SVET Weekly Markets Update (July 11, 2022)
This week brings us four updates of two leading and two lagging economic indicators to be watched closely. It starts on Wednesday, July 13 when Bureau of Labor Statistics (BLS) will publish its June’s estimate of US yearly inflation rate.
A month ago, when BLS revealed its May estimates, markets were taken by surprise seeing the inflation risen from 8.3% in April to 8.6% in the following months after it fell from 8.5% registered in March.
This week, when BLS’s June inflation update is due, Wall Street analytics try to over-shoot their fleeing target by re-adjusting prognosis to 8.8% and we can’t blame them for that. May 2022 became the US generational records setting month for the inflationary race on energy and food markets and this trend is likely to continue as most inflationary causes are caused by geopolitical — not economical factors. Those causes are out of the FED’s control despite Powell’s megalomaniac political ambitions and his fruitlessly efforts to prove otherwise.
For example, prices for fuel oil more than doubled in May (106.7% increase during the preceding twelve months). For the US economic statistics history records it is the unprecedented up-tick, which had never been registered before. Additionally, electricity costs went up 12%, which is the largest yearly increase since August 2006 and natural gas — 30.2% (that haven’t been seen since July 2008).
On the food costs side prices increased 10.1% in May on a 12-months basis. In March 1981, when that happened previously in USA, most of us were not even been a micro-spot on the map of this planet.
Another record, although a less dramatic one, was set by costs of rented apartments (a shelter price), which 5.5% increase in May might look very moderate safe for the fact that it became the first one of that magnitude registered in US since February 1991.
Other notable increase were in used cars prices — 16.1% — and in airline fares — 37.8%. At the same time, a yearly increase in costs of new vehicles eased from 13.2% registered in April to 12.6% in May, which might be taken as an early sign of the upcoming deflation when peoples relent to consume but prices still rise.
Another closely watched indicator — PPI (Producer Price Inflation for June — will be revealed to market player by BLS on Thursday July 14 2022 at 07:30 AM ET before markets open at 9:30 AM ET.
In May it was reported to increase 0.8% on a monthly basis. In June this figure is adjusted up 0.1% to 0.9% by market prognosis.
PPI is considered by economists to be one of the most important leading indicators for, obviously, its two components — wholesale prices of goods and services received by domestic producers — have a major impact on consumer prices (measured by CPI).
In May prices of goods went up 1.4% with biggest risers being gasoline (8.4%), jet and diesel fuels, natural gas (paid by residential households), products made from steel and, of all other things — processed young chickens (I assume cheep poultry feed, including Ukraine’s sunflower seeds, is either not so cheep anymore or have to be replaced by more costly components). At the same time monthly cost of services increased for a much lesser 0.4% (including transportation and warehousing — 2.9%)
Expressed in a yearly term, wholesale prices went up 10.8% in May (the highest increase was 11.5% in March). As we can see this is much lower than CPI (consumer price index) increase of 8.6 percent of the same month. Retailers are still able to use their stocks to keep prices lower than charged by producers. Naturally, that can’t last for much longer. Unless manufacturers find a way to drastically cut their costs we might soon see another price rise for a broad spectrum of goods and services in the consumer sector.
Basic economics teaches us that if prices of goods rise faster than those of salaries peoples tend to buy less and to save more. That stalls businesses. Under competitive markets conditions, when brainless govs bureaucrats are not meddling with markets, young entrepreneurs are stepping in to apply their unrestrained ingenuity to breakthrough innovations. Then new productive technologies over compete their more costly and older corporate substitutes.
However, that natural process of better-and-cheaper products replacing old ones is now being destroyed by FED’s archaic and stupid back-and-forth policy which effectively shuts down entrepreneurs access to all forms of investment capitals.
How much damage has been already done by Mr. Powell to the US economy will be seen on Friday July 15 2022 at 07:30 AM ET when US Census Bureau, which periodically takes maximally broad measurements of US consumers shopping activity, publishes its US Retail Sales report.
Since the beginning of 2022 US consumers have been tightening their purses which was reflected in retail sales statistics. It showed steady decrease (2.7, 1.7, 1.2, 0.7 by monthly in percentages) of sales growth figures among all USA retailers after January 2020.
In May retail sales contracted (-0.3%) first time this year. Most affected were auto sales (-4%) and sales of electronics (-1.3%). In June analytics expect sales coming back to their spring level (about 0.8%). That optimism is substantiated by higher prices expectations at gasoline stations as well as at food stores and service centers.
Meanwhile, FED’s unqualified career-orientated bureaucrats, guided by their short-term political considerations, will continue to jerk the world’s financial machine’s steering wheel back-and-forth. This gigantic over-bureaucratized monster, built by career-orientated short-cited politicians, is now excelling in one thing only — to frighten the hell out of retail investors and consumers.
Michigan Consumer Sentiment index (MCSI) published by the University of Michigan is one of fundamental economic indicators proving this point. MCSI has been falling from its close-to-ATH heights of ~90 reached in March 2021 to its record low of 50 marked in June.
After conducting a consumers sentiment telephone survey, which includes 500 or more respondents at the first two weeks of July, the University publishes its preliminary data at a mid and its full report at closing dates of each month. This Friday July 15 at 09:00 AM ET analytics expect that the preliminary MCSI hits the new record low of 49.3.
The historically nearest time period when MCSI dropped so precipitately from ATH to ATL withing less than a year was 2007–2009 during the world’s financial awakening giving birth to BTC, initiated by the real estates mortgages’ colossal over-leveraging.
This massive dis-balance on markets was caused by the financial oligopolies which used the world’s economic rapid expansion to issue countless unbacked loans derivatives on several highly centralized and mostly FED/SEC-controlled assets exchanges.
At the same time, the great majority of world’s retail investors were not allowed (by their ‘authorities’ issuing draconian regulations to fight against ‘money-laundering schemes’) to park this new cash abundance (which might have backed up those loans derivatives) into liquid financial instruments. As a result, this cash over-flow was directed into excessive buying of various durable goods (primarily, into partially or not-at-all-registered real estates deals).
FED attempts to stop this natural process by hiking its rate from 1 to over 5 percent during 2004–2006 were absolutely ineffective. Then in 2007, when the first way of forced liquidations hit North American and European debt issuers, FED reverted its detrimental policies making its even worser by dropping rate from 5 to almost zero in a matter of a year.
We all know that none of those FED exercises in bureaucratic stupidity prevented markets from following its natural expansion-contraction pattern. We can’t expect that this will happen during 2022–2023 cycle as well.
Today, there is no more doubts left that FED outdated policies are not capable to influence positively the major macro-factors globally affecting goods and services supply-demand ratio. FED ‘apparatchiks’ unwanted activities only rise higher business-entry barriers for young entrepreneurs capable to drastically improve world’s population majority standards of living.