a shortage of semiconductors. Wholesale inventories, excluding autos, advanced 2.3% in October. A moderate pace of inventory drawdown in the third quarter accounted for all of the 2.1% annualized rates of increase in GDP growth last quarter. Inventories were depleted in the first half of the year and COVID-19 pandemic-related shortages are making it difficult to rebuild stocks. The need to restock is keeping manufacturing humming. There are concerns that the delays in getting stocks could force businesses to over-order and end up with excess inventory. Sales at wholesalers increased 2.2% in October after rising 1.7% in September. At October’s sales pace, it would take 1.22 months to clear shelves, unchanged from September.

U.S. consumer prices rose solidly in November as Americans paid more for food and a range of goods, leading to the largest annual gain since June 1982. The CPI increased 0.8% in November, following a 0.9% increase in October. In the last twelve months, the index was up 6.8%. The November gain was largely driven by increases in gasoline, shelter, food, used cars, and trucks that were among the biggest contributors. Food prices increased 0.7% as the food at home prices advanced 0.8%. Energy prices rose 3.5% in November as gasoline prices 6.1% and the other major energy components also increased for the month. The index excluding food and energy rose 0.5% in November, following a 0.6% increase in October. The core index was up 4.9% from a year earlier. Over the past year, the energy index is up 33.3% and the food index is up 6.1%. The index for used cars and trucks is up 31.4% over the last twelve months and the index for new cars is up 11.1%. Inflation is still being largely driven by supply chain issues and there is some evidence that we might be seeing the peak. Fuel prices have moderated in November and there is some evidence the supply chain problems are starting to make progress. The FMOC has a meeting this week and many eyes will be watching for clues to likely interest rate increases, as well as the pace of reducing the Fed’s bond-buying program.

Important Data Releases This Week

  • The November NFIB small business optimism report will be released on Tuesday, December 14 at 6:00 AM. The NFIB index has been making incremental improvements in recent months but is still hovering at a relatively low level. Small businesses are facing labor shortages and delays in receiving needed inputs. We expect the same pattern to continue, with the index rising from 98.2 to 98.4.
  • The November PPI report will be released on Tuesday, December 14 at 8:30 AM. The latest CPI report shows that inflation is still running hot. The energy index for CPI jumped 3.5% in November and gas prices rose 6.1% last month and that will be a boost that will help drive the PPI higher. Supply chain problems are still constraining production and adding to inflation. Inflation will slow in 2022 and the retreat in oil prices suggests that inflation may have peaked. Still, prices are increasing, and the Fed may start a more forceful pace to start to contain what could be termed “run-away” inflation.
  • The November retail sales report will be released on Wednesday, December 15 at 8:30 AM. Retail sales came in above expectations in October, jumping 1.7%. Gains were widespread, showing a strong consumer, and pricing was an issue in some sectors, like energy. It will be a good holiday season, but the new year will see rising interest rates, continued high price increases, especially in the first half of 2022, and a slower economy for the consumer to contend with next year. We project retail sales to increase 0.8% for November.
  • The October business inventories report will be released on Wednesday, December 15 at 10:00 AM. The already released wholesale inventories jumped 2.3% in October from September. Wholesale inventories were up 14.4% from a year earlier. Motor vehicle inventories are volatile, depending on semiconductor deliveries. There has been some progress in building inventories of some commodities, but others are still scarce, A slow pattern to build inventories will continue well into 2022. We look for a 1.0% jump in inventories for October.
  • The November housing starts report will be released on Thursday, December 16 at 8:30 AM. Total starts fell 0.7% to 1.52 million annualized units in October. Single-family starts fell3.9%, the fourth straight decline. Building material and labor shortages are still restraining buildings. Permitting is running at roughly the 2020 pace, suggesting strong demand. The number of unfinished multi-family structures is at a 47-year high, suggesting that supply chain shortages will continue to restrain building. Housing starts are projected to equal 1.59 million for November.





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