Evening Brief – 09.14.23

Feelin’ Hot, Hot, Hot

The US economy is experiencing a comeback of inflationary fears as producer inflation soars, indicating that the period of widespread price decreases may be over – or least entering a pause. But data on retail sales and labor continued to paint a picture of a robust economy.

Following Wednesday’s hotter-than-expected comeback in consumer prices, the focus on Thursday was on producer prices for evidence that the inflation pipeline may continue to trend lower. Unfortunately, it was not the case.

Wholesale inflation climbed more than expected in August, as PPI jumped for the second month in a row. According to the Bureau of Labor Statistics, PPI rose 0.7% in August, up from 0.3% in July and higher than the +0.4% predicted by many economists. This is the strongest print since June 2022, pushing prices up 1.6% year-on-year. This is not what the Federal Reserve Chair Jay Powell wanted to see.

Goods prices are reaccelerating quickly and are already back in line with inflation year on year, while the rise in service costs has moderated, albeit modestly. Moreover, much of last month’s PPI increase was caused by a significant increase in portfolio management costs. These prices increased again in August.

Meanwhile, following July’s consumer shopping spree, retail sales were expected to fall in August, with the rise in fuel costs serving as the lone price support.

The celebration continued, however, as retail sales were hotter than expected, increasing 0.6% month on month and easily exceeding market estimates of a 0.1% increase. Retail sales climbed for the fifth month in a row. The increase was 2.5% year over year. Unsurprisingly, there was a 5.2% jump in spending on gasoline as oil prices have rallied sharply over the past month.

Retail sales outperformed expectations in all areas with Core (ex-autos and gas) up 0.2% in August versus an expected increase of 0.1%, and the ‘control group’ – which is used for GDP calculations – up 0.1% versus expectations of a 0.1% drop.

Finally, following the previous week’s decline to the lowest levels since 2022, initial claims were expected to climb, and the headline print did rise a bit from 215k to 220k. Non-seasonally adjusted claims, on the other hand, fell to their lowest level since September 2022. Continuing claims increased slightly in the previous week but remained below the critical 1.7 million mark.

However, as Goldman Sachs notes, “ongoing seasonal distortions have likely weighed on continuing claims over the last few months, and we estimate they could exert a cumulative drag on the level of continuing claims of 375k between April and the end of September.”

The August rise in both producer and consumer inflation signals that the US economy is once again battling with upward price pressures. Yet, while initial jobless claims are declining, continuing claims are stable, indicating the labor market remains resilient.

Investors continue to price in a 50-50 possibility of another rate hike this year, as there is still concern that inflation will remain hot enough for the Fed to pull the trigger again.