As the Pandemic Starts To Fade, We Expect Some Acceleration of Inflation

By | November 16, 2020

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Global stocks were little changed but near a record high, while the dollar and bond yields remained sluggish on Friday on bets a divided U.S. Congress would hinder government borrowing, which could smooth the way towards more central bank stimulus. Investors expect Joe Biden will beat President Donald Trump, but the Republicans will keep control of the Senate, allowing them to block corporate tax hikes and spending on infrastructure. MSCI’s all-country index was flat on Friday after gains earlier in the week, still close to the record reached in September. Europe’s main index, the STOXX 600 opened Friday, up 0.4%, with investors dimmed by the economic toll of new lockdowns in Europe and Italy and France recorded record cases of COVID-19. With the virus raging, investors expect more monetary stimulus.

Global stocks flatlined on Friday as rising COVID-19 infections in the U.S. and Europe are tempering favorable news about the possibility of a vaccine. The pan-European STOXX 600 was down 0.2%, near its opening. MSCI’s all-country index slipped 0.1%. Thursday saw Wall Street lower on news of rising coronavirus infections and several states introduced stricter social distancing rules following reports of record hospitalizations. In Europe too, the number of hospitalizations are now higher than at the peak of the first wave. U.S. Federal Reserve Chair Jerome Powell said on Thursday that progress in developing a coronavirus vaccine was welcome news but near term economic risks remain, underscoring the need for additional government stimulus. 

Wall Street jumped on Friday as encouraging earnings reports stoked risk appetite and Joe Bidens advisory teams said it was not considering a nationwide shutdown. Oil prices slid as Libyan output rose and investors worried the resurgent pandemic could hurt global demand. The bellwether S&P 500 and the Russell 2000 both reached record closing highs. The Dow Jones Industrial Average rose 399.64 points, or 1.75 TO 29,479.81, The S&P 500 gained 48,14 points, or 1.35 to 3,585.15 and the Nasdaq Composite added 119.70 points, or 1.025 TO 11,829.29. Economic data released on Friday showed consumers growing more pessimistic. While tepid inflation reflected slack labor markets and sluggish demand. 

Initial claims for unemployment insurance benefits declined slightly to 709,000 in the week ending November 7. New filings for Pandemic Unemployment Assistance fell 63,805 to 298,154 in the week ending November 7. Meantime, continuing claims for unemployment insurance benefits continue to signal improvement, falling from down 436,000 to 6.786 million in the week ending October 31. The labor market continues to show improvement, but unemployment remains high. The October payroll report was decent. The forecast calls for employment growth to moderate in the fourth quarter. A sustained recovery will not commence until a vaccine is found. Risks to employment growth are high as new infection haves increased recently.

Although it remains contested, the outcome of the election and some positive developments in respect of a vaccine from Pfizer boosted financial markets last week. The prospect of a divided government and an eventual winding down of the pandemic were the background of what was a weak economic week. Small business confidence did not move in October and small businesses were concerned about the future of the economy. The election and the future path of the economy weighed on respondents. The uncertainty index jumped to 98 in October, near a record high. A jump right in the index near an election is not unusual and that feeling will fade. However, the recent spike in COVID-19 cases and what it means to the consumer going into the important holiday season will not be going away soon. Staring down on what could be a difficult winter, businesses are becoming more cautious. Expectations for capital spending scaled down a bit and also hiring and borrowing plans. 

Despite the Federal Reserve’s new-found tolerance for higher inflation, consumer prices were flat in October. Food and energy edged higher but core prices were unchanged. Producer prices rose 0.3% in October and goods prices rose 0.5% on an increase in food and energy prices. Core goods were unchanged in October. However, core goods prices are up 1.2% from a year earlier. For years now, the combination of outsourcing to countries with lower labor costs and soft commodity costs have meant very little pricing pressures for producers and retailers. The lack of inflation has been a subject of debate among economists for several years, even before the pandemic. Although we do expect some acceleration of inflation, starting in the second half of 2021, as the pandemic starts to fade, its likely to remain restrained for a prolonger period.

Next week, we get a look at the NFIB small business optimism index, CPI and PPI and JOLTS data.

Latest Data

The U.S. Economy:

Factory orders increased 1.1% in September, following a 0.7% increase in August. September marked the fifth consecutive month of increases. Durable goods orders increased 1.9% in September and nondurable goods rose 0.3%.  Total shipments were up 0.3% for s second consecutive month. The important core capital goods orders sector rose 1.0% after increasing 2.4% in August. Factory orders imply that business investment has some momentum moving into the fourth quarter. All told, manufacturing conditions improved in October, but rising COVI019 cases are rising in the U.S. and in Europe and the lack of fiscal stimulus could weigh on factory conditions in the next few months.

Consumer prices were unchanged in October and the core CPI was also unchanged. Food prices rose 0.2% during the month and energy prices rose 0.1%. Within the core, apparel prices dropped more than 1%. On a year ago basis, the CPI rose 1.2%, while the core increased 1.6%. Producer prices rose 0.3% IN October. The PPI for food rose 2.4%, following a 1.2% gain in September. Energy prices gained 0.8% after declining the previous two months. Core goods were unchanged, after rising 0.4% in September. Services increased 0.2%. Goods prices were down 1.0% from a year earlier, but core goods were up 1.2%. Inflation accelerated in the third quarter as the economy advanced. However, a slowdown in Q4 is likely as the economy moderates. It will likely be the second half of 2021 before we see any marked speedup and even then, it will be restrained. This will keep the Fed on the sidelines for prolonged period.  

International:

China’s economic recovery is gaining steam as the global economy slowly recovers. Chinese exports rose 11.4% from a year earlier, the fastest pace in 19 months. Imports rose 4.7% year-over-year, slower than September’s 13.2% growth but still a second month of growth. The economy grew 4.9% in the third quarter and better trade performance could boost the nation’s economy. Growth could slow to 2% this year, the weakest in three decades but much stronger than other major economies. China has a better recovery from the pandemic and has a comparative advantage over some of its competitors. Exports may come under pressure in coming months as rising COVID-19 infections may slow growth in the U.S. and in Europe. 

Important Data Releases This Week

The October NFIB small business optimism Index report will be released on Tuesday, November 10 at 6:00 AM. The pandemic has been hard n small businesses. Some businesses in the service sector like leisure and hospitality and travel have been hard hit but are only recovering slowly. Others like construction and manufacturing are rebounding quicker. We look for the index, which stood at 104.0 in September to rise to 104.2 for October. 

The October CPI report will be released on Thursday, November 12 at 8:30 AM. The Federal Reserve’s recent adoption of inflation-level targeting and its new tolerance for higher inflation have yet to be tested. As both actual and core inflation remain below 2%. Inflation will gain a little velocity in coming months but remain restrained until a vaccine is widely available and the economy fully recovers from COVID-19. Inflation will remain at 1.3% year-over-year for October.

The October PPI report will be released on Friday, November 13 at 8:30 AM. Oil prices are restrained as COVID-19 cases multiply in the U.S. and Europe. The PPI rose 0.2% in September and will likely rise the same amount in October. 

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.