This morning’s Consumer Price Index for November was mostly in line with expectations (although the headline reading was slightly higher than expected), and the lack of any meaningful surprises has allowed the market to continue with what has lately been the path of least resistance, which has been higher. The report also showed that the most rapid leg of disinflation is most likely behind us, and while that could lead some to believe that the road ahead will be a slog, that isn’t necessarily the case.

For starters, the focus of monthly inflation reports lately has been in Core CPI (ex-food and energy). After peaking at 6.6% in June 2022, the November year/year reading came in at 4.0% for the second month in a row.

The chart below shows the historical 12-month rate of change in the y/y core CPI.  Over the last 12 months, that rate of increase has declined by two full percentage points, and outside of the prior two months, that is one of the sharpest declines since the early 1980s.  In other words, the 12-month rate of change is still declining, but the pace of decline is slowing.

November’s streak also ended what has been a monumental streak of monthly declines in the y/y core CPI reading. At seven months in October, it was the second longest streak on record, trailing only the ten-month streak of declines ending in December 1975.

Understandably, the end of the streak of declines along with the slowing rate of decline in the y/y core CPI reading could lead one to think that inflation levels are plateauing at a higher level.  However, a look at the trend of monthly prints in core CPI shows a potential tailwind in the months ahead.  The chart below shows the monthly change in core CPI over the last 24 months. While it hasn’t exactly been linear, the trend is lower.  In the twelve months from December 2021 through November 2022, eight out of twelve monthly prints were 0.5% or above, but in the last twelve months, only one print has been 0.5%.

Just looking at the last year (shaded area in chart) it’s a similar trend.  From December 2022 through May 2022, every monthly print was 0.4% or above, but in the most recent six months, every print has been 0.3% or below.  If just the trend of the last six months remains in place, for the next six months the y/y reading will be replacing monthly prints of 0.4% or more with prints of 0.3% or less which should help to keep the trend of disinflation going.

The NFIB unveiled its latest look at small business sentiment early this morning. The headline number remains in the bottom decile of its historical range, falling 0.1 points to 90.6 in November. That is compared to expectations which called for the number to be unchanged last month.

Across the categories factoring into the index, breadth was mixed in November with four categories falling, four rising, and one unchanged.  Like the headline number, many categories are also in the bottom few percentiles of their respective historical ranges, albeit with some exceptions like robust readings in plans to increase employment, current inventories, and job openings hard to fill.

As we discussed in our Morning Lineup, combining the report’s readings on employment shows some rebounding conditions for labor markets over the past few months.  Looking more closely, though, it is hard to say labor market conditions are materially accelerating.  As shown, hiring plans have risen, but on net more companies are reporting negative employment changes.  In a similar vein, compensation plans have risen sharply including a six point jump month over month in November (the largest one month increase since last October and the third largest on record), even though actual changes to compensation have been flat. Meanwhile, fewer businesses are reporting job openings are hard to fill. Small businesses are showing labor conditions have cooled over the past couple of years but are far from weak as any more recent improvements have been from plans rather than observed changes.

Similarly, sales expectations rebounded in November, contrary to a flat reading on actual sales and earnings changes. Perhaps most importantly, the share of businesses reporting higher prices has fallen down to 25,  matching the July low.  In combination with the higher reading on sales expectations, that likely helped the number of firms reporting now as a good time to expand.

Looking at the reverse, of those reporting now as not a good time to expand, the single biggest reason given for such sentiment was economic conditions.  That is typically the most widely cited reason historically followed by political climate (the NFIB has a tendency to be sensitive to politics, namely which party holds the presidency), but for the first time in at least a decade, financial conditions and interest rates earned the number two spot.  As shown below, the number of firms reporting that rates are holding them back from expanding has risen steadily since the current tightening cycle began.

As mentioned previously, actual earnings changes saw no improvement in November and are sitting near historically weak levels.  As for the reasons given for lower earnings, increased costs remain a key reason, but November also saw a significant jump in those reporting sales volumes as a problem.  In other words, inflation and weaker demand appear to be weighing on small business earnings.

Despite the burden of interest rates and expectations for credit conditions sitting at the lowest levels in over a decade, small businesses have actually increased capital expenditures dramatically to a new post-pandemic high. However, that is counter to capital expenditure plans, which have fallen in the past few months, and inventories showing drawdowns.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

While you’re here, join Bespoke Premium with a 30-day trial!

On This Day in History:

What’s a Real-Estate Fund Worth? Depends on Who’s Doing the Math (WSJ)
Nontraded real estate investment trusts (REITs) define net asset value (NAV) differently from mutual funds, leading to comparability and valuation concerns as asset performance may not be accurately represented. These REITs, like Blackstone REIT and Starwood REIT, have flexible NAV calculations not bound by standard accounting rules and are not audited. This practice, diverging from traditional mutual fund NAV definitions, raises questions about the transparency and accuracy of these valuations, potentially confusing investors, especially since higher interest rates have hurt real estate. [Link]

The World’s Most Anonymous CEO Is About to Take Center Stage (WSJ)
Sky Xu, a discreet yet wealthy entrepreneur and the force behind Shein, a globally popular shopping app, is relatively unknown even among his employees. Despite his low profile, Xu’s company has significantly impacted the fashion industry with its ultra-affordable clothing and efficient supply chain. Shein is preparing for a major US IPO, which will likely push Xu into the public eye. Although the company is criticized for environmental and labor issues, Xu and his co-founders have yet to publicly address them, focusing instead on adapting Shein’s designs and services for global markets. [Link]

First Quadruple Leveraged S&P 500 ETN Proposed (Yahoo Finance)
A small ETN issuer, MAX ETNs, is planning to launch the first quadruple leveraged S&P 500 ETN, providing investors with daily compounded four times leveraged exposure to the S&P 500 Total Return Index. While the SEC typically allows only up to three times leveraged products, this ETN could bypass such regulations due to its structure. The launch of such high-risk investment products like this ETN raises questions, especially compared to the ongoing SEC approval process for spot bitcoin ETFs. [Link]

Hundreds of Stocks Have Fallen Below $1. They’re Still Listed on Nasdaq. (WSJ)
The number of US stocks trading below $1 is surging, particularly on the Nasdaq, where 557 stocks are now below this threshold, up from less than 12 in early 2021. The rise is linked to a slump in startup stocks and companies from the 2020-2021 IPO and SPAC boom. Nasdaq rules require a $1 minimum share price, and many companies are employing strategies like reverse stock splits to avoid delisting. The situation raises concerns about market integrity and investor risks as stocks that fall below a buck are often more vulnerable to “catastrophic losses.” [Link]

Economic Trends

Digesting inflation (Briefing Book)
Despite recent disinflation, consumer sentiment remains negative, potentially due to the cumulative effect of significant price increases over the past three years. Even though annual inflation eased to 3.2% this year, the overall increase in prices over the last three years was 18.6%. The University of Michigan’s consumer sentiment index remains low, similar to levels during the Great Recession, despite improvements in inflation and gas prices, as well as a seemingly lower risk of recession. [Link]

The ID.4 Could Be Volkswagen’s First EV Made With U.S. Union Labor (Heatmap News)
UAW president Shawn Fain aims to aims to organize non-union auto workers, starting with Volkswagen’s Chattanooga, Tennessee plant where over 30% of workers have signed union cards. The Chattanooga plant, VW’s only US factory, has been accused of lower pay and poor working conditions. Previous unionization attempts failed in 2014 and 2019. Potential unionization at Tesla’s US factories was also mentioned. This development comes after UAW secured significant raises and benefits with major automakers earlier this year. [Link]

Crime

D.C. restaurants are blowing their budgets on security (Axios)
In Washington DC, rising crime has led many restaurants, including small businesses, to spend significantly on private security. Georgetown Events, for instance, has spent over $450,000 on security this year. While options like hiring off-duty police officers exist, the costs are becoming unsustainable for some businesses, aside from the factor that DC already has an officer shortage. Owners are concerned about this financial burden, especially when they already contribute to public safety through taxes. Some smaller businesses are resorting to less expensive security measures due to these high costs, sometimes at the expense of the safety of their employees and guests. [Link]

US retail lobbyists retract key claim on ‘organized’ retail crime (Reuters)
The National Retail Federation (NRF) retracted its claim that nearly half of all inventory losses in 2021 were due to organized retail crime, after discovering inaccuracies in their data. The original statement had been cited in multiple media reports and used to advocate for stricter crime laws. However, the NRF removed references to this claim from published materials. Some law enforcement officials argue that outside of cities, shoplifting has declined since the beginning of the pandemic. On the other hand, many retailers say that the drops are due to underreporting. The mixed claims highlight the challenges in accurately quantifying inventory losses, which include various factors like shoplifting, shipping errors, and clerical mistakes. [Link]

Screen Time

Boost Mobile founder pushes carriers to back ban on cell phones in schools (New York Post)
CEO of MobileX and founder of Boost Mobile advocates for a ban on cell phone use in schools, citing carriers like Verizon and T-Mobile have a moral responsibility to support this. His call for action in the US is inspired by positive outcomes seen in Australia, where a ban led to improved academic performance and increased social interaction. Several US states and districts have implemented similar bans, addressing issues like distractions, cyberbullying, and declining mental health among young people. The proposal does face opposition though, as some argue that cell phone access is crucial for safety, especially in emergencies. [Link]

Read Bespoke’s most actionable market research by joining Bespoke Premium today!  Get started here.

Have a great weekend!