Wentz Weekly: Stocks Higher Again on Expectations of A ‘Fed Pivot’

Wentz Weekly Insights
Stocks Higher Again on Expectations of A ‘Fed Pivot’

Recent Economic Data

• According to the consumer price index, disinflation gained traction in October with the index flat in the month, slightly less than the 0.1% increase expected and a big slowdown from the 0.4% increase from September. The index is now up 3.2% from a year ago, the lowest 12-month rate since the beginning of 2021. Lower energy prices, particularly gasoline, were a big driver of lower headline inflation in the month as energy prices fell 2.5% and gasoline prices fell 0.5%. Food prices rose a moderate 0.3% in the month. Excluding these two volatile categories, core prices rose just 0.2%, also 0.1% less than the increase expected, and core prices decelerated on a 12-month basis for the seventh consecutive month to a 4.0% increase, lower than the 4.1% increase from September and the lowest since mid-2021. Used cars saw a significant decline of 0.8% in the month and 7.1% over the past 12 months. On the other hand, transportation services continue to run very hot, rising another 0.8% in the month and up 9.2% from a year ago, due to vehicle insurance and maintenance/repair, and offset by a big drop in airline fares. The largest index component, shelter, rose 0.3% in the month and is still up 6.7% from a year ago.

• Prices at the producer level showed a surprise decline of 0.5% in October, much lower than the 0.1% increase expected, after a 0.4% increase from September, and the sharpest decline since a 1.2% drop during the middle of the pandemic April 2020. Energy prices saw a large drop, similar to consumer prices, of 6.5%, while food saw a 0.2% decline. Excluding the two volatile categories, producer prices were flat in the month. Prices for final demand goods were down 1.4% (includes food & energy) while prices for final demand services were flat, driven by a 1.5% increase in transportation/warehousing and offset by a 0.7% decline in trade. Prices are 1.3% higher from a year ago with core prices 2.9% higher.

• Prices of US imports fell 0.8% in the month of October, after increasing for two straight months, and was driven mostly by a 6.3% decline in fuel import prices. Import prices have been very volatile over the past 2-years, reaching historical highs last year, and multi-decade lows earlier this year, and are still down 2.0% over the past 12 months. Export prices declined 1.1% in October, after increasing for three consecutive months, and were driven by a 1.1% drop in agricultural prices. Export prices have also been very volatile and have followed the same trend. Prices of exports are down 4.9% over the past 12 months.

• The advanced estimate on retail sales for October show sales fell 0.1% in the month for the first decline since March, coming after a streak of very strong monthly increases. Despite the drop it was still slightly better than the 0.3% decline expected. Only five of the 13 major categories saw an increase in the month. Vehicle sales (and parts) were down 1.0% in the month while gasoline sales were down 0.3% in the month, which is likely driven by lower gas prices. Excluding the two categories which are very volatile month to month, sales were up 0.1%, a little lower than expected. Strength was seen in health/personal care +1.1%, food/beverage +0.6%, and electronics +0.6%, with the largest declines in furniture -2.0%, miscellaneous stores -1.7%, and sporting goods -0.8%. Sales are up 2.5% from a year ago, however inflation over the same period was 3.2%, meaning real retail sales were down 0.7% over the past 12 months.

• The Empire State Manufacturing index was 9.1 for November, an improvement from -4.6 from October for the best reading since April, suggesting manufacturing activity expanded for the first time in months in the New York region. About 33% of respondents said conditions improved in the month while 24% said conditions had worsened. New orders continued to decline, labor market indicators pointed to a small decline in employment, and the pace of input price increases moderated somewhat.

• The Philly Fed manufacturing index remained in negative territory, suggesting manufacturing activity in the Philly region continued to decline in the latest survey. The index was -5.9, a slight improvement from -9.0 last month. The indicator for new orders was positive, but barely, shipments fell, and the price index indicated overall price increases. The future indicators suggested expectations for growth over the next six months remains subdued.

• Industrial production fell -0.6% in October, double the decline expected, following a 0.1% increase in September. The decline was due to a 0.7% drop in manufacturing, a 1.6% decline in utilities (which is driven mostly by weather conditions), and slightly offset by a 0.4% increase in mining. The measure of capacity utilization saw a sizable drop of 0.6% and now stands at 78.9%, which is now almost a full percentage point below its long-run average (in this environment a lower rate is better for inflation).

• The number of unemployment claims filed the week ended November 11 was 231,000, an increase of 13k from the prior week for the highest levels since mid-August. The four-week average of initial claims rose 8k to 220,250. The number of continuing claims was 1.865 million, up 32k from the prior week and is now at the highest level since November 2021 and something worth keeping a close watch on. The four-week average rose 34.5k to 1.823 million.

• The number of housing starts increased 1.9% in October to a seasonally adjusted annualized rate of 1.372 million, slightly ahead of expectations. Starts have been in the 1.300 million to 1.550 million range all year. The number of permits to build a new home increased 1.1% to a rate of 1.478 million, also slightly ahead of expectations, and have been basically running higher than starts for a while now. There was an expectation starts and permits would come down because this is data from October and that is when we saw another substantial rise in mortgage rates, actually the highest of the year. However, builders are still benefiting because there is very little supply on the market, in addition, they are aggressively buying down mortgage rates. For example, many home builders in earnings reports say they are buying rates down on many mortgages to around 5.5%, so this may explain why housing starts/permits have held up better than existing home sales.

• The housing market index, a measure of homebuilder sentiment, dropped another 6 points in October to 34, the fourth consecutive monthly decline, the lowest since December 2022, and was a big miss on the downside versus expectations. An index level of 50 is breakeven – below 50 indicates weakening/contracting activity. The present sales index fell 6 points to 40, the expectations of sales over the next six months fell 5 points to 39, while buyer traffic fell 5 points to 21, all the lowest levels of the year.

Other News

• President Biden and China President Xi met last week in what was a highly anticipated high level meeting in effort to boost communications between the two nations. The meeting ended with both parties agreeing to resume military communication, curtail fentanyl production, and open other high-level communication. It may have been a move by China to improve investor sentiment in China in effort to improve its economy, with Xi saying to American executives at dinner that it is ready “to be a partner of the U.S.,” as he called on Biden for the removal of the sanctions on China.

• The House and Senate passed a temporary spending bill that would avert a government shutdown by the Friday deadline. It saw a lot of opposition from Republicans but support from nearly all Democrats in the House. The bill will kick the can down the road and extend government funding at current levels through mid-January. Republicans are pushing for spending cuts while Democrats are opposed to this, so this should become another big headline near the end of January.

• It was another busy week in Fed speak – which refers to Federal Reserve policy makers making public appearances and making public comments on monetary policy. Most comments were more of the same that included remarks like rates will stay at a “restrictive” level for some time and the data has encouraging, but not enough to convince all Fed members inflation is on a persistent path to its 2% target. One of the noticeable comments came from several that said it is too early to declare victory on inflation. Some have noted that parts of the economy are showing signs of strain from tighter financial conditions, and they are trying to identify the full effects of the lag in monetary policy. They are also looking further into whether small businesses, the housing sector, and low/moderate income households “could be warning signs of broader stress ahead.”

• Senator Joe Manchin, Democratic Senator from West Virginia, who said he will not run for reelection in the Senate seat, said he is considering launching a 2024 presidential campaign. He is planning to go on a cross country tour to see if there is voter appetite for a moderate candidate before he decides to run or not.

• Prior to Friday, crude oil fell into bear market territory with a 23% drop from its September highs. Over the past several weeks, inventories at US storage facilities have been on the rise and there have been increasing worries global demand is weakening. On Friday, however, reports from the Financial Times said OPEC was considering whether to make additional supply cuts at its next meeting after crude saw a +20% drop. An OPEC+ source said the 5.16 million barrels/day of cuts already in place by Saudi Arabia, Russia and several other OPEC members might not be enough and deeper cuts will be discussed. The next OPEC+ Ministerial meeting will be this Friday.

Did You Know…?

New 2024 Contribution Limits & Tax Brackets

• The standard deduction for single taxpayers and individuals filing separately increased $750 to $14,600. The standard deduction for married couples filing jointly increased $1,500 to $29,200, while the standard deduction for those filing head of household increased $1,100 to $21,900.
• Income levels for marginal tax rates were adjusted upward for 2024. See the IRS link here for details.
• The contribution limit for employees in a work-sponsored retirement plan such as a 401k, 403b, and 457 plan increased $500 to $23,000. The catch-up contribution remains at an additional $7,500 ($30,500 for those age 50 and over).
• The contribution limit for employees in a SIMPLE IRA plan increased $500 to $16,000, with the catch-up contribution remaining at an additional $3,500 ($19,500 for those age 50 and over).
• The limit on annual contributions to an IRA (including Roth IRAs) increased $500 to $7,000 per individual. The catch up contribution remains at an additional $1,000 ($8,000 for those age 50 and over).
• The limit for health savings accounts for those with a high deductible health plan increased $300 for to $4,150 for single coverage and increased $550 to $8,300 for family coverage.

WFG News

Medicare Open Enrollment

• During this period, individuals are able to make changes to their current Medicare coverage. Individuals on Medicare should receive an Annual Notice of Change and/or Evidence of Coverage for Medicare Advantage or Part D plan. This is a good time to review coverage, as medical needs, benefits, and premiums may have changed over the year. During this time here are some things to consider:
• Will your primary doctor still accept you Medicare Advantage Plan?
• Have your medical needs changed? Different plans offer different benefits and different costs
• Are there comparable, lower cost plans available? Don’t forget to consider out-of-pocket costs when comparing options
• Are you medications still on your plan’s list of covered medications?
• You can compare plans online with the “Plan Finder” tool at medicare.gov
• You can input medications and it will show estimated costs, including copayments and coinsurance.

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