Inflation Surprises to the Upside

CPI proves sticky in September … why next month could be even stickier … uncertainty within the Fed … the last chance to get Luke Lango’s AV research

This morning, we learned that the September Consumer Price Index (CPI) increased a seasonally adjusted 0.2% for the month and 2.4% on the year. Both readings were 0.1 percentage point above the Dow Jones consensus.

Core CPI, which strips our food and energy prices (and is more important to the Fed), climbed 0.3% for the month and 3.3% for the year. These readings were also above estimates.

Meanwhile, initial filings for unemployment benefits rose unexpectedly. They came in at 258,000, which was the highest total since Aug. 5, 2023.

So, what do we make of this? And does this affect our investing approach?

Well, while it’s not a horrendous report, neither is it very reassuring.

As you can see below in a chart from The Wall Street Journal, though headline inflation (in gray) keeps falling toward the Fed’s 2% goal, core inflation (in purple) has U-turned north.

Now, on one hand, it’s important to see the bigger picture: Inflation continues falling overall. And one month of rising core inflation doesn’t mean we’ve begun a new uptrend.

On the other hand, it would be foolish to brush this off as insignificant. While inflation is dying, it’s not dead – and Fed officials are very aware.

Lack of buy-in for 50 basis points

Yesterday, the Fed released the minutes from its September meeting. They showed a divided Fed on the size of last month’s rate cut.

From CNBC:

Members (were) divided over the economic outlook.

Some officials hoped for a smaller, quarter percentage point reduction as they sought assurance that inflation was moving sustainably lower and were less worried about the jobs picture.

Ultimately, only one Federal Open Market Committee member, Governor Michelle Bowman, voted against the half-point cut, saying she would have preferred a quarter point.

But the minutes indicated that others also favored a smaller move.

This lack of uniformity makes the recent inconsistency we saw from Fed members more understandable. As we pointed out in yesterday’s Digest, in Federal Reserve Chairman Jerome Powell’s September FOMC statement, he said:

As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished, and the downside risks to employment have increased.

However, last week, Richmond Federal Reserve President Thomas Barkin said:

I’m more concerned about inflation than I am about the labor market… I do think getting stuck is a very real risk.

Literally opposite sentiments.

And here’s Bowman from two weeks ago:

Core inflation remains uncomfortably above our 2% target… I cannot rule out the risk that progress on inflation could continue to stall.

Are investors ready for stalling inflation?

After this morning’s CPI data, we need to be.

Plus, as things look today, upward pressure on prices aren’t done. After all, consider what’s changing here in October…

• Surging oil prices
• Rising home prices

The upward pressures on next month’s CPI

The two largest contributors to the bottom-line CPI number are housing and transportation. Housing makes up roughly a third of the entire CPI reading, while “transportation,” which includes fuel costs, comprises about 17%.

And what’s happening with these costs here in October?

“Up.”

Beginning with fuel costs, the price of oil has been climbing virtually all month.

The average price of West Texas Intermediate Crude in September was $70.23 per barrel, according to the Fed. So far in October, we’re averaging $73.63.

Now, this isn’t a huge difference, but it’s certainly higher, and therefore will be a “stalling” influence on inflation’s downward progress, as Bowman put it.

Plus, remember, we’re yet to see whether Israel takes out part of Iran’s oil production facilities. If so, we’re likely to see prices climb materially higher.

As to housing, though we can’t say for sure, it appears higher prices are on the way. Legendary investor Louis Navellier explained why earlier this week in his latest issue of Accelerated Profits:

There’s been tremendous demand for mortgages recently, especially since the Federal Reserve cut key interest rates last month.

Mortgage rates have dipped to a two-year low, which boosted applications to refinance home loans by 20% during the week of September 16. In the same week, applications to buy a home rose 1% and were up 2% year-over-year.

All things equal, more demand to buy a home puts upward pressure on prices.

Below, we look at data from real estate brokerage company Redfin

On top, we’re seeing the median sales price of homes in Redfin metros, measured week-to-week. On bottom, we get the year-over-year percentage change in median home prices.

Note two things…

One, how the downward pressure on median home prices from June 10 through September 29 turned sideways at the end of last month (presumably from the influx of new buyers after the Fed’s rate cut). This hints at higher weekly prices in October.

Two, how year-over-year prices just spiked between August 19 and September 29 and are likely now on a higher trajectory this month.

While we can’t say how much this might push inflation higher in next month’s reading (assuming the trend persists), we can say it certainly won’t lower inflation.

The bond market seems to share a similar perspective, which is why the 10-year yield has rocketed back above 4%. As I write Thursday, it’s trading at 4.10%.

Here’s bond expert Jim Bianco’s quick-and-dirty explanation:

A reasonable interpretation is the market is “rejecting” the cut, fearing it will overstimulate and spur more inflation.

This morning’s CPI reading didn’t do much to quell that concern.

As investors wake up to this, we’re suddenly seeing headlines about the Fed not cutting rates at all in November

Three weeks ago, traders were confident that the Fed would give us at least one more 50-basis-point cut at one of its remaining two meetings this year, then a 25-basis-point cut. Some more aggressive traders expected two different 50-basis-point cuts.

Yet here we are a few weeks later, and now 12% of traders are saying we won’t get any rate cut in November. And if we look out to December, 13% of traders believe we’re in for just one more quarter-point cut in 2024.

Here’s Barron’s, from its article titled, “The Fed May Not Cut Rates in November. What to Do With Treasury Bonds Now”:

The best-laid plans often go awry, and that goes even for the Federal Reserve, whose rate-cut intentions were thrown for a loop by a surprisingly strong jobs report…

In the past 30 years, the Fed has never initiated a rate-cutting cycle without implementing at least three consecutive cuts. So, after the first reduction in rates in September, Wall Street was prepped for a smooth and steady ride lower, expecting at least a quarter-point cut in both the November and December meetings…

Now some traders are questioning the need for immediate rate cuts…

The call for the Fed to revise its script has translated into stomach-churning moves in the bond market. Yields on both the 10-year and two-year government bonds have risen above the 4% level…

Yields on 10-year have reached their highest levels since July 31 because the market now estimates that the lowest point for the fed-funds rate is at 3.25%, up from around 3%—and higher than the Fed’s own estimate of 2.875%.

Higher terminal rates call for higher long-term yields to compensate for the increased interest rate risk. Plus, bond investors are sniffing out the attack on predictability and confidence in the policy path.

Meanwhile, as we question what could happen with inflation and bond yields, let’s not overlook potential curveballs in the labor market

Let’s return to Fed President Barkin’s comment:

I’m more concerned about inflation than I am about the labor market… I do think getting stuck is a very real risk.

So, the labor market is fine then, right?

That’s certainly how it appeared last week. After all, coming into last Friday’s payroll report, the Dow Jones consensus forecast called for 150,000 new jobs. The actual number clocked in at an eyewatering 254,000. This pushed the overall unemployment rate down to 4.1% in September.

But two important notes…

First, that 254,000 figure was goosed by seasonal adjustments.

Here’s MarketWatch to explain:

Every year since 1997 the private sector has lost jobs in September, with the lone exception of the pandemic year in 2020.

How come? Young people leave summer jobs and return to school while educators go back to work. That’s a big reason.

The seasonal adjustments are supposed to try to account for this. If fewer private jobs than usual are lost in September, or more educational jobs are created, the headline U.S. jobs number will look pretty good.

In the reverse situation, the September jobs gain would be weaker.

Before adjustments, the private sector shed 458,000 jobs in September. Government employment, on the other hand, jumped by an unadjusted 918,000.

Not quite as strong, no?

Second, be aware that hidden beneath the broad category of “job growth” is a breakdown of full-time jobs added and part-time jobs added.

It turns out, we’re swapping out full-time jobs for part-time jobs.

Here’s The Kobeissi Letter:

The number of people working MULTIPLE jobs in the US hit 8.66 million in September, a new record.

This is ~300,000 above the peak seen before the pandemic and ~600,000 above the 2008 peak. Furthermore, the number of part-time jobs has jumped by ~3 million over the last 3 years to a near-record 28.2 million.

Concerningly, full-time employment has declined by 1 million since November 2023.

Multiple jobholders have been rapidly rising over the last few years as Americans are fighting record-high prices. Millions of Americans are working multiple jobs to afford basic necessities.

So, what’s in store for our economy and investment markets looking forward?

A strong economy/labor force yet a potential uptick in inflation?

Weaker inflation yet continued deterioration of the labor force?

Or a Goldilocks environment of robust growth with dying inflation?

Clearly, we would prefer #3, but the data don’t have us convinced.

Despite our lack of conviction, we’re not bailing on this bull market

Quite the opposite…

Despite the mild pullback as I write Thursday afternoon, we remain in a roaring bull market. In fact, the S&P is having its strongest year-to-date performance of the 21^st century…

At the end of the day, this performance is what matters.

After all, as far as your portfolio value is concerned, price trumps everything. And here in 2024, investors are gleefully pushing prices higher. Let’s benefit from that. 

However, let’s be aware of these economic cracks and inconsistencies. While we enjoy today’s bull market, let’s not become complacent. After all, a study of the most successful traders of all time reveals their obsession with preparing for “what can go wrong” far more than trying to squeeze profits out of “what can go right.”

So, mind your stop-losses… use wise position sizes… maintain a balanced portfolio of various assets that are non-correlated… and then stay in the market for as long as this bull market wants to run…

Before we sign off, don’t miss your last chance to get Luke Lango’s latest research on opportunities in the autonomous/electric vehicle sector

This evening, Tesla will be holding its “We, Robot” event. The electric car manufacturer is expected to reveal its first dedicated robotaxi, tentatively called the “Cybercab.”

Our technology expert Luke Lango has spent months researching the impact of this technology on our world as well as the investment markets. And earlier this week, he held a live event to present his findings:

If self-driving cars are successful, AV stocks could (and should) soar over the coming years.

That’s why, this past Monday, I detailed all the recent groundbreaking developments in the autonomous vehicle industry, including how robotaxis are set to completely transform transportation, save millions of lives, and potentially put up to $30,000 a year in passive income in your pocket.

I also dove headlong into the highly anticipated Robotaxi launch that could unlock a staggering $9 trillion in value – bigger than all of Elon Musk’s companies combined.

While Elon has been promising self-driving technology for years without success, I believe a tiny $3 company holds the key to unlocking his biggest, boldest promise.

Today is the last day we’ll be making Luke’s research widely available. So, if you’re interested in getting Luke’s blueprint for investing in the age of autonomous vehicles but haven’t yet, please check it out right here before we take it down later tonight.

Have a good evening,

Jeff Remsburg