The Week in Charts (2/19/24)

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The most important charts and themes in markets and investing…

1) Inflation Coming in Hot

The war against inflation has not yet been won.

The latest CPI report reinforced that, with overall CPI coming in at 3.1%, above expectations for a decline to 3.0%. Core CPI (excludes food/energy) was also hotter than anticipated at 3.9% versus the 3.7% consensus estimate.

While disappointing to market participants, this was still the lowest core inflation reading that we’ve seen since August 2021.

Digging into the numbers, we can readily see that Shelter is the primary reason why inflation remains elevated. It is the largest single component of CPI (over one third of the index), and with an increase of 0.6% in January and 6.0% over the past year, it is single-handedly preventing the index from moving back down to the Fed’s 2% target.

Indeed, if we remove shelter from the index, CPI has increased only 1.5% over the last year. That’s the 8th consecutive month below 2%.

Why is Shelter CPI still elevated while real-time asking rents are showing a 1% decline over the past year?

Because Shelter CPI is a severely lagging indicator, only now reflecting the surge in housing inflation from 2021-2022. But with each passing month, we should be getting closer to the end of that lag, and with it smaller price increases from Shelter CPI. That, in turn, should lead to lower overall inflation rates to come.

The best news in the CPI report continues to come from the food-at-home category (aka grocery prices). The 1.2% increase over the past year is the lowest food price inflation we’ve seen since June 2021.

And with wages up over 4% in the past year, that is making the trip to the grocery store much more palatable. This is now the 9th consecutive month in which wages have outpaced inflation on a year-over-year basis, great news for the American worker that hopefully continues.

2) Skyrocketing Car Insurance Rates

Outside of Shelter, Transportation is the other component in CPI that has remained stubbornly high.

A big reason for that is skyrocketing auto insurance rates, up 20.6% over the last year. That’s the biggest 1-year spike in prices since 1976.

Over the last decade, car insurance rates have increased 85% versus a 31% increase for overall CPI. A few of the reasons attributed to this spike: a) an increase in accidents, b) an increase replacement costs (used car bubble), and c) rising costs to repair damaged vehicles (+50% in last 10 years).

Who’s benefitting from rising insurance prices? Car insurance companies. Progressive ($PGR) stock has increased 881% in the last decade versus a 227% gain for the S&P 500.

3) Rate Cuts Pushed Back

The hotter-than-expected jobs report combined with the hotter-than-expected inflation report have had a big impact on Fed rate cut expectations.

Only month ago the market was pricing in a 77% probability of a rate cut in March. Today those odds are below 10%.

The market is now pricing in 4 Fed rate cuts this year, down from 6-7 cuts at the start of the year. As for when the first cut will occur, the market is now expecting that won’t happen until June, pushed back from March.

But with the gap between CPI and the 2% inflation trendline widening yet again in January, instead asking the Fed when they’ll cut rates the much better question is why.

4) Borrowing Money to Pay Interest

While the Fed would never admit to it, the answer to that question may lie in the country’s deteriorating fiscal situation.

The US National Debt continues to grow at a rapid pace, with a deficit of over $1.7 trillion in the past year.

And an increasing portion of that new borrowing is going towards interest payments, hitting another record high of $979 billion over the past 12 months. There seems to be little appetite in Washington to do anything about this problem, which puts increasing pressure on the Fed to lower interest rates.

5) Nvidia Passes Amazon and Google

Nvidia’s unrelenting march higher continues to be the number one story in equity markets.

Last week it first surpassed Amazon to become the 4th largest US company and then passed Google to become the 3rd largest. Nvidia’s current revenues of $45 billion pale in comparison to Amazon ($575 billion) and Google ($307 billion), illustrating the sky-high expectations embedded into its current share price.

Its current price to sales ratio of 41x is the highest ever for a company of its size, and exceeds that of Google (6x) and Amazon (3x) by a wide margin.

6) Renewed Consumer Concerns

US Retail Sales fell 0.2% over the last year, the first YoY decline since May 2020. On an inflation-adjusted basis sales were down 3.2%.

Many consumers continue to finance their purchases, with U.S. Credit Card debt hitting a record $1.13 trillion in the 4th quarter. That’s 14.5% increase over the last year, well above the rate of inflation.

Meanwhile, the average interest rate on credit card balances has moved up to 21.5%. With data going back to 1994, that’s the highest rate we’ve ever seen.

The monthly payment on auto loans continues to increase as well, with the average interest rate on 48-month loans rising to 8.51%. That’s the highest we’ve seen since 2001.

7) Narrowing Trade Deficit

The US Trade Deficit totaled $773 billion in 2023, narrowing 19% from the record high in 2022 ($951 billion).

The biggest contributor to that decline was the sharp reduction in goods imported from China. At the same time, products imported from Mexico have surged, with the goods trade deficit there widening to a record $152 billion.

8) Shifting Demand: From EVs to Hybrids

After years of increasing demand, the US consumer seems to be pulling back from purchases of electric vehicles of late.

As a result, the available inventory of EVs is now much higher than Gasoline or Hybrid vehicles, with some dealers reportedly selling their EVs at a loss.

Among other concerns, cost is a major issue, and consumers have become more reluctant to pay a premium for EVs. Lower priced Hybrids, on the other hand, are increasingly popular, and Toyota has benefitted from this trend as it is the market leader in the space.

Over the last year Toyota ($TM) shares have gained 64% while Tesla’s stock ($TSLA) is down 4%.

And that’s all for this week. Have a great week!

-Charlie

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