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Inflation:

The latest Consumer Price Index offers some hope that inflation might be back on a cooling trend. It also shows why that might not translate into immediate relief for consumers.

Why it matters: Underlying inflation finally ticked down after it looked stuck for much of late 2024, but that measure excludes the soaring food and energy prices that were especially brutal on household budgets last month.

• Financial markets are celebrating because they see softer underlying inflation.
• But consumers likely didn't feel that cooling much at all. Prices shot higher for gasoline and other energy sources, and for eggs and many other groceries.

What they're saying: "Core inflation rising less than expected may portend good news for inflation in the months ahead, but this was a particularly painful report for consumers," Robert Frick, an economist at Navy Federal Credit Union, wrote in a note.

• "The cost of necessities that hurt household budgets, especially for lower-income Americans, were among the top reasons inflation rose in December," Frick added.

By the numbers: CPI rose by 0.4% last month, the second straight monthly increase. In the 12 months through December, CPI increased 2.9%, up from 2.7% in November.

• Among the culprits: higher prices for gasoline and some grocery staples, like eggs. Energy prices rose 2.6% in December alone, accounting for 40% of the monthly increase in CPI.
• Overall grocery prices ticked down, but that disguises sharp increases for everyday foods. Egg prices were up 3.2% in December and up 36.8% over a year ago.
• Airfares were up 3.9% in December, and rose 7.9% over the last 12 months.

The other side: The inflation picture brightens a bit once energy and food prices are excluded. That core measure makes little sense for consumers, but economists watch it for clues about underlying inflation.

• Core inflation rose 0.2% last month, the slowest pace since last summer. For the 12 months ending in December, core CPI was 3.2% — a leg down after moving sideways in recent months.
• Shelter costs — a key category keeping inflation elevated — rose just 0.3% for the second straight month, a sign that price pressures might be normalizing.
• Over the last three months, core CPI rose 3.3% on an annualized basis, down from 3.7% in November.

"The Federal Reserve is ok with watching the headline CPI go up temporarily if that increase does not spill over into the core CPI, and this is what happened in December," Eugenio Aleman, chief economist at Raymond James, wrote in a note.

Politics:

President-elect Trump's administration will be intently focused on making the U.S. border more secure and deporting people who are in the country illegally, but may prove more open to legal immigration of highly skilled workers.

• Done right, that would be an economic boon, a new paper argues.

Why it matters: The report, out this morning from the centrist Economic Innovation Group, finds that when some of the world's most talented and entrepreneurial people are allowed into the United States, the results are faster growth, higher wages for native-born citizens, and lower fiscal deficits.

• It is America's "not-so-secret weapon," they write, while identifying numerous weaknesses in current policy that prevent those benefits from fully accruing.

State of play: MAGA world has been roiled in recent weeks by a clash between Trump allies (led by Elon Musk and Vivek Ramaswamy) who want more legal immigration of highly skilled workers and the nativist right (including Steve Bannon and Laura Loomer) who want less.

• Trump sided with the pro-skilled immigration crowd last month.
• While that conversation specifically focused on the H-1B visas, it implies some broader openness to rethinking how America might open its doors to the world's best and brightest, as Musk and Ramaswamy seek.

By the numbers: The authors calculate that under the current H-1B program, the typical skilled immigrant pays more than $32,000 per year in federal taxes, while consuming only about $3,500 worth of government services.

Zoom in: "Our high-skilled immigration system should be designed first and foremost to advance the national interest of the United States and the interests of its communities and workers," write Adam Ozimek, Connor O'Brien and John Lettieri.

• "Designed well, immigration policy can make our workers more productive, make American industry more globally competitive, spark new growth in left-behind parts of the country, and improve living standards nationwide," they add.
• They argue that the system should be based on bringing in workers with the highest earnings, as opposed to the lottery system used in the H-1B program or offering visas based on education.
• This, they argue, would ensure it's the immigrants with unique skills and the greatest ability to add to economy-wide productivity who are allowed in — not just undercutting wages of native-born workers.
• The authors also advise abandoning quotas by country, further pushing toward a system based on merit that brings in tippy-top talent.

What they're saying: "The fact that the president-elect has reaffirmed his support for high-skilled immigration presents a very interesting moment where what has been an afterthought in our broader immigration has a chance to become a centerpiece, as we think it should be," Lettieri, the president of EIG, tells Axios.

• "There's enormous pressure to turn the tide on the fiscal outlook of the country and to find ways to boost the economy that don't carry a huge price tag," he adds. "There are very few levers to pull that meet those criteria."

Demographics (related to the above);

Falling fertility is a problem across the developed world. Unlike many other risks, demographic changes can be predicted with some certainty; sliding birth rates translate directly into smaller populations ahead. That is a good thing in many ways. Two hundred years ago, the Malthusian fear was of population growth so rapid that it outstripped natural resources. But there are other ways in which it’s a serious problem, which could also create opportunities for those who offer solutions. And so the McKinsey Global Institute offers a new report on “confronting the consequences of a new demographic reality.” As it sounds, it’s not cheerful reading, but it shouldn’t be avoided.

The fall in birth rates to date is universal, but far sharper in the developed world and Greater China. These countries make up what McKinsey calls the “first wave” of depopulation:

 

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More than two live births per woman are needed to sustain populations, so declining numbers are already more or less guaranteed for much of the developed world. Lower populations will mean a smaller economy, but do not necessarily entail lower gross domestic product per capita. Problems arise as the smaller cohort of people arrives at working age. This chart from McKinsey shows those of working age (between 15 and 64) as a proportion of the total. The lower this drops, the fewer workers there are to support children and the elderly. In the “first wave” developed nations, this number peaked more than a decade ago, and is now on a serious decline. In sub-Saharan Africa, workers should keep increasing as a proportion of the population for another 50 years:

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The chances are that the rest of this century will see some shift in economic power toward the Global South, and specifically sub-Saharan Africa. At present, the region accounts for 16% of the world’s population. By the end of this century, it will have risen to 34% — almost double the population of China and the current developed world:

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How is the developed world going to deal with this? One obvious solution is for people to work more, both through longer hours and through waiting longer before retiring. Outside of China, where people work far longer hours per capita than in the west, that is doable. McKinsey’s numbers, from the International Labor Organization, confirm that people in Western Europe at present work significantly fewer hours than in North America or the developed nations of Asia. That is in many ways a policy choice; people are glad to eschew some economic growth in return for more opportunities to enjoy life. But that deal will grow harder to sustain:

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However, working longer hours on its own cannot realistically deal with the issue. McKinsey did the math. This chart shows how many extra hours different groups of the population would need to work to sustain economic growth per capita at the rate to which people have become accustomed. South Koreans under 50 would have to work 24 more hours each week. For Spaniards, this number approaches 30 hours. This, surely, is not going to happen:

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If people want to keep working the same hours, however, economies are going to have to make some really dramatic improvements in productivity (outside of China, where productivity growth has been far higher than anywhere in the west). Across the west, most countries would need to treble their annual rates of productivity growth to keep their economy growing at the same speed. That implies a big turnaround after years of steady declines, and it’s very hard to see it happening:

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Some combination of the above is going to be needed. People will have to work longer hours and retire later, which will mean reversing generations of gains made by workers. Improvements in longevity and health care would help this to happen, but the passionate objections to attempts to raise retirement ages (most dramatically in France, but nobody wants to have to wait longer for their pension) show how difficult this will be. That leaves, it seems to me, two obvious conclusions:

1. Productivity has to improve somehow. That’s easier said than done, as the history of the last few decades makes clear, but the fact that it’s growing so urgent to find a way to get each worker producing more does suggest that the excitement over artificial intelligence has some justification. AI really might liberate a lot of people from jobs altogether, and boost others’ productivity. It does make sense to invest a lot in a technology that has true potential to solve the productivity problem.
2. Heavy emigration from sub-Saharan Africa makes immense sense. The region will be producing more workers, who can fill the gaps emerging in the labor forces everywhere else. The region has made great progress in eliminating extreme poverty, but is much less far forward in the attempt to build a prosperous middle class. Immigrant remittances, and the job experience to be gained overseas, would be just what the region is needing. Solving the problems caused by falling fertility in the developed world while bringing some prosperity to the region where it is most conspicuously lacking would make eminent sense.

Of course, western populations do not at the moment seem ready to encourage an influx of African migrant labor. Quite the reverse. But the problem can only intensify, and that will force us all into examining some unpalatable alternatives.  

Commodities:

[URL unfurl="true"]https://www.allstarcharts.com/commodity-supercycle-2025[/URL]

Housing Market

We start with what’s happening with housing. Right now housing just isn’t working.

It all starts with where mortgage rates are at. The 30-year mortgage rate just hit 7.64%. That’s the highest level since May.

Take a look at this chart of the 30-year mortgage but notice what has happened to rates since the Fed started to cut.

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Source: Ben Carlson

This has essentially turned off mortgage demand. Last week saw single-family home applications fall for the 4th consecutive week. U.S mortgage demand is at the lowest since 2011.

The mortgage demand index has now fallen to the lowest since February 2004. That’s the 3rd lowest level in the past 30 years.

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Source: Nick Gerli

If 7% mortgage rates are going to be the new normal, it’s very hard to see housing working in that environment.

This chart shows just what has happened to mortgage loan applications since mortgage rates have started to rise.

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Source: RenMac via Daily Chartbook

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You can guess what this has done to home construction.

Home builder spec inventory, which are homes that get built without a buyer ready to buy it are at the 2nd highest level going back to 1972. Only the 2008 housing bubble had a higher inventory than today.

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Source: Michael Burry Stock Tracker

Home construction stocks (ITB - iShares US Home Construction ETF) is now at a 5 month low. This is an important industry reading that I watch as it’s important to the overall health of the economy and stock market.

J.C. Parets does a great job showing just how closely industrials (XLI - Industrial Select Sector SPDR Fund) another very important industry and home construction have been so closely correlated.

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Source: J.C. Parets

You now exactly where this is then leading for construction sector jobs. This real estate slowdown is now reflected in these two charts that show construction job openings and postings. They’re about back to 2020 levels.

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Source: The Kobeissi Letter

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Source: MacroEdge

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Next let’s take a look at some worrying signs around the stock market, inflation and the labor market. ...

Bank Earnings (yesterday's thoughts)

• Earnings season kicks off tomorrow, with several major banks reporting on Wednesday morning, including $JPM, $GS, $BLK, $WFC, and $C.
  
• The Financial Sector ETF ($XLF) has stabilized after correcting -7.8% over the past month. Today marked its first back-to-back gain of the new year, gaining +2% in this week's choppy tape.
  
• Larry points out that $XLF is primed for a meaningful rebound. It formed a Failed Breakdown by reclaiming its December low yesterday. RSI has created a Bullish Momentum Divergence, and 80% of its members are above their long-term moving averages.
  

The Takeaway: On the eve of big bank earnings, the Financial Sector ($XLF) has set the stage for a potential rebound.

Banks are up biggly today. Should not be a shock. If there is one area of the market that can be manipulated...this is it.

False Starts, Fails, and Shakeouts

STEVE STRAZZA

 JANUARY 14, 2025

We’ve been talking all about the lack of follow-through in recent weeks.

Fons just wrote an excellent post about failed breakouts. Upside resolutions won’t stick. We’re seeing it all over.

But, there’s more to the story. Breakouts failing to print is just one half of it.

BreakDOWNs are not sticking, either.

There is simply no directional bias in either direction. Resolutions are hard to come by. False starts, failed moves, and whipsaws are the norm. Both bulls and bears are getting chopped up and shook around.

I wanted to share a few failed breakdowns that stood out to me today, as this is an important distinction to make in a messy market environment.

Here’s Energy $XLE:

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After exploring a breakdown to lows not seen since Q1 of last year, bulls stepped in and reversed it.

XLE shook below the double-top breakdown level for a few sessions before digging in and ripping higher.

This failed move has already resulted in a fast move higher. XLE has gone from an extreme oversold reading to just about overbought in less than a month.

Next is Health Care $XLV:

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This one was also sitting around fresh 52-week lows with momentum at an extreme oversold level recently.

Bears had their chance to knock it down and complete the top, but couldn’t get the job done. XLV has fired higher off the breakdown level over the past few weeks.

Last but not least, here is Materials $XLB:

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After collapsing to its lowest level since February, XLB is soaring higher this week.

What looked like a clean break below a well-tested level of former resistance, has now morphed into a bear trap.

We’re one green candle away from an epic scoop n’ score for materials.

The takeaway here is simple. These are three of the worst-performing sectors since the back half of last year. It doesn’t matter though. Bears still can’t take control of these trends.

These sectors just hit some of their most oversold readings in history. And with all that selling pressure, they didn’t even break down.

If you tried to short these laggards, you just got smoked.

The same thing would have happened if you tried to buy the recent breakouts in small-caps, transports, or even the market darling, Nvidia. They all failed and rolled over.

So whether you are buying breakouts or shorting breakdowns, you are probably struggling out here.

It’s a messy market. And it’s the case for both bulls and bears.

Trendless.

Don’t fight it. Listen to it.

I think it’s a good time to buy the lower bounds of ranges instead of the upper bounds. I think we can anticipate failed moves to get better entries. I think we can be quicker to take profits.

But I don’t think we should keep buying breakouts if the market keeps punishing us for it.

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Big green day.

jog on

duc