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Everyone is looking up.
Whether itâs spy balloons, CPI prints, retail sales, or ARKK 0.00%â YTD performance, the start of 2023 looks like it has shiny object syndrome.
While the market continues to do whatever proves the most people wrong, we have more and more calls that âthis rally is too extendedâ, âhigher for longer (both CPI and rates)â, and, âOh look! meme stocks are on a run again, we know how that ends!â
The oracle du jour, Mike Wilson is back at it again with a lengthy piece on how earnings are going to continue to suck big time and the market is way over its skis.
But the path of least resistance still remains to beâŚupâŚ
As economists tinker with their airplane runway analogies from soft landing to hard landing to no landing, letâs look at one of the most important tea leaves in a little more depth now that weâve had more time to digest the figuresâŚ
CPI.
This week, in <5 minutes, weâll cover the CPI print this week:
Going into the Print đ Expectations, Relevant FOMC Comments
Change in Methodology đ OER + Calendar Year Expenditure
By The Numbers đ Breaking it Down
Supplemental Data đ Retail Sales, PPI, NFIB
Letâs get started!
1. Going into the Print đ Expectations, Relevant FOMC Comments
The CPI print has been operating in tandem with the FOMC meetings to be the largest market-moving event. As we know, the two are closely correlated as elevated inflation means more hawkish comments from Powell in order to put a lid on inflation.
However, last week, we had Powell say the word âdisinflationâ 15 times during the FOMC presser. This sent risk assets into party-on mode as many are looking through to a pause in the rapid rate-hiking cycle.
It seemed like deja vu as meme stocks were back on and WallStreetBets somehow became relevant again.
Heading into the print, many were thinking about the mental gymnastics of breaking down the underlying components. Whatâs becoming difficult here is trying to perform a balancing act of what is a leading, coincident, and lagging indicator.
What people are trying to get to the bottom of here is the amount of time it takes for interest rate hikes to ripple through to the real economy.
Some are arguing that the timing impact on traditional lagging indicators like housing is changing. It used to be that prices would have a 12-18 month lag as a less liquid asset was much slower to reflect real changes in prices. For various reasons - people are hesitant to uproot their lives to move, those with fixed rates are locked in and less likely to go back to the market, and the transaction costs are high.
However, there are several net differences this time around: the impact of technology (pricing transparency), lowering transaction costs, and differentiated buyer pool (REITs, Investors, iBuyers, etc..). This may shorten the time that it takes for an increase in rates to reach the housing market.
The free flow of information also changes expectations. Remember back in Econ 101 whenever you drew one of those supply and demand charts, the inflation curve always had an âeâ next to it? This is because inflation expectations largely form consumer behaviour and become self-fulfilling.
If you expect inflation to rise, you will demand more salary from work, which will allow you to pay these higher prices. As more people have more disposable income, the prices of goods will rise. Self-fulfilling.
When everyone jumps on Twitter, all you can see is the rising price of eggs, or the rising price of groceries, or the rising price of every.
Information is now immediately distributed and disseminated. Iâm not saying we have perfect information symmetry, just that these effects are being digested and adjusted to in a much faster translation method than before. Since consumer behaviour drives a lot of these macro trends, this is important to remember.
Before we get to the print, itâs important to note that there was a change in the reporting method that took place.

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2. Change in Methodology đ OER + Calendar Year Expenditure
Beginning with January 2023 data, adjusted the weighting method for Ownerâs Equivalent Rent (OER) in the CPI.
The new method will use neighborhood-level information on housing structure types to weigh OERâs unit sample observations. BLS will continue to sample and weigh housing units to be geographically representative.Â
In some neighborhoods, detached houses are underrepresented in survey responses, so additional unit weight will be given to them in the OER index sample.Â
For an in-depth review of the methodology, the BLS released âLocation, Location, Structure Type: Rent Divergence within Neighborhoods.â
TLDR; OER will now account for more than a quarter of the total calculation, while housing overall will account for more than 44 percent. Used car prices have been lowered in importance after a year in which wholesale and retail used car prices fell out of sync with each other.
This is why Iâm stressing the importance of the housing market lag on the figure.
Also starting with January 2023 data, the BLS plans to update weights annually for the Consumer Price Index based on a single calendar year of data, using consumer expenditure data from 2021. This reflects a change from the prior practice of updating weights biennially using two years of expenditure data.
Without further ado, letâs get to the printâŚ
3. By The Numbers đ Breaking it Down
Vehicles
Used vehicles as a portion of CPI continues its MoM decline, now down 11.6% YoY. This is contradictory to the figures that weâre seeing when we look at the Manheim Indexâs uptick at the beginning of the year:
An interesting difference is the gap between new vs. used cars. Used cars are much more a function of disposable income whereas new cars have more to it. New cars are typically financed and these rates are largely pegged to the rest of the interest rate market. With rising rates, the average monthly payment for a new car has soared to $777, which is a new record and nearly a double from late 2019.
Food
When it comes to the grocery store bill - inflation is still looking quite sticky here, up another 0.5% MoM, bringing the YoY increase to 10.1%. This is one of the most core components of inflation that affect consumers daily, eroding their purchasing power.
Who cares about used car prices when you canât afford eggs?
Shelter
Shelted added another 0.7% increase MoM, bringing the YoY figure to 7.9%. Remember - people are still trying to figure out the lagged impact of this. I found this chart to be extremely interesting. Check out the lagged impacts:
Rents have turned a corner in the market, but not in CPI.
Energy
The volatile energy components continue to beâŚvolatile. Utility gas services were up 6.7% MoM, and 26.7% YoY while fuel oil decreased 1.2% MoM, now only up 27.7% YoY. A lot of volatility remains as we continue to have politicization of critical energy infrastructure, but it is good to see some months where energy costs stabilize, as fuel costs generally pass on through the entire goods market.
4. Supplemental Data đ Retail Sales, PPI, NFIB
We also have had a whole bunch of economic data come out over the last little while. Hereâs a recapâŚ
Retail sales
Janâs nominal retail sales were much stronger than expected as the headline reading rose +3.0% MoM. Retail sales ex motor vehicle rose +2.3%. The headline retail sales tally is up +6.4% YoY in Jan.
However, we need to account for inflation. I went on FOX to talk about it:
PPI
The January PPI data was firmer than expected, with the headline rising 0.7% and the core index (ex. food and energy) up 0.5%. While year-ago inflation rates for these aggregates moderated between December and January, the seasonally adjusted monthly changes reported for January were the firmest since about the middle of last year.
NFIB
Wrapping UpâŚ
The economy remains a very elusive puzzle. There are many indicators out there that tell very different stories. Strong retail figures - strong labour numbers are flying in the face of recession.
While company earnings, inverted yield curves, and a âhigher for longerâ Fed point towards the increased probabilities of recession.
In this tug of war, itâs important to be more active in security selection, be more patient with your long-term ideas, and add to any high-conviction stocks in pullbacks.
Buckle up.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
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What else we Grittinâ On?
INVENTORIES. Inventory gluts could push inflation higher. US storage prices are up ~11% YoY.
HOMEBUILDERS. Homebuilder sentiment jumped by the most in a decade. Slightly lower mortgage rates are sparking demand.
FATIGUE. Survey fatigue is threatening to undermine US economic data. Survey response rates have been declining for years.
CEOs. Big bank CEOs are increasingly expecting a soft landing. Optimistic comments from BofA and Goldman Sachs executives.
BILLS. Twitter has 9 different lawsuits demanding payment for unpaid bills. The complaints total more than $14 million (plus interest).
Sources
https://www.bloomberg.com/news/features/2023-02-14/new-car-prices-are-so-high-only-rich-americans-can-afford-them?sref=1jcHkHmg
https://www.cnbc.com/2023/02/14/heres-the-breakdown-of-the-inflation-report-for-january-in-one-chart.html
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