DATA DIVE - Inflation, Consumer Confidence and Employment.

Reading Time: 7 mins

The aim of this series of articles, which will be published every Thursday, is to share with you important data which you can use to come to your own conclusions. I will restrict my commentary to the strictly necessary, as I guide you through it.

Given that Inflation is the theme of the moment I must necessarily start with that, I shall then move on to look at two other economic indicators, Consumer Confidence and Employment. The former can be considered a leading indicator, the latter a lagging indicator. Generally, you would expect a leading indicator to turn before the economic cycle turns, while a lagging economic indicator to turn after the economic cycle (with a lag).

Note: Technically speaking Inflation is also considered a lagging indicator.So far, this cycle seems to be playing by the rules.

You may have noticed something interesting in that last paragraph - the two mandates of the Fed, Full Employment and Price Stability are based on lagging economic indicators.Enough said.

Prior to yesterday's Inflation data in my Sunday note I said:“Chasing a lower inflation print, except for a short-term trade, may result in being baited by Noise into a very unfortunate trap.”This turned out to be quite true.

First let us look at the data, then let me mention why I was able to make this statement with such confidence, and why next time you hear it you will also know it to be BS.

US Inflation Rate YoY came in at +8.3%, MoM +0.1%The significant decrease in energy prices down -10% MoM, was offset by significant increases in Food, Shelter and Medical care costs.On a YoY basis food inflation rose +11.4%, the most since 1979,Shelter (rents) rose +6.2%, the most since 1984.

UNITED STATES INFLATION RATE

Despite inflation surprising to the upside, the RoC, as evident from the MoM series, has declined significantly compared to earlier this year - ergo inflation is slowing.

UNITED STATES INFLATION RATE MoM

US Core Inflation rose to +6.3% YoY reflecting the sticker nature of inflation in all things not Energy.

UNITED STATES CORE INFLATION RATE

Similarly in the UK Core Inflation rose to a new high of +6.3% YoY

UNITED KINGDOM CORE INFLATION RATE

While the Inflation Rate slowed slightly to +9.9% YoY.

With the ECB having hiked 75bps, and the Fed also likely to do +75bps, it will be interesting to see what the BOE decides to do next week.

UNITED KINGDOM INFLATION RATE

In Germany (and the rest of Europe) inflation is also staying stubbornly high due to the ongoing energy crisis. The prices of energy products rose sharply YoY, especially for heating oil (111.5%), natural gas (83.3%), electricity (16.6%), motor fuels (16.5%).

GERMANY INFLATION RATE

Something to bear in mind is that the dollar strength is undoubtedly forcing more persistent inflation in all countries that do not have King Dollar as their main currency.

For example, the Dollar has risen around 30% against Swedish Krone this year and is close to breaking out to all-time highs. It is hardly surprising that inflation in Sweden is making new highs. Food & Non Alcoholic beverages inflation in Sweden came in at +14% YoY.

It is my opinion that Food Inflation in particular is likely to prove to be one of the sticker components of inflation, and quite possibly for several years to come.

SWEDEN INFLATION RATE

Inflation in India took a notable step up again in Aug, after cooling over the summer.

INDIA INFLATION RATE

Food inflation & currency devaluation is already sparking an emerging market crisis which as the months move on is only likely to get worse. I here present only two of the most concerning cases.

Sri Lanka where inflation has gone from +5% to +60% YoY in only 12 months!

SRI LANKA INFLATION RATE

Pakistan, where inflation is now running at +27% YoY and where sadly the very recent floods are likely to only exacerbate the situation.

PAKISTAN INFLATION RATE

So inflation remains stubbornly high and persistent, this is not surprising, but as investors we need to look ahead and so I want to bring your attention back to the US inflation rate. Let's see if we can gather any hints of the future from there.

UNITED STATES INFLATION RATE

As you can see from the red arrow, last year inflation started to reaccelerate meaningfully from October, until it ultimately peaked in June of this year at 9.1%.

Going forwards base effects become steeper so unless anything drastic changes you should expect inflation to start slowing, possibly meaningfully, from October onwards. Inflation lags, and as the economy continues to weaken, demand wains, high inventories have to be sold off, etc it should be no surprise that inflation slows from here.

This does not mean we will be back at 2% by next summer and consequently does not mean the Fed is going to Pivot any time soon. But it does mean that there is very real possibility inflation is back around 5%ish by late Q1 / early Q2 2023. (Reminder FED Target is 2%)

Certain components of inflation will be more stubborn than others, but unless Oil makes a move back above 120 and heads to new highs the trend should be downwards.

The whole point of me telling you this is to reinforce the lesson the market thought investors on Tuesday and try to help you avoid getting sucked in by the noise next time the narrative "inflation is coming down so the market has bottom" emerges, as itl inevitably will later this year.Inflation coming down is a consequence of a slowing economy. This is not a "buy the dip" signal.

If you read my article from Tuesday you will know that the Fed has learned its lesson well. They do not want to repeat the mistake of the 70s and let inflation un-anchor. They have singled they will stop hiking rates by end of the year or early 2023. That does not mean easing is imminent, quite to the contrary, unless anything changes, we should expect the Fed to remain tight for some time, while they continue to shrink the balance sheet well into 2023.

History would suggest that a Fed funds rate below the inflation rate is not enough to bring the latter back down in a substantial way, but we shall have to see how things play out this time.

Moving on to Consumer Confidence.

These charts need much less explanation, they are abysmal, in many cases at all-time lows, as inflation eats away at consumers' margins and future prospects look glim.

After the post covid recovery, UK consumer confidence began to decline again at the end of the summer of 2021, about 5 months before the FTSE 100 peaked.

UNITED KINGDOM CONSUMER CONFIDENCE

German consumer confidence is also at an all-time low as far as this data series goes.

GERMANY GfK CONSUMER CLIMATE

After the post covid recovery, US consumer sentiment also began to decline at the end of last summer, again 4 months ahead of the peak in the SPX. It is currently lower than both Covid Crash and the Great Financial crisis, despite having ticked up over the last 3 months, from a low reading of 50 in June to 58 in Aug 2022.

UNITED STATE MICHIGAN CONSUMER SENTIMENT

Now in case you thought all I shared here was doom and gloom, which I assure you is not my intention, it is simply a reality of this particular moment in time, I will present a few brighter spots as far as consumer sentiment is concerned.

Consumer Sentiment has been rising in India since early last summer and took another step up this year after the latest Covid spike in Jan/Feb 2022 ended. India’s data series is bi-monthly so as it stands it is hard to tell how this may change over the next few months.

INDIA CONFIDENCE CONFIDENCE - CURRENT SITUATION INDEX

Consumer Confidence in Canada has held steady all year

CANADA CONSUMER CONFIDENCE

Let us stay with Canada for a moment and use it to pivot to the Employment data, as in the case of Canada it presents a slightly contrasting picture. After the Covid high in April 2020, unemployment declined to a low point in June of this year. It has since then been tiking up slowly and in Aug the number of unemployed persons in Canada rose significantly by 100k in one month to a 6 month high.

CANADA UNEMPLOYMENT PERSONS

Why the contrasting signs between employment and consumer confidence? As I have said before there is little point in trying to explain every single divergence, for there can be a multitude of factors at play at any time.

A point I would make is that house prices in Canada are at record highs, on every metric, and with homes being the average person's number one asset this may be one of the many reasons. A lesson here is you have to look at everything, and should never anchor on one single metric alone.

Moving on, the latest data shows that Unemployment Claims in the UK rose for the first time since 2020.

UNITED KINGDOM CLAIMANT COURT CHANGE

And to conclude let us look at the latest US employment data, where the number of unemployment claims has been slowly ticking up since the early summer, but where the labour market remains still very strong.

This week Continuing Jobless claims rose by only 2K and Initial Jobless Claims came in at a 4-month low.

UNITED STATES CONTINUING JOBLESS CLAIMS

It is worth noting that the participation rate is rising and so is the number of people reporting that they are working multiple jobs. The labour market remains strong and tight, while people's disposable income and budgets remain strained.

In short leading indicators are leading and lagging indicators are lagging, but starting to turn. Surprise surprise!

I hope you enjoyed this article. I realise there is much room to improve on how I present all the data to you, I will continue to work on the layout of these Data Dives over the coming weeks. Frankly, there is so much to look at every week that I need to find an efficient way of presenting this to you without these articles becoming ridiculously long or overly complex.

Antonio C. Nobile

I am not a Financial Advisor & this is not financial advice

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