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Continuing accelerated consumer inflation points to sharp slowdown, but no recession imminent

  – by New Deal democratInflation, along with the expiration of the emergency pandemic payments, is one of the two big threats to this expansion. This…

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This article was originally published by Bondad Blog

 

 – by New Deal democrat

Inflation, along with the expiration of the emergency pandemic payments, is one of the two big threats to this expansion. This morning’s report on consumer inflation for September, at 0.4%, was certainly elevated compared with its typical pre-pandemic reading of 0.2%/month, but on the other hand was the third month in a row of sharp deceleration from springtime, during which inflation averaged 0.8%/month. 

Typically inflation has not been a concern unless inflation ex-gas (red) has been in excess of 3.0%. YoY it is now 4.1%, as it has been for 2 of the 3 prior months. Meanwhile YoY total inflation (blue) is 5.4%, slightly higher than the last 3 months: 

Just as importantly, one of the traditional “real” harbingers of a recession has been wages (more broadly, household income) failing to keep pace with inflation: 

Since April, on a YoY basis wages had failed to keep pace with inflation. In September, they eked out a 0.1% gain.

In Absolute terms real wages have been more or less flat for over a year:

This does not necessarily portend a recession, but it is certainly consistent with a sharp slowdown.

Taking a somewhat more granular look at inflation, housing (shelter) is over 1/3 of the entire index, and reflects households’ biggest monthly expense. The bad news is that on a monthly basis both inflation in shelter (blue in the graph below) and rent increases (red), which had been within their normal ranges in August, are now both running hot (particularly with the expiration of the eviction moratorium):

This has caused the YoY indexes to also turn up:

This will bleed over into the general shelter inflation index, which has already been telegraphed for many months by price increases as measured by the FHFA and Case-Shiller Indexes.

Turning to motor vehicles, new car prices (red) continued to increase at an elevated pace in September, while used car prices (blue) hit a wall in July and have decreased for two month is a row since then:

On a YoY basis, used car prices, which had been up over 40%, are now up “only” 24%, while new car prices are now up nearly 10%:

Finally, although I won’t bother with a graph, there have been renewed gas price pressures in the past several weeks, with prices up about $.10/gallon in that time.

What is the conclusion from all of this? 

First of all, price pressures in these very important sectors of the consumer economy – housing, vehicles, and gas – are constraints going forward into 2022. As I wrote in connection with last month’s report, heightened inflation has gone on long enough now that I expect some damage to show up in consumer spending. It hasn’t yet, probably because in the aggregate personal savings is up over 20% since just before the pandemic began. That’s quite a cushion! Additionally, “real” wage earnings have generally kept pace with inflation, as opposed to declining, so that suggests that consumers can maintain at least a steady level of “real” spending – and it is spending that drives production and jobs.

Secondly, there has been a real deceleration in inflation between the second quarter, during which consumer prices increased at an 8.4% annualized pace (red, monthly right scale vs. YoY, blue, left scale), and the third quarter, during which they increased at a 6.6% annualized pace:

 I expect inflation in both wages and consumer prices to decelerate further from here, with a very important caveat that inflation in rents is a wild card. 

To me this adds up to a sharp slowdown in the economy, but not enough evidence at this point – certainly not in the long or short leading indicators – to suggest a recession in the immediate future.

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Economics

UST Yield Curve Tumbles To 18-Month Lows Amid Policy Error Panic

UST Yield Curve Tumbles To 18-Month Lows Amid Policy Error Panic

“In stark contrast with the mindset of corporate leaders who are dealing…

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UST Yield Curve Tumbles To 18-Month Lows Amid Policy Error Panic

In stark contrast with the mindset of corporate leaders who are dealing daily with the reality of higher and persistent inflationary pressures, the transitory concept has managed to retain an almost mystical hold on the thinking of many policy makers,” El-Erian wrote in an Oct. 25 op-ed in Bloomberg.

“The longer this persists, the greater the risk of a historic policy error whose negative implications could last for years and extend well beyond the U.S.,” he argued.

It would appear from the accelerating flattening of the yield curve, that the market is believing El-Erian’s narrative.

Expectations for rate-hikes are being pulled forward by the market…

Pushing 2Y Yields above 50bps for the first time since March 2020…

And as rate-hikes are increasingly priced in, the long-end of the curve is tumbling…

Crushing the yield curve to its flattest in 18 months…

We give the last word to El-Erian, who said he fears that Fed officials will double down on the transitory narrative rather than cast it aside, raising the probability of the central bank “having to slam on the monetary policy brakes down the road—the ‘handbrake turn.’”

“A delayed and partial response initially, followed by big catch-up tightening—would constitute the biggest monetary policy mistake in more than 40 years,” El-Erian argued, adding that it would “unnecessarily undermine America’s economic and financial well-being” while also sending “avoidable waves of instability throughout the global economy.”

His warning comes as the Federal Open Market Committee (FOMC) – the Fed’s policy-setting body – will hold its next two-day meeting on November 2 and 3.

Tyler Durden
Wed, 10/27/2021 – 09:25





Author: Tyler Durden

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Economics

CAD treading lightly ahead of BOC

The Canadian dollar has traded quietly so far this week as the economic calendar has been light. The remainder of the week is busy, with the Bank of Canada…

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The Canadian dollar has traded quietly so far this week as the economic calendar has been light. The remainder of the week is busy, with the Bank of Canada policy meeting later today and the September GDP report on Friday. USD/CAD is currently trading at 1.2419, up 0.24% on the day.

Will Bank of Canada taper?

The BoC has shown the markets that it is serious about tightening policy as the economic recovery finds its footing. The BoC was the first major central bank to trim bond purchases and is widely expected to trim again, reducing bond purchases from CAD 2 billion to CAD 1 billion.

The Canadian dollar has soared in October, with several drivers for the upswing. Domestic data, such as the falling unemployment rate, a rise in retail sales and high inflation. Investor risk appetite has been moving higher, and the jump in oil prices has been boosted the loonie, as Canada is a major oil producer.

The BoC could end its bond purchase scheme before the end of the year, but it remains unclear what bank policy makers plan to do about rate policy. No change is expected to the current rate of 0.25%, but will today’s meeting hint at a rate hike sometime next year? If so, USD/CAD could test some multi-month lows. Conversely, if the BoC is silent about rates, that could generate some disappointment and send USD/CAD higher. Investors will also be interested in what the bank has to say about the surge in inflation. September CPI hit 4.4% (YoY), much higher than the bank’s inflation target of 2%. Like the Federal Reserve, the BoC continues to insist that inflation, which is running way above the bank’s target of 2%, is transitory, but that stance is increasingly being questioned, with no signs that inflation will ease up anytime soon.

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 USD/CAD Technical

  • USD/CAD is testing resistance at 1.2422. Above, there is support at 1.2475
  • There is support at 1.2302, followed by 1.2235






Author: Kenny Fisher

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Economics

7 A-Rated Energy Stocks to Buy Before Winter Strikes

The fact that the Federal Reserve is contemplating shifting its easy money policies as early as mid-November shows that inflation isn’t as transitory…

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The fact that the Federal Reserve is contemplating shifting its easy money policies as early as mid-November shows that inflation isn’t as transitory as thought a couple months ago. And that’s great news for energy stocks.

When inflation rises, the dollar weakens as interest rates rise. That means it takes more dollars to buy commodities like oil, for example. Certainly, the supply chain problems have something to do with this but it’s also a lack of supply that started during the pandemic last year.

Now, demand bounces back — until the delta variant slowed things down again — but it’s tough to ramp up production in a quarter or two. It’s certainly a unique situation.

But that doesn’t mean you have to wait until things get better before stepping into the market. Energy stocks like the ones below can be a great addition now, as we see that energy prices will remain high for some time to come. Another noteworthy aspect of these stocks is that each has an A-rating in my Portfolio Grader.

  • Continental Resources (NYSE:CLR)
  • ConocoPhillips (NYSE:COP)
  • Diamondback Energy (NASDAQ:FANG)
  • Marathon Oil (NYSE:MRO)
  • HollyFrontier (NYSE:HFC)
  • ONEOK (NYSE:OKE)
  • Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B)

Energy Stocks to Buy: Continental Resources (CLR)

Source: Maksym Vynohradov / Shutterstock.com

Exploration and production (E&P) companies are also called upstream energy companies. That means they’re the ones finding oil and natural gas and then selling it downstream.

CLR is an E&P player that primarily works out of the Bakken Shale in North Dakota and Montana. Its energy leans more toward oil than natural gas but it produces both. And both are in great demand, especially in global markets.

Since extraction costs are more or less fixed for E&P companies, the higher the price of oil and gas means the bigger the margins. And that’s precisely why CLR stock is up 203% year-to-date. But even after that run, its current price-to-earnings ratio is 48x. That’s a little high, but there’s a good chance earnings will be rolling in to justify it.

ConocoPhillips (COP)

a sign in front of the Conoco Philips office buildingSource: JHVEPhoto / Shutterstock.com

COP is a global E&P player with a nearly $100 billion market cap that also operates some midstream (pipelines, transportation) services to move production to demand markets.

This is a good time for COP since natural gas is in high demand in Europe and Japan, and oil is in demand in China. With a global E&P and distribution operation, COP can supply them with what they need efficiently. And COP can realize expanding profit margins.

The stock has risen 95% YTD and is richly valued. But this is the way the energy markets work — big swings in either direction — and we’re in an multi-year uptrend now. Earnings will catch up.

COP also still has a 2.5% dividend, which isn’t beating inflation, but it’s a nice kicker.

Energy Stocks to Buy: Diamondback Energy (FANG)

Image of an oil filed at the Permian Basin.Source: FreezeFrames / Shutterstock.com

FANG is a land-based U.S. E&P that has operations primarily in the Permian Basin, an energy-rich area in West Texas and Southeast New Mexico. The company has numerous properties in the basin and uses unconventional drilling methods — fracking and horizontal drilling — to access the reserves.

About 60% of its production is oil, another 20 is natural gas and the remaining 20% in natural gas liquids (NGLs). All these products are in high demand.

The trouble is, FANG has been struggling to keep its earnings in positive territory recently unlike other energy stocks. This shouldn’t be a problem moving forward, now that global energy demand has kicked into gear.

FANG stock has gained almost 130% YTD and has a 1.6% dividend. There’s still plenty of upside left.

Marathon Oil (MRO)

Marathon Oil (MRO) gas station carport on sunny day with blue sky backgroundSource: Jonathan Weiss/shutterstock.com

Like other E&P plays, earnings haven’t been great for MRO as we slowly emerge from the pandemic and the delta variant wave. But now we’re in recovery mode and demand it rising in all sectors, including energy stocks.

That’s great news for MRO, which has been drilling for black gold since 1887. And with that kind of legacy, today’s markets aren’t anything new to this company. It has seen a few things just as crazy since Grover Cleveland was president.

MRO stock is up 146% YTD and has a sub-1% dividend. But we’re not concerned about dividends now. This is about energy demand growth, and MRO will be a beneficiary.

Energy Stocks to Buy: HollyFrontier (HFC)

Pipelines in the desertSource: bht2000 / Shutterstock.com

Once you get the black stuff out of the ground and ship it along a pipeline, the business of turning it into viable products begins at the refinery. And that’s where HFC comes in. It operates about a half dozen oil refineries and three asphalt terminals.

In energy parlance, refineries are part of downstream operations, along with distribution and marketing to retailers and wholesalers. This is a key part of the process since getting the oil out of the ground doesn’t mean much if it can’t be refined in a timely manner.

HFC is one of the smaller refiners in the U.S. — it has a $6 billion market cap — which means its gains will amplify in current markets. The stock is up 43% YTD and still trades at a decent current P/E around 31x.

ONEOK (OKE)

Image of a gas burner with a blue flameSource: Shutterstock

Founded in 1906 as the Oklahoma Natural Gas Company, OKE is a leading natural gas and NGL marketer in the U.S. NGLs are derivatives found in raw natural gas that are then used in various industrial processes or for fuel.

The most common are ethane (plastic bags, anti-freeze), propane (fuel), butane (synthetic rubber, lighter fuel), isobutane (refrigerant, aerosols), pentane (gasoline) and pentanes plus (gasoline, ethanol).

The U.S. is like the Saudi Arabia of natural gas supplies. Even as prices have risen domestically, overseas prices are triple or are higher than they are here, which makes for great export opportunities.

This is a very good time for natural gas companies regardless of where they sit in the supply chain. And OKE is a sure beneficiary of the current demand but also a growing transition to cleaner burning (more efficient) fuels, which also boosts its interest with ESG investors.

OKE stock is up 75% YTD yet it only has a current P/E of 22x and offers an inflation-pacing 5.8% dividend.

Energy Stocks to Buy: Royal Dutch Shell (RDS.A)

The Royal Dutch Shell (RDS.A, RDS.B) logo on a gas station in Iceland.Source: JuliusKielaitis / Shutterstock.com

As measured by revenue, Shell is among the largest companies in the world. That’s some rarified air. But if you can recall a few years ago, when energy prices were headed in the opposite direction as they are today, RDS.A wasn’t very attractive. It had cut its dividend and was tightening operations, shuttering wells … the whole nine yards.

But in good times, the big integrated oil companies are like the desert blooming after a rain. Big energy stocks can grow their margins upstream, midstream and downstream. And just a little growth in margins is huge when you’re talking about the scale of RDS.A.

Plus, Shell is actively looking to establish itself in renewable and alternative energy markets as well. For example, it can convert some of its natural gas into “blue” hydrogen and then begin to use its filling station networks as distribution points.

The stock has risen 35% YTD and it has a P/E of 34x. It also has a 2.6% dividend that’s unspectacular but dependable.

On the date of publication, Louis Navellier has a position in COP in this article. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Louis Navellier, who has been called “one of the most important money managers of our time,” has broken the silence in this shocking “tell all” video… exposing one of the most shocking events in our country’s history… and the one move every American needs to make today.

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