Weekly Wisdom – November 16, 2022

By Hightower Great Lakes on November 16, 2022

Inflation and Retail Data Paint a Pretty Picture

A variety of recently released inflation reports indicated better-than-anticipated progress during October.

It remains true that inflation is far above the Fed’s 2% target, but the data highlights a trend in the right direction. Less inflation is better for the consumer and businesses, as the pace of rising costs slows.

Chart 1: PPI and CPI Below Peak¹

Even in the face of rising costs, the consumer has remained resilient. Retailers reported earnings this week, and key themes included pricing power and consumer resilience.

Companies are boosting revenues and earnings via higher prices. Consumers are supported by elevated savings, higher wages and low unemployment.

Chart 2: Corporate Transcripts Show Spike in Mentions of Consumer Resilience²

The latest retail sales data was also better than expected – retail sales increased +1.3% m/m vs. +0.90% expectations. October was the biggest step-up in retail sales since February.

Consumers are spending less on home-related goods (e.g., furniture and electronics) vs. last year, but they’re spending much more on restaurants, gasoline, health and personal care.

Inflation is having an impact on consumer spending habits, but both Walmart (WMT) and Home Depot (HD) managed to surpass earnings expectations with higher pricing and key category drivers.

WMT shared that they’ve observed “incremental trade-down in categories including proteins, walking goods, baby and dog food.” Their earnings were boosted by grocery, pet, personal care and beauty.

These tend to be categories that represent trade-down (grocery) and more inelastic price categories where consumers are less likely to stray from their preferred brands (pet, personal care and beauty).

HD said, “customers are trading up for innovation and value,” while also seeing a “push to value.”

In the Hands of the Labor Market

While consumer resilience remains a key component to company profits, the Fed has continued to indicate that their restrictive policy could bring “some pain” to the labor market.

Today, the labor market remains tight, with 1.9 job openings for every available worker and four million less people in the labor force than pre-pandemic.³

If a slowing economy forces cost cutting in the form of labor reduction, that could also impact consumer spending. While other components of inflation appear to be receding – particularly around supply chain and materials costs – labor costs remain high.

For historical perspective, in 1970 and 1974 it wasn’t until after the unemployment rate and claims clearly rose that the Fed eased and the yield curve steepened.

The China Factor

Last week, China shortened quarantines and eased some rules within its “zero-COVID policy.” The reopening of the world’s second-largest economy could provide a significant upside catalyst for markets.

Beneficiaries would be widespread and likely include retailers, industrials and food chains with exposure to the Chinese economy.

China’s much-anticipated reopening remains a wild card. This year, China’s President Xi has prioritized “zero-COVID policy” and nationalism over the economy.

This week, President Biden and President Xi met in person at the G-20 to discuss relations.

In recent months, the U.S. has issued strict policy – particularly in the semiconductor industry – that would restrict U.S. companies from selling advanced technologies to China.⁴

U.S. companies have also invested in diversifying supply chains away from China. But if the U.S. and China manage to maintain positive trade relations, there are many U.S. companies that benefit.

The Other Q3 Margin Headwind: FX Rates

In addition to margin pressure from elevated inflation costs, currency has impacted international revenues for global companies. The strong dollar has created an unfavorable conversion rate for foreign sales.

The dollar strength was driven by global geopolitical risk and rising U.S. bond rates, which created strong demand for the U.S. dollar.

This strong currency dynamic has abated in correspondence to inflation data and expectations for a slower pace of Fed rate hikes, and fiscal policy gridlock expectations following the midterms.

An uncertain geopolitical environment and continued restrictive Fed policy, however, provides support for continued U.S. dollar strength.

Staying Positioned for Uncertainty

Much uncertainty remains, and we’re not getting over our skis amid the positive inflation news, currency shift, retail sales data and China hopes.

While the recent rally in both equity and fixed income markets has benefited investors, it remains true that the economy is slowing, consumers are facing price pressures and the Fed is continuing to raise rates.

The housing market has clearly slowed, but we’re also seeing a slowdown in industrial production and ISM survey figures. We have yet to experience a material rise in initial claims or unemployment, which will likely be necessary before the Fed begins to pivot.

Chart 3: Slowing Economy Becoming Clear⁵

Click here to read last week’s Weekly Wisdom (11/10).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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¹ Source: FactSet (chart). Data as of November 16, 2022

² Source: FactSet (chart). Data as of November 16, 2022

³ Source: Brookings Institute

⁴ Source: The New York Times

⁵ Source: FactSet (chart). Data as of November 16, 2022