The CPI report undershot estimates with flat October figures for both the headline and core, following gains for both of 0.2% in September, 0.4% in August, and 0.6% in July. The 12-month pace for CPI gains slowed to 1.2% y/y for the headline from 1.4% y/y in September, and to 1.6% y/y for the core from 1.7% y/y.
CPI Report Bottom Line
Today’s lean CPI figures capped a four-month stretch of solid gains for both through September but a prior three-month stretch of declines The initial impact of shutdowns was a demand shock, followed by a rebound in oil prices and supply constraints, though the price trajectory was more mixed in October. We do assume that upward pressure from supply constraints will be evident into early-2021, though headline inflation should remain below the Fed’s 2% objective.
Bear Drivers
We believe the CPI data is signally a possible slowly of the economy that makes it VERY vulernable and investors should be prepared for a drop for two reasons.
1) National & State Lock-Downs
New York and several other states are looking at starting new lock downs. Yesterday Dr. Michael Osterholm, a top health advisor for Biden, floated the idea of another national 6 week lock-down on a Yahoo live event. If this happens, expect the market to drop at least 15% from current highs.​
2) Presidential Race Uncertainty
Investors should be aware that are several lawsuits filed now by Trump which could help him win. If two or more swing states like Michigan or Pennsylvanian are unable to confirm their elections, Biden does not have the votes to win. The uncertainty will cause some kind of short term dip in the markets, but should come back quickly.
Bull Driver
If we have a strong consumer spending for the holidays and there are not any major lock-downs, expect the market to trend up. We are currently on track for a V shaped recovery from Covid-19. However, the bull trend is very fragil and could be upset by political events or coronavirus until a vaccine is approved.
CPI Report Broken Down
Weakness was led by apparel and medical care prices, alongside welcome restraint in used car prices after a three-month stretch of out-sized gains.
Apparel prices fell -1.2% after falling -0.5% in September. These declines trim summer gains of 0.6% in August, 1.1% in July and 1.7% in June, following spring declines of -2.3% in May, -4.7% in April, and -2.0% in March.
The medical care service component fell -0.3% in October, following a flat September figure and a lean 0.1% August rise, but a five-month stretch of big 0.5%-0.6% gains. We saw a -0.4% drop for the separate medical cost measure, after a flat September figure, a 0.1% August rise, and prior increases of 0.4%-0.5% since March.
Used vehicle prices fell -0.7% in October, after a 6.7% September surge that marked the largest gain since 1969, a 5.4% August rise that was previously the largest gain since 1969, and a 2.3% rise in July. We saw a prior three-month string of declines. New vehicle prices rose 0.X% after a 0.3% September rise, a flat August figure, and a 0.8% July gain. Demand in the vehicle sector has exceeded supply since Q2 factory shutdowns.
We saw the expected 0.1% October energy price uptick. This gain followed increases of 0.8% in September, 0.9% in August, 2.5% in July and 5.1% in June, but five consecutive declines for the energy component through May.
Food prices rose 0.2%, after a flat September figure, a lean 0.1% August rise, and a -0.4% July drop that marked the first decline for the series since April of 2019.
Owners’ equivalent rent rose by 0.2%, after gains of 0.1% in both September and August, 0.2% in July, and 0.1% in June. This mix includes the three smallest gains since a 0.1% increase in July of 2013.
Tobacco prices fell by -0.2%, after gains of 0.3% in September, 0.4% in August, 0.8% in July, and 1.1% in June.
Real average hourly earnings inched 0.1% higher from -0.2% previously, and were steady at a 3.2% y/y pace for a third straight month.
Initial and Continuing Jobless Claims:
The -48k initial claims drop to 709k in the first week of November extended the -1k drop to 757k (was 751k) to leave a slightly tighter than expected path for the series. For a sixth consecutive week we saw a big continuing claims decline, this time of -436k to 6,786k after a -601k drop to 7,222k (was 7,285k), leaving a decline that was a tad smaller than assumed.
Initial claims not seasonally adjusted dropped -21k to 723k, after a 5k rise to 744k (was 738k).
The insured jobless rate fell to 4.6% from 4.9% (was 5.0%), versus a 17.1% peak in the second week of May and a 1.2% cycle-low for nearly two years ending in mid-March.
We still expect continuing claims to fall by -1,823k between the October and November BLS survey weeks. We saw prior declines of -4,924k in October, -1,745k in September, -2,459k in August, -2,280k in July, and -1,610k in June.
Initial claims entered November below the 786k (was 785k) October average, versus prior averages of 865k in September, 992k in August, and 1,340k in July. We saw a 4,572k peak in April and a 211k prior cycle-low average in January. We saw a 50-year low for the weekly claims figures of 201k in the first week of February.
Next week’s BLS survey week reading will likely undershoot recent survey week readings of 797k in October, 866k in September and 1,104k in August. We saw a 4,442k peak in April and a 203k prior cycle-low in April of 2019.
Today’s mix of claims data largely tracked assumptions, and we will continue to assume a 750k November nonfarm payroll gain.
