SCHR - A Flat CPI Points To The End Of Rising Rates
Summary
- The Labor Department announced that the Consumer Price Index (CPI) declined -0.1% MoM in December, which was in line with economists’ consensus estimate. Core CPI rose 0.3%, but that was also in line with the economists’ consensus estimates.
- There is no CPI evidence yet that the housing market and rental rates are cooling off, but overall, the December CPI report was mixed and will likely cause the Fed to remain somewhat hawkish until housing costs decline.
- As rising interest rate concerns diminish, the stock market can finally focus on corporate earnings growth. The strongest sectors reporting (or pre-reporting) so far are Energy and Primary Metals (i.e., specialty steel).
Last Thursday, the Labor Department announced that the Consumer Price Index ((CPI)) declined -0.1% in December (month-over-month), which was in line with economists’ consensus estimate. The core CPI, excluding food and energy, rose 0.3%, but that was also in line with the economists’ consensus estimates.
Food prices rose 0.3% in December, while energy prices declined -4.5%. In the past 12 months, the CPI and core CPI are up 6.5% and 5.7%, respectively, which is substantially lower than November’s annual pace of 7.1% and 6.0%, and way below the peak CPI inflation of 9.1% (annual pace) set back in June.
The crucial “owners’ equivalent rent” rose 0.8% in December, up from 0.6% in November, so there is no CPI evidence yet that the housing market and rental rates are cooling off, but overall, the December CPI report was mixed and will likely cause the Fed to remain somewhat hawkish until housing costs decline.
Speaking of lower prices, on Friday, Tesla ( TSLA ) slashed the price of some of its popular electric vehicles (EVs) by up to 20% in the U.S. in order to stimulate sales and lower inventories. Germany’s prices are now being cut by up to 17%, while China’s prices are being cut up to 14%. The base Model 3 and Y models in the U.S. now also qualify for a $7,500 federal tax credit, which should help to stimulate sales. It will be interesting if these price cuts stimulate EV sales, since Tesla’s near-term production exceeded demand.
The best news is that after the CPI announcement, the Treasury note and bond yields both decreased. Furthermore, at least one FOMC voting member, namely Philadelphia Fed President Patrick Harker, said that a smaller (0.25%) rate hike would be appropriate at the next FOMC meeting on February 1 st .
So, as rising interest rate concerns diminish, the stock market can finally focus on corporate earnings growth - and therein lies another new problem, since outside of the Top 15% of stocks (as rated in our Dividend Grader and Portfolio Grader databases), positive earnings growth remains elusive due to more difficult year-over-year comparisons, as well as sputtering economic activity.
The strongest sectors reporting (or pre-reporting) so far are Energy and Primary Metals (i.e., specialty steel). Already, one of my steel stocks, Commercial Metals ( CMC ), announced better-than-expected quarterly results and provided positive guidance. Energy companies are forecasted to post the strongest earnings, despite low natural gas prices due to mild winter weather. However, crude oil prices typically rise in the spring due to strong seasonal demand, so $100 per barrel crude oil is likely, and $120 per barrel crude oil could occur if there is another supply disruption from Russia or OPEC.
Speaking of slowing the economy, the upcoming Beige Book survey - to be released prior to the February 1 st Federal Open Market Committee ((FOMC)) meeting - is expected to provide some insight into monetary policy based on how all 12 Fed districts are doing economically. Now that the Institute of Supply Management (ISM) surveys say that both manufacturing and the service sector contracted in December, many Fed districts should be reporting in the upcoming Beige Book survey that economic activity is sputtering. As a result, the Fed’s Beige Book survey will be an important report.
I should add that the Atlanta Fed on Tuesday revised its fourth-quarter GDP estimate up to an annual pace of 4.1% from its previous estimate of a 3.8% annual pace, so although the ISM manufacturing and service surveys say that economic activity was contracting, the Atlanta Fed continues to forecast robust economic growth. The wildcard when calculating GDP growth is the trade deficit data, because as the trade deficit shrinks, GDP growth naturally rises. For example, 2.77% of the 3.2% of the GDP growth in the third quarter was attributable to an improving trade deficit from rising energy exports.
The Fed was a party pooper with its hawkish December 15 th FOMC statement, but in the wake of cooling inflation, weak PMI reports, and falling Treasury yields, I am expecting a more favorable FOMC statement on February 1 st, as well as the possibility that the Fed may only hike key interest rates 0.25%. As soon as the stock market realizes that the Fed’s rate hikes are nearing an end, the market should rally.
Other Analysts Now Share Our View that Crude Oil is Headed for $100 (and Maybe $120)
There are several reasons that I remain bullish on crude oil. The primary reason is that China is reviving from a terrible Covid scare. Chinese exports declined 9.9% in December after falling 8.7% in November, when much of the country was constrained by zero-Covid rules. The December export plunge was the largest since February 2020, when Covid travel restrictions began. Now that China is reopening, its trade data in the upcoming months will be closely scrutinized for a return to normal economic activity.
Due to China reopening its international air travel after a 3-year Covid ban, plus some evidence that economic activity may be picking up there, copper prices have surged to over $9,000 per ton for the first time since last June. Goldman Sachs analyst Jeff Currie said that copper may reach $11,500 per ton by the end of the year. I should add that as electric vehicle sales rise and the electricity grid is upgraded with battery storage facilities, copper demand naturally rises.
Besides China reopening its economy and international air travel, China also boosted the amount of crude oil that its refiners could import, just as the House of Representatives voted 331 to 97 to stop the Biden Administration from selling crude oil from the Strategic Petroleum Reserve ((SPR)) to China or Chinese-owned companies. There is also more seasonal demand in the spring. Bloomberg TV asked multiple experts last week about how high crude oil prices can go without the 1 million barrel per day release from the SPR, and the consensus was that $100 per barrel was likely in the spring and up to $120 in the summer.
The Wall Street Journal on Tuesday reported that U.S. production of natural gas has hit record high levels, due partially to active drilling in the Haynesville basin in Louisiana and Texas. Natural gas exports are at an all-time record due to LNG exports. Additionally, domestic crude oil production is almost near 2019 production levels. Although natural gas prices are currently low due to abnormally warm winter weather in Europe and the U.S., natural gas prices in California remain almost five times higher due to limited pipeline capacity. (There is a major natural gas pipeline to Southern California that remains closed.)
The U.S. Consumer Product Safety Commission is now proposing a ban on natural gas stoves to address indoor air pollution that can cause health and respiratory problems. This is just the latest attempt by the federal government to expand California’s statewide ban on natural gas appliances to the national level. This fight against natural gas appliances in our homes is stupid, in my view. It will be interesting to see if the Consumer Product Safety Commission can impose a ban on natural gas stoves, despite growing outrage from homeowners and restaurants.
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A Flat CPI Points To The End Of Rising Rates