Wholesale and consumer inflation edged higher earlier in the week, but retail spending rose less than expected. It was a mixed bag for Treasury rate watchers. Yields peaked last Friday and moved lower early in the week as stocks fell, submits Lance Gaitan, Dent Research, November 17, 2017. Keep your eyes on consumer spending for the rest of the year.
Thanks to Dent Research, here’s the noise vs the news on November 17, 2017. We hope this information helps you separate the noise for the real news you can use.
Retail Sales Tick Up 0.2% in October... Sales grew slightly faster than the 0.1% estimated gain.
What it means – The modest increase follows a substantial 1.9% rise in September, which reflected replacement sales in the wake of Hurricanes Harvey and Irma. Auto sales are still stronger than they would have been without the storms, but the monthly gain fell from 4.6% in September to 0.7% last month.
Building supplies followed the same trend, but gave up ground in October, slipping 1.2%, after September’s 3.0% increase. Furniture and electronics were both up last month.
I expect the numbers to ease further as hurricane-related sales drop off in the months ahead, especially for autos.
Inflation Up 0.1% Last Month... The consumer price index rose as expected last month, and is 2% higher for the year.
What it means – The core inflation rate, which excludes food and energy, ticked up 0.2% and is up 1.8% over last year. This puts the core rate very close to the Fed’s 2% target. Under the surface, wireless phone plans edged up, as did housing and medical costs. While we bought more cars, we paid a little less for them, with auto prices down 0.2%.
The Fed will take this as comforting news, and rely on it to raise rates next month. But I think they’ll be hard pressed to raise rates after December.
Once we get into 2018, auto sales should slow down and the Fed’s balance sheet reduction plan should weigh on the bond markets. The data will be less friendly for incoming Fed Chair Powell.
Housing Starts Up 13.7% in October, but Still Down 2.9% for the Year... Starts rebounded last month, particularly in multifamily units, which were up 36.8%.
What it means – Multifamily units, which are basically apartments and condos, had been lagging most of the year.
Single-family housing starts, which take more labor, were up 5.3% in October. It’s good to see more activity in the homebuilding sector, but with numbers still lower than last year, supply isn’t coming fast enough to ease prices or add more growth to GDP.
Oil Prices Ease as Inventory Builds... The price of oil dipped from recent highs after the IEA forecast weaker demand and U.S. inventory posted unexpected gains.
What it means – The price of oil shot higher over the past several months from the mid-$40s to $60 for Brent Crude. Investors worried about OPEC supply cuts, political instability in the Middle East, and rising demand.
It now looks like all three issues are off the table for the moment. OPEC and its conspiring non-members don’t appear to be producing less, and U.S. producers are putting more of the black gold into storage.
The political shakeout in Saudi Arabia hasn’t caused widespread panic, and the international energy agency noted that it expects less demand over the next couple of years, not more.
Industrial Production Up 0.9% in October... The manufacturing component increased 1.3%.
What it means – The auto replacement effect after Hurricane Harvey is on full display in the October industrial production report. Auto manufacturing jumped another 1% last month, and drove capacity utilization up from 76.4% to 77%. This is one more statistic that I expect to decline in the first quarter as the replacement effect wears off.
Saudis Demand 70% of Wealth in Exchange for Freedom... Many of the suspects rounded up in recent weeks on suspicion of corruption were offered a deal. Hand over 70% of your wealth in exchange for your freedom.
What it means – It’s interesting that the Saudi roundup came about the same time as the 500-year anniversary of Martin Luther posting his 95 theses. In his protest, Luther noted that the Catholic church was incorrectly selling the path to heaven by telling congregants they could pay to get their deceased loved ones out of purgatory. The church also offered to forgive sins for the right price.
Apparently, Mohammed bin Salman (MBS), the new Saudi crown prince, thinks the Catholics of old were on to something. For the right price, you can keep much of your ill-gotten goods and your comfy lifestyle. It’s also possible that MBS wasn’t thinking about the Christians at all. Instead, he was simply channeling the bank robber Willie Sutton, who went after banks because, “That’s where the money is.”
Tesla Unveils New Semi-Tractor and Roadster... The electric car company displayed a new semi-tractor that CEO Elon Musk claims can go 500 miles on a single charge.
What it means – As usual Musk was long on theatrics and short on specifics. The truck is electric, so it has unlimited torque and few moving parts. That’s great for operation, but you still have to buy it and charge it. The price remains a secret, but Musk hinted that Tesla products are “expensive.” Right. He noted production would begin by late 2019, but because the company has never met a production schedule it couldn’t fail to meet, don’t count on it.
After introducing the truck, Musk drove a surprise new roadster out of the trailer. The new car can go from zero to 60 miles per hour in 1.9 seconds, which would make it the fastest production car in the world. That is, if the company could actually produce it. Given the production problems with the current Model 3, I don’t expect the new roadster to be available anytime soon.
Next Week – The week of Thanksgiving brings reports on existing home sales and durable goods, as well as the minutes from the last Fed meeting. Because of the holidays, we will publish the Dent Digest on Wednesday.
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