Economy Normalizes

The economy normalized quickly from lockdown to neutral from March to mid-June as shown in the chart below. Interestingly, the opening of the economy started slowing a week after the cyclical stocks peaked on June 8^th. The stock market probably predicted this change by looking at the rate of change of new COVID-19 cases. There was a spike in a few hotspots in the south and the west which spread in July. 

From mid-June to late August, the index only increased from 63 to 65 which signals the economy was stuck in neutral. When the index was in total lockdown, most of the economy was shut down. There weren’t any winners. Even the tech stocks fell.

(Click on image to enlarge)

When the index is in neutral, there are winners and losers. The economy opening stocks like airlines lose, while the tech stocks, which thrive on people working from home, win. Good news for the stocks that do well when the economy is open is that the index rose 7 points to 72 in the first week of September which is a new high. In my opinion, this index will get back to the 80s this fall. 

We probably won’t see updates unless someone posts Goldman Sachs’ report, but we will be able to tell from other economic data points if the economy reopened further. Just check airline stocks in October to see if that's right. Many are not buyers of airlines because there are less risky ways to play the economy reopening, but they are an easy indicator to review (JETS ETF).

Job Postings Pick Up Slightly

The jobless claims report left many scratching their head because of the major runup in PUAs in the past 2 weeks. With the spike in California potentially related to fraud, it’s tough to see how the labor market is doing using that metric. The good news is we have other metrics. As you can see from the chart below, job postings growth on Indeed increased in the 2^nd half of August. It’s now down 19% from last year.

(Click on image to enlarge)

Bloomberg Consumer Comfort Index rose the most in 11 years in the first week of September as it increased 2.7 points to 47.8. Furthermore, opinions on the economy and personal finances increased to the highest levels since early April and late March. Let’s piece this situation together. We have rising job postings, a declining unemployment rate, more consumers willing to go on vacation, and higher consumer comfort. This is a recipe for an improving economy!

The economic opening index is increasing and the 7 day average of daily new deaths from COVID-19 is falling. Furthermore, the 2^nd wave spike in cases in Europe didn’t cause nearly the number of deaths as there were in March. A relative increase in deaths in August in Europe was lower than it was in America in July. It’s possible to largely defeat this virus without a vaccine. Imagine how far deaths will fall in the next few months as treatments improve and testing goes national.

Slight Increase In Core Inflation

In August, headline monthly inflation was 0.4% which fell from 0.6%, but beat estimates for 0.3%. Headline yearly inflation was 1.3% which increased from 1% and beat estimates by a tick. There’s nothing daunting here. Core CPI was 0.4% monthly which doubled the consensus and fell from 0.6%. 

As you can see from the chart below, core CPI rose from 1.6% to 1.7% which beat estimates by a tick. We’re getting closer to the Fed’s 2% target, but core PCE inflation is almost always lower than core CPI. Therefore, we aren’t near the target yet. If the Fed used core CPI to measure inflation, its record on meeting its 2% goal would be much better.

(Click on image to enlarge)

Energy dragged headline inflation lower again as its inflation was -9%. Energy commodities inflation was -16.7%. Food inflation was 4.1% because food at home inflation was high (4.6%). Once again, meats, poultry, fish, and eggs had very high inflation as it was 7.1%. Dairy inflation was 5.7%. As has been the case for most of the past few years, services inflation drove core inflation higher.

If core CPI is ever going to get to 2% or higher, shelter inflation is going to need to increase because of its high weighting. Shelter inflation was only 2.3%. Medical care services inflation was 5.3% and transportation services inflation was -4%. Shelter inflation is the lowest since October 2013 even though the hot housing market is driving prices up. 

As expected, medical care services inflation was down from July (down 0.6%). We knew it would fall because the comp was 1% higher. Therefore, the 0.4% increase in the 2-year stack is still impressive (in a bad way because obviously we don’t want healthcare to be more expensive). With medical care services facing increasingly tougher comps, it’s tough to see core CPI getting to 2% by next spring.

The bond market yawned at the CPI report as the 10-year yield fell 9 tenths of a basis point to 0.671%. So far, the 10-year yield hasn’t gotten to 1% like expected, but there is still time. Going short the 10-year bond hasn’t been nearly as expensive as going long energy in the past 3 months.

COVID-19 Update

COVID-19 situation gets better almost every day as we approach the start of the Abbott tests going out. We can expect important updates on the launch of Abbott’s test within the next 1-2 weeks. As you can see from the chart below, hospitalizations are steadily declining. 

As of September 11^th, there were 31,421 people in the hospital because of COVID-19. We are rapidly approaching the low in June. About 2-4 weeks after we hit that, the 7 day average of new deaths will break the July low of 519.

(Click on image to enlarge)

Deaths fell at a more gradual pace than expected in early August, but the situation is still improving. There were 1,094 new deaths on Friday which pushed the 7-day average up modestly to 758. This week’s data was slightly off because of the Monday holiday.