At this time last month, traders were seemingly convinced that inflation was, at long last, coming to the US. Nearly unanimously, diverse measures of price pressures (CPI, PPI, average hourly earnings, the “prices paid” components of various regional surveys, etc) were all showing that prices were rising faster than they had in years. Indeed, as we noted in our blog post about the previous Non-Farm Payroll report:
“If we truly [were] reaching a turning point for US wages, we would expect these moves to carry over in the days and weeks to come.”
Spoiler alert: it’s looking like that wasn’t the long-awaited turning point for the US labor market. Friday’s jobs report showed a disappointing 0.1% m/m (2.6% y/y) increase in average hourly earnings, and that slowdown in price pressures was also seen in the US CPI report earlier this week, which printed at just 0.2% m/m. So far at least, it’s looking like January’s data was yet another “false dawn” for price pressures.
Of course, you could easily argue when we do eventually see inflationary pressures perking up, traditional economic indicators will not be the first place that they appear. As experienced traders know, the stock market tends to lead the economic cycle by at least a couple of months. This means that, if we are going to see inflation rising sustainably, the proverbial “canary in the coal mine” could be the relative performance of stocks in traditional “late cycle” sectors like materials and energy.
Looking at the relative performance (NYSE:XLB/NYSE:SPY and NYSE:XLE/SPY) shows no changes to the recent trends: materials stocks continue to perform in-line with the broader market, while energy stocks continue to lag:
Source: Stockcharts.com, Faraday Research
Source: Stockcharts.com, Faraday Research
With both the recent intermarket performance and this month’s economic data pointing to more steady-as-she-goes price pressures, we’re not seeing evidence of a sustained pickup in inflation yet.