Ugly Data Today – CPI and Initial Claims

The market is struggling today and we believe that the data this morning is signaling rough waters ahead. Below is special report.

Executive Summary

In the past couple of months we have been and continue to be generally bullish, but the tides could turn very quickly. The ugly round of claims data will likely require a downward revision in our December nonfarm payroll estimate of 220k, alongside downward revisions in other macro-measures for December overall.

Investors should be careful to limit exposure to real estate investments like REITs and energy stocks/ETFs.

As mentioned above, the data this morning points to a deterioration of the labor market.  We believe the market will be directly affecting consumer spending and real estate. The increased lock-downs will only make this situation direr.

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It is reported that roughly 30% of renters and homeowners are behind in rent payments or mortgages. The market right now is being held up by the promise of vaccines (released soon?) and another stimulus bill from Congress.

If everything goes as planned, there will be a small dip in the markets but nothing significant. However, if the vaccine and another stimulus bill is not rolled out, we could see a 15% correction in the market.

Data Breakdown

Today’s U.S. reports revealed significant gains in the claims metrics that suggested deterioration in the labor market with expanding coronavirus restrictions. The shifts in seasonal behavior with the pandemic make the weekly measures suspect.

We also saw the expected 0.2% November gains for both the headline and core CPI indexes, though the core rise rounded down from a firm 0.219%. The report extends the pattern of restrained price gains overall that should keep headline inflation at or below the 2% objective, despite bottlenecks in some industries that boost related component prices.

The weak claims data will take a chunk out of our December forecasts for employment and retail activity, and we lowered our December nonfarm payroll estimate to 100k from 220k. We would have to say that the initial claims data is BEARISH and pointing to a market decline.

* We saw a 37k initial claims surge to 753k from 716k (was 712k).

* Continuing claims rose 230k to 5,757k from 5,527k (was 5,520k).

* The insured jobless rate rose to 3.9% from 3.8%, versus a 17.1% peak in May and a 1.2% cycle-low for nearly two years ending in mid-March.

* Initial claims not seasonally surged 229k to 948k, after a -117k drop to 719k (was 714k).

* CPI rose 0.2% in November after a flat figure, leaving no change in the y/y metric at 1.2%.

* CPI core rose 0.2% in November after a flat figure, leaving no change in the y/y metric at 1.6%.

* The November CPI headline and core price figures rounded from gains of 0.189% and 0.219%, respectively.

* The weekly Bloomberg consumer comfort index slipped to 49.0 in the first week of December from 49.3, versus an average of 49.1 in November and 47.2 in October.

CPI

The CPI report largely tracked estimates with November gains of 0.2% for both the headline and core, following flat figures for both in October. More restrained CPI figures in October and November capped a four-month stretch of big gains for both through September, but a prior three-month stretch of declines.

The 12-month pace for the CPI headline remained at October’s 1.2%, while the core gain remained at October’s 1.6%.

October and November weakness was led by medical care prices, alongside declines in used car prices over both months after a three-month stretch of out-sized gains through September. The November report also revealed a -0.1% drop for new car prices, after a 0.4% October gain, while owners’ equivalent rent was flat in November after a 0.2% gain.

Apparel prices offset the medical and vehicle price weakness, with a 0.9% bounce after falling -1.2% in October and -0.5% in September.

We saw the expected 0.4% November energy price uptick. This rise followed increases of 0.1% in October, 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 fell -0.1%, after a 0.2% October rise, 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.

The medical care service component fell -0.1% in November, following a -0.3% October drop, a flat September figure, a lean 0.1% August rise, and 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 -0.4% October decline, a flat September figure, a 0.1% August rise, and prior increases of 0.4%-0.5% since March.

Real average hourly earnings were up 0.1% on the month and posted a 3.2% y/y clip, as seen in October.

The inflation report largely extended the pattern of restrained price gains overall that should keep headline inflation at or below the 2% objective, despite bottlenecks in some industries that are boosting prices.

Initial and Continuing Claims

The 137k initial claims surge to 853k in the first week of December reverses the -71k drop to 716k (was 712k) in the week of Thanksgiving, as claims are now showing what may be a big boost from expanding coronavirus restrictions.

We’re seeing the same thing with continuing claims, given a 230k surge to 5,757k, after a -562k drop to 5,527k (was 5,520k), though he the rise only took back part of last week’s out-sized decline.

The insured jobless rate rose modestly, to 3.9% from 3.8%, versus a 17.1% peak in May and a 1.2% cycle-low for nearly two years ending in mid-March.

Initial claims are entering December well above prior averages of 748k in November, 786k in October, and 865k in September.

The seasonal factors remain suspicious through this holiday period given that historic seasonal factors likely don’t align with holiday behavior during the pandemic, but today’s hefty initial claims rise, alongside an even bigger 229k rise in initial claims on an NSA basis, after a -117k drop to 719k (was 714k), suggests a big deterioration in labor market conditions.

The ugly round of claims data will likely require a downward revision in our December nonfarm payroll estimate of 220k, alongside downward revisions in other macro-measures for December overall.

 

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