WEEKLY PLAN - 09.10 - 13.10.2023
Wednesday
Change in the core producer price index during the month.
The US Federal Bureau of Statistics releases the core producer price index every month, approximately 13 days after the end of the previous month. The calculation is based on prices by major sectors of the economy and by stages of production.
Core is a variant of the index calculation that does not take into account energy and food prices. It is used to smooth the index and monitor price changes on an ongoing basis.
Energy is the most important sector of the modern economy. Energy is used to produce goods, move vehicles that transport the goods produced, light streets, heat homes, and much more.
The higher the energy prices, the higher the prices for all other aspects of life. The rise/fall in prices cascades down a long chain, affecting the prices of everything else.
Food is the most important component in human life. Without quality food, a person cannot exist. Today, most of the food produced is made with the help of machines. Raw materials are sown and harvested with specialized machines. Then it is processed in factories by specialized machines. This whole process is connected by energy, because neither machines nor machines will work without energy - fuel and electricity, which is obtained in various ways.
Since it is a basic element of human survival, the higher the food prices, the faster they grow - people buy food en masse, fearing shortages and other things.
To "smooth out" the price increase, economists have gone to great lengths to create an additional parameter that does not take into account energy and food prices. Even without taking these prices into account, they still indirectly affect everything because of their importance.
The producer price index is an important parameter that shows how prices are changing on the production side of the business. Before a product reaches the shelves of a store where people buy it, it has to be made. This is a chain of stages where raw materials are gradually processed into a product.
All these stages and transformations require different goods, equipment, etc. If prices increase at each of these stages, the cost of the final product is affected.
When a manufacturer realizes that the cost of its goods is constantly rising, it has two options for further pricing of the finished product:
Or reduce your margins. To put it simply, start selling goods at a loss, and therefore earn less.
or increase the cost of the product itself. And here, the final buyer pays for the increase in the price of production.
I think you realize that producers most often choose the second option. That is why the producer price growth parameter actively influences the growth of commodity prices and consumer inflation.
The core producer price index has been on a downward trend for a year now. Most often, the actual change coincides with the forecasted change.
After the COVID-19 lockdowns, which caused a large number of businesses to close and disrupted logistics, producer prices rose sharply. The main factor was that businesses that work directly with consumers made a large number of requests, as the goods simply did not reach the warehouses.
For example, you wanted to order 10 cars. You placed an order, and one arrived because of logistical problems. So to solve this problem, you made several orders to pick up these 10 machines bit by bit. This caused a huge burden on the company.
To meet this demand, they had to work harder, order more raw materials and components for production. However, people are on lockdown, raw materials are also difficult to come by, because there are interruptions in logistics, and the companies that supply raw materials are also partially on lockdown and also have logistics problems at their level. It's a vicious circle.
As soon as the supply problem began to be resolved, prices began to decline.
The latest release of the actual figure (0.2%) was completely identical to the forecast (0.2%).
The current market forecast is 0.2%.
Change in the producer price index during the month.
This type of index takes into account energy and food prices, showing a more realistic picture of the current situation.
Why producer prices are so important is described above. I would also like to discuss why the net indicator is so important, without removing prices that are convenient for statistics.
When working with data, it is easy to manipulate it. The reason for manipulation is often an attempt to fit reality to your model, and to say that the people responsible for this are good, they are doing the right thing and everything will be fine.
As described above, energy is the main indicator that affects everything. Therefore, an attempt to reduce the weight of this indicator simply does not reflect reality.
There is still a big problem with OPEC and the attempt to keep oil prices down. For a very long time, the United States supplied oil to the market at reduced prices through its strategic reserves, but they have been almost depleted.
The war that began in Israel is reminiscent of the Yom Kippur War in 73. After the United States helped Israel, Arab countries united and declared an oil embargo on Western countries.
All of this can have a very active impact on the growth of oil prices, the cost of goods and consumer prices along the chain.
Just compare the chart of Core PPI and PPI, how beautiful Core PPI is and how volatile PPI is. That's all the manipulation in action.
The latest release of the actual figure (0.7%) was better than the forecast (0.4%).
The current market forecast is 0.3%.
USD / FOMC Meeting Minutes - 21:00
Publication of the FOMC meeting minutes (FOMC Minutes).
A detailed report on the FOMC meeting. Meetings are held 8 times a year, they consider economic and financial conditions in the country, determine monetary policy, and make decisions on interest rates.
The event is important because it describes in detail the commission's decision on the latest change in the refinancing rate. You can find out who voted in favor of a particular decision and who was against it. In the future, you can observe the dynamics and draw conclusions about the upcoming decision on the rate.
Any information that points to the upcoming FOMC rate decision is very useful.
More details can be found here.
Thursday
USD (US dollar) / Core CPI m/m - 15:30
Change in the core consumer price index during the month.
Energy and food prices are believed to be very volatile, and they account for only 1/4 of the total index. Therefore, economists use the Core index for a more accurate measurement.
Consumer prices account for most of the inflation, as they are the main buyers of goods. This is a very important macroeconomic parameter and indicator, as it is the last in the chain of inflation and shows the real situation in the economy.
Inflation is dangerous because money is constantly depreciating. This causes very big economic and social problems, which, if uncontrolled, can even lead to civil conflicts and wars. We have already seen such a history. That is why the government is watching this parameter very closely and doing everything possible to influence the price growth.
The Fed is now making every effort to curb inflation. The main tool is raising refinancing rates. The higher the rate, the higher the cost of loans and borrowing. Expensive loans and borrowings mean that people cannot buy new goods, houses, and cars. Lack of great demand for goods - manufacturers place fewer orders, do not increase production capacity, and thus do not raise prices at their level.
All this should lead to a reduction in overall inflation and bring the system to a stable state. So far, the Fed is doing a good job, but new problems are constantly emerging, and the tools to influence the situation are unfortunately limited.
The latest actual figure (0.3%) was higher than the forecast (0.2%). The reason for this was increased demand for housing, transportation, and medical goods.
The current market forecast is 0.3%.
USD (US dollar) / CPI m/m - 15:30
Change in the consumer price index during the month.
Since the index includes energy and food prices, it is more realistic and closer to ordinary people. The relationship between prices and energy costs was described above.
The infrastructure of the cities is built in such a way that it is very difficult to get around without a car. The public transportation system there is not as well developed as in European cities. Therefore, the cost of fuel used to refuel their cars is very important for ordinary citizens. The same goes for food.
If all this is taken into account, then, as with the example of comparing Core PPI and PPI, a very large volatility in the indicators is created. If you look at it from an academic point of view, this is unnecessary information that does not play a role and is smoothed out. If you look at it from a consumer point of view, this extra information is everything. Today, you filled up a liter of gasoline for 55 hryvnias, tomorrow for 70, the day after tomorrow for 90, and a week later for 60. It's not a very calm situation for an ordinary person.
The latest actual figure (0.6%) was the same as the forecast (0.6%). Fuel was the main driver of growth, with prices rising by 10% year-on-year.
The current market forecast is 0.3%.
USD (US dollar) / CPI y/y - 15:30
Change in the consumer price index during the year.
The indicator is annualized. It is widely used in the media because it is easier to explain to ordinary people. A large number of economic indicators affecting various services and goods are calculated on the basis of this index.
For several months, the annual consumer inflation rate had been declining, but the latest actual figure (3.7%) was higher than the forecast (3.6%). The reason for this was a rise in fuel prices.
The current market forecast is 3.6%.
USD (US dollar) / Unemployment Claims - 15:30
Applications for unemployment benefits.
The indicator is very important because it shows the strength/weakness of the labor market. If people are employed, they receive salaries and consume services and goods. This can influence the growth of consumer inflation.
At the moment, the Fed is actively fighting inflation. The strong labor market shows the central bank that the economy is holding up and the current inflation situation will continue.
The more jobless claims, the better for the Fed's actions. The fewer unemployment claims, the worse for the Fed's actions - they have to raise the rate even more.
The latest release of the indicator (207 thousand) was slightly lower than the forecast (210 thousand). The labor market remains stable, although it is slowing down. Therefore, there is no particular negative impact of the increase in unemployment.
The current market forecast is 216 thousand.
Friday
USD / Prelim UoM Consumer Sentiment - 15:30
Preliminary indicator of US consumer sentiment.
University of Michigan releases preliminary data on consumer sentiment based on a survey of citizens answering questions about the current and future state of the economy. The main version will be released 2 weeks after the preliminary data is published.
The indicator indicates how consumers feel at the moment and what they expect in the future. If they feel negative, this indicates a possible decrease in consumption in the future, which worsens the economic situation. If they feel positive, it indicates a possible increase in consumption in the future, which improves the economic situation.
As part of the fight against inflation, this indicator, in connection with consumer income, can be a good indicator for further actions by the Fed.
The indicator showed positive dynamics throughout the summer, but it deteriorated in September. The actual figure (67%) was lower than the forecast (69%). As with the higher indicators, the main negative factor was the increase in fuel prices.
The current market forecast is 67.5.
