Plus: This Week's Featured Place: Chattanooga, Tennessee
Inside this Issue:
Starting to Ease or Just a Tease? Signs Emerging of Inflation Stabilization
Plummet from the Summit: Housing Sales Plunge; Mortgage Rates Falling Too
Retail Sales Tales: There’s Still a Spending Boom, But It May Be Ending Soon
Dimon Says: Economy Still Strong, Says JPMChief. But Storm Clouds Brewing
Jump at the Pump: U.S. Gasoline Prices Hit Memorial Day Record
That ‘70s Show? Maybe No. Today’s Inflation Looks More Like the Late 1940s
Grain Street, USA: The Role of Wheat in American History
And This Week’s Featured Place: Chattanooga, Tennessee, Appalachian Revitalization
Quote of the Week
“Inflation that is high but falling is much less frightening to the market than inflation that’s high but rising. This should help reduce the market’s fear about a more extreme 1970s’s style scenario.”
-Morgan Stanley strategist Andrew Sheets
Maybe Mr. Powell was right all along. Maybe the inflation scourge really is transitory.
The latest data suggests this might be so. According to the PCE price index for April (published by the Bureau of Economic Analysis last week), annual inflation dropped to 6.3%, from 6.6% in March. Exclude the volatile categories of food and energy, and the figure is now below 5%. Goods inflation, more specifically, stands at 9.5%, while services inflation (services are a larger part of the economy) stands at 4.6%. The Fed, keep in mind, puts more faith in these PCE numbers than it does the Labor Department’s CPI figures—those showed inflation at 8.3% for April.
Let’s be perfectly clear: Inflationary forces are still on the loose. Americans are still spending a lot. Supply chains remain clogged. And shortages persist—shortages for workers, houses, cars, minerals, semiconductors, etc. High oil prices alone are infecting the rest of the economy with inflation, swelling the cost of moving goods and producing everything from chemicals to plastics. Longer-term price pressures loom as well—the cost of transitioning to greener energy, a potential economic divorce with China, the loss of Russian natural resources, de-globalization more generally, the impact of climate change on agriculture, the shrinking U.S. workforce, dwindling competition from consolidation and never forget the chronic market failures in housing, health care and higher education (the notorious “Three H’s”).
Then why are prices showing some hints of easing? Remember when Walmart and Amazon said they’re suddenly overstaffed, suggesting some degree of loosening in labor markets? Several tech companies have even announced layoffs or at least a hiring freeze. The latest S&P update from purchasing managers notes that “[supply] bottlenecks showed further encouraging signs of easing.” Here’s a quote from Morgan Stanley last week: “We’re also seeing encouraging signs that some of the worst disruption to supply chains are easing. Fewer ships are sitting off U.S. ports unloaded. The cost of freight is declining. Many retailers are now reporting plenty of inventory… [and] market-based estimates of future inflation have been declining in both the U.S. and Europe.”
The nation’s four largest freight railroads, meanwhile, currently have more than 2,500 front-line employees in training, heralding further supply chain relief as they graduate later this year. Auto production, though still constrained, is steadily picking up as access to semicons improves. The strong dollar is driving down import prices, with talk now about lowering import tariffs. There’s also talk of retirees coming back to the workforce. And don’t look now but mortgage rates are starting to decline again—the 30-year fixed dropped to 5.1% last week, according to Freddie Mac, from 5.3% two weeks earlier.
Speaking of the housing market, it’s now screeching to a halt. New data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development show sales of new single‐family houses in April plummeted 17% from just the month prior, and a jaw-dropping 27% from the year prior. Redfin, the online real estate broker, had this to say: “The sudden surge in mortgage rates has reduced homebuyers’ budgets in many markets, forcing sellers to reset their price expectations. Price drops are becoming increasingly common.”
The Fed’s tightening thus seems to be working, slowing a key engine of the economy. Its higher rates have deflated financial assets as well, most importantly stocks. Last week though, stocks finally lurched upward, perhaps an indication that investors, too, see the inflation scourge easing. Sure enough, long-term Treasury yields are also starting to drop again, another possible sign of the Fed achieving its objective. Raphael Bostic, the Atlanta Fed president, began a speech last week by stating unambiguously that inflation is too high and could get even worse—the full inflationary impact of the Ukraine war, he warned, hasn’t yet been fully felt. Bostic told reporters after the speech, however, that the Fed might be ready to pause its rate hiking in September. This is what it sounds like… when the doves fly.
But what about demand? There’s little question that it remains strong. Banks say it. Government reports show it. Another round of retailer earnings calls last week make it clear. But how long will the robust spending last? Last week’s report on personal
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