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I hope everyone had a great weekend. The week ahead could have some fireworks, with Fednesday being the pivotal event. Before we get to that, though, let's zoom out and look at the macro situation.
The Big Picture
There's a lot of talk about moving factories, with a variety of "shoring" in question with the bottom line being less business going to China.
A good amount of that re-shoring shift in the US has been within technology, and particularly semiconductors.
The last CPI report brought us a re-acceleration in headline CPI and a continued deceleration in core. Rising energy prices are pushing readings higher, and will work their way into other areas of inflation should they remain firm.
An example of this is diesel, where we saw a 41% rose month-over-month during August according to PPI. That's a big problem, as diesel is used for shipping, freight, rail, farming, and much more.
If the Fed is content to accept the current tightening cycle has complete then it is likely that the 'new normal' for headline CPI becomes 4% and core 3%, according to Bank of America.
On the other side, we are seeing consumer spending normalizing based on nominal retail sales. If we look at real retail sales, these numbers have been flat to down since May of 2021.
Job gains are also slowing, which is something I have my eye on, particularly within the services sector to see if that slowing is meaningful.
The underperformance of small cap equities is also consistent with what one tends to see during a slowdown in the economy. They also tend to be more rate sensitive as many are not profitable and run revolving debt lines.
