Weighing The Week Ahead: Should Investors Start Worrying About Inflation?

The economic calendar is about normal, with market participants back from holiday vacations (but perhaps fighting the snow). The key reports are the PPI and CPI. Inflation is the key 2018 worry for many, so these reports will get more attention. Especially if the numbers are a little hot, I expect the punditry to be asking: How worried should we be about inflation?

Last Week Recap

In the last edition of WTWA I foresaw (despite significant fresh data) another week of punditry. It was time for everyone to lay out what to worry about. This allows them to claim victory at the end of the year. This was the dominant theme, if you ignored White House gossip and nuclear war with North Korea. The stories have little beyond what I reported last week, including plenty of help from readers. Here are a few samples in case you need to stay awake at night.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. I especially like the Doug Short design with Jill Mislinski updates and commentary. You can see many important features in a single look. She notes the new records along with other indicators. The entire post is well worth reading for the collection of charts and analytical observations.

The trading range for the week was the highest in recent weeks, almost 2.6%. This increased actual volatility, but not the VIX. Our indicator snapshot tracks this important comparison.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

The economic news was mixed, especially on the employment front. Before the employment numbers I published a guide to assist interpretation. Many seemed to find it useful, and one of my plans for the new year is to more analysis of economic indicators.

The Good

ISM Index registered 59.7, beating an expected 58.0 and the prior month at 58.2. Bespoke shows the significance with one of their typical great charts.

Construction spending for November gained 0.8%, .1% lower than October but above expectations.

Rail traffic ended a good year (Steven Hansen, GEI).

ADP private employment showed a very nice gain of 250K, handily beating expectations of 190K.

Auto sales, especially trucks finished a strong year by beating expectations.

Employment via the Household survey was strong. The WSJ has ten excellent charts. Below is one showing the range of unemployment measures, showing the state of part-time and discouraged workers. People frequently cite these alternative measures without making clear that the employment picture has gotten much better – no matter what the measure.

Labor force participation, as explained by the BLS, is also improving as demonstrated with this helpful explanatory table.

Persons who are neither employed nor unemployed are not in the labor force. This category includes retired persons, students, those taking care of children or other family members, and others who are neither working nor seeking work. Information is collected on their desire for and availability for work, job search activity in the prior year, and reasons for not currently searching.

The Bad

ISM Services of 55.9 missed expectations and the prior month reading by about 1.5 points.

Initial jobless claims edged higher to 250K rather than moving back toward recent levels, as most expected. Bespoke’s chart:

Investor sentiment has become more bullish, a contrarian indicator. (David Templeton, HORAN).

Headline payroll employment net increase of 148K was a disappointment compared to expectations. Some were also concerned about the changes by industry (WSJ).

The retail decline looks bad, fueling the many worries about the Amazon effect. Economist Michael Mandel is a leading expert on changes in the labor market structure. He frequently discovers important data and draws sound conclusions that you just don’t see anywhere else. For retail jobs, which have varying and sometimes short hours, he uses FTE instead of the simple job numbers. The increase in hours (and thus FTEs) has been dramatic since the peak of brick and mortar.

So let’s look at the two years since brick-and-mortar FTE peaked. Over those two years, brick-and-mortar retail FTE jobs fell by 123,000. That’s a decline of about 1%. The increase in FTE ecommerce jobs was 178,000 over the same stretch. That’s based on hours worked in the electronic shopping and mail-order industry, and the warehousing industry, where many fulfillment centers are reported. FTE jobs at couriers and messengers, including express delivery companies, rose by 58,000. All told, the gains in ecommerce and delivery services was almost twice the size of the losses in brick=and-mortar retail.

Change in FTE jobs, 3Q15-3Q17 (thousands)

Brick-and-mortar retail -123

Ecommerce +178

Express delivery and couriers+58

Data: BLS, PPI.

The data are from October, but on Twitter he cited the continuing improvement.