Monday Update: Inflation Steady, Confidence Pulls Back

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Oct 15, 2018 3:15:08 PM

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Monday updateLast week was mostly about prices, although we finished with a look at consumer confidence. This is a busy week, with a wide range of data from across the economy.

Last week’s news

The data started on Wednesday, with the producer prices report. The headline index, which includes energy and food, rose by 0.2 percent for September, as expected. This result was up from a decline of 0.1 percent in August. But the annual change dropped by slightly more than expected, from 2.8 percent to 2.6 percent, indicating that longer-term inflation pressures are moderating but remain elevated above the Federal Reserve’s (Fed’s) target range. The core index, which excludes energy and food, also rose as expected. It came in at 0.2 percent for September, up from a 0.1-percent decline in August. Here, the annual figure rose by slightly less than expected, going from 2.3 percent to 2.5 percent. This was largely due to base effects.

On Thursday, the consumer price reports pulled back a bit at the headline level. The headline index, which again includes food and energy, rose by 0.1 percent in September, which was lower than expected and down from 0.2 percent in August. The annual figure also declined but by much more, going from 2.7 percent in August to 2.3 percent in September, on base effects. The core index stayed steady, however. It saw a 0.1-percent increase, the same as in August, while the annual figure also stayed steady at 2.2 percent. As with the producer prices, these figures indicate inflation is moderating but continues to run above the Fed’s target levels, which should continue to drive interest rate increases.

Finally, the University of Michigan consumer confidence survey was released on Friday. It showed confidence down slightly, to 99 for October from 100.1 in September, against an expected small increase to 100.8. But this remains at a high level, historically, and suggests that consumers are not yet worried about the effects of a trade war, given the continued strong labor market. This level should continue to support consumer spending and economic growth.

What to look forward to

On Monday, the retail sales report slowed sharply. It came in with a gain of 0.1 percent, well below the expected growth of 0.7 percent and the same as the 0.1-percent gain in August. Core retail sales, which exclude autos and gas, also slowed; they were flat in September, while August growth was revised down from 0.2 percent to 0.1 percent. This is the second month in a row of slower-than-expected growth and may suggest consumer spending growth is pulling back.

On Tuesday, the industrial production report is expected to tick down a bit, from a gain of 0.4 percent for August to a gain of 0.3 percent for September. There may be some upside risk here, on a weather-related increase in utilities output. Manufacturing is expected to show a similar result, going from a 0.2-percent gain in August to a 0.3-percent gain in September. Here, there may be some downside risk, as manufacturing labor demand declined last month. Again, the expected numbers would indicate continued growth and be positive for the economy.

Also on Tuesday, the National Association of Home Builders survey will be released. It is expected to stay steady at 67 for September, for the fourth month in a row. There may be some downside risk, as the industry continues to suffer from labor shortages, and rising interest rates are expected to affect demand.

The housing starts report, released on Wednesday, is expected to show a decline after a recovery in August. It should drop from 1.28 million in August to 1.22 million (annualized) in September, although better building permit data suggests the final result might be somewhat better than expected.

The minutes from the last Federal Reserve Open Market Committee meeting will also be released on Wednesday. Markets will be looking for guidance on whether the Fed expects to hike rates in December and on what to expect in 2019—that is, whether three hikes are indeed likely and on what factors might change that forecast.

Finally, on Friday, the existing home sales report is expected to show that sales have dropped from 5.34 million in August to 5.31 million in September. Housing, in general, appears to be in a slowing trend, and this data would continue that trend.

Thanks for reading and have a great week!

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