HF Indicators (Sales, Rates, Money, Inflation, Oil, Dollar): Unscheduled Interruption
We're going to interrupt the previously scheduled discussion on dashboards, data, and decisions to focus on some real data and what it means. Oh wait....is that an interruption or a continuation ? In any case we will be a broken record with a brief interlude on something we seem to do every month - compare and contrast the headlines on retail sales with the reality of the underlying data. And as usual the cast of usual suspects (CalculatedRisk, BigPicture) had something to say on these lines. The good news is we found another sorta blog (CEO Economic Update) who really gets it and dug beneath the headlines to look at the de-construction of same:Inflation wipes out the Retail sales report.
Last time we talked about HF Indicators (Behind the Misperception Veil: What's that Data Behind the Curtain ?) it was with an unusual set, i.e. slightly different from our standard dashboard (Current Economic Outlook: HF Indicators vs the Business Cycle) focused on Consumption, Investment, & Future Demand. This time we're going to focus, after the break, on the other 1/2 of the standard set - the Monetary, Inflation and Interest Rate indicators. What's that Harry Potter phrase about mischief ? Well here it's Mischief Discovered as we try to unravel the linkages between rate spreads, shrinking money bases, the CPI/PPI gap, inflation, the dollar and oil prices.
Real Retail Sales - Deconstructed:
As you've no doubt heard Retail Sales was up a whopping 1% MtM ! Glory Alleluia !! And core inflation was flat. Of course sales was up 2.5% YoY, which is really a continuing downturn. And core inflation was 2.3% - higher than the Fed's upper limit - while overall CPI continued over 4% YoY. BUT this was the month that the rebate checks that we're going to save us all went out. How is that nominal Retail Sales continues to slow ? This is good news ? Is that all there is ? Take a good look at the rather busy little multi-part chart (sorry - trying to over-compress my dashboards ?). On the top is our standard nominal vs real Retail Sales, the latter being down -1.4% !!
We got curious so we hand-transcribed gas sales, deflated it ourselves and backed it out of retail sales and created some quarterly numbers (another first hear btw :) ). That's the middle chart which is worth some careful scrutiny. First off since 1992 real Retail Sales and xGas sales have move in tandem - and Gas sales have followed along the cyclic pattern, with a lag. Until the last two quarters when gas has turned into a moon rocket while sales looks like an Acapulco cliff-diver.
When you shorten the horizon and dial-up the granularity that latter pattern comes out even more clearly in the 3rd sub-chart (sorry about label/color switch). Notice that the two are definitely opening out like the jaws of a set of clippers (pun & metaphor with Freudian overtones intended) about to snip something off. Two more things to notice at the monthly granularity level that could be really important. YoY Retail Sales xGas is now pulling away from Retail at an accelerating rate. Think about that for Retail Stores, Consumer Discretionary spending or even Staples (ding, ding what's the XLP doing ?) and future demand ? Here those blades a swishing, swishing 'round the bend, they're coming...never mind. Big build up .....real Gas sales on a monthly YoY basis are also slowing !!
People are diverting their spending as best they can into gas and energy and it's still going down ! BtW real Sales xGas was down -2.6% and has been negative since Oct. Wow, what a surprise. Levels last seen since, and lower than, the downturn of '01 - and here's the real rub. The length of negative real sales declines is already exceeding by several months the one during the downturn.
HF Indicators: Rates, Money, Inflation, Oil and Exchange
1. Rate Spread and Monetary Base: the top sub-chart shows the spread between 3Mo AA's and Treasuries and the 10YR Treasury and FedFunds. The former is narrowing but still elevated above where it was by over 50 bps - indicating that the credit crisis is dissipating but we're still suffering after-shocks. The latter, which normally shrinks as the economy slows, has risen abruptly and rapidly. Indicating either serious fears of inflation, an economic boom about to start or something else. This could be important. Also shown is the inflation-adjusted YoY% change in the Monetary Base (r.h.s.). Which, despite all the hand-wringing and gnashing about rapidly increasing money supply, continues in seriously negative territory, ~ -3.5% ! Which is what you get when the economy is headed into the you-know-what. Which also knocks the inflation thing on it's head a bit. And tells us that slowing money velocity is indicating the credit crisis is morphing into the credit crunch as lending standards continue to tighten.
2. CPI, PPI, & 10Yr - as we mentioned the CPI is running about 4% YoY which is definitely not good though not the disaster various commentators would have it (btw - all this controversy on government index mis-construction goes away when you look back at long-term trends and YoY changes). What is more than a little scary is the very elevated level in the PPI (our estimate for this month btw) which continue to run over 11% YoY. The evidence is that Inflation is not spreading into Wages, consumer goods and certainly not the core. From this discussion it would appear to be concentrated in a few areas. Which also means that the CPI-PPI gap is a measure of the profit and earnings pressures building up in the commercial sectors of the economy. Something we've been noticing for a long...long time. In other words inflation is not setting in or metastasizing into the economy as whole - if anything everybody just keeps sucking it up. What we're seeing is a very narrow concentration that's implicitly a huge tax increase on consumption. And another on profits. with all that means for future demand and growth.
The other fun thing is that the 10Yr rate is still down quite a bit from it's peak, though it's picked up in the last few months. Again...not a strong inflationary pressure signal; more an ebb back from the flight to quality perhaps ?
3. Exchange Rate and Oil Prices: Mischief Resolved, if not Ended ?!
The last sub-chart shows YoY changes in the trade-weighted dollar exchange rate and oil prices. Notice that since Aug07 they've definitely been moving in opposite directions at what appear to be accelerating rates. At least until the last few weeks for the Dollar, who's decline has flattened. Nonetheless when the $ goes down oil prices do go up over and above the base cost increase. Similarly we start importing inflation as the prices of inputs increase in addition to energy. The other thing to bear in mind - and we ask you to recall the Chairman's eloquent remarks about the Fed "noticing" the need for the $ to stay strong - is that rates go up if a) one must attract foreign investment, b) your currency declines so that c) one needs to pay more for the money rental. Remember that sudden jump in the 10Yr-FF spread and the "other" explanation ? Well here it is.
They used to call it seignorage back when the Baron's strong right-arm was the arbiter of value. Now it's his check-writing hand that matters. Look it up - you might be amused by the definition in this context. Ah, what the heck...
"a government revenue from the manufacture of coins calculated as the difference between the face value and the metal value of the coins"
Comments
Thanks for the hattip, nice reference.
Posted by: Michael Donnelly | June 17, 2008 03:20 PM