Three Data topics today:
#1: US Food Inflation. While aggregate US good-and-service inflation remains muted (June CPI +0.7%), food inflation has been rising dramatically. This is especially true in the “Food at home” subcategory of the Consumer Price Index, which was +5.6% year over year in June. Here is a 10-year chart of headline annual CPI inflation (in black) and Food at Home inflation (in red):
Two reasons why this matters: First, consumers feel food inflation quickly and it has an outsized effect on their perceptions of overall price levels. As much as bond prices may be discounting little-to-no inflation, Americans see a different reality. Second, higher food prices are obviously unwelcome just now and stretch consumers’ limited budgets.
Why is this happening? America’s food supply chain runs down two paths: one to supermarkets/grocery stores and the other to restaurants/food service. The COVID Crisis has shifted consumer demand from the latter to the former. A producer of ground beef for restaurants or institutional food service, for example, cannot quickly shift output to supermarkets when clients reduce their orders. As a result, ground beef prices in the meat aisle rise until the supply chain or demand resets.
Bottom line: food inflation will be with us until restaurant dining and institutional demand returns, so expect to hear more about it in coming weeks (July CPI is out next Wednesday).
#2: US mutual/exchange traded fund investors really, really don’t like stocks. The Investment Company Institute released their weekly money flow data through July 29th yesterday, and it shows that:
- For the 4 weeks ending July 29th US fund investors redeemed $53.9 billion of equity fund holdings. Most of these outflows were in domestic equity products (-$41.6 billion), with the rest non-US (-$12.3 billion).
- Believe it or not, that makes July 2020 the worst month for equity fund outflows since December 2018 (-$57.4 billion) because March – May 2020 have been pretty benign (equity outflows of -$20 – $45 billion).
- Fixed income fund flows were OK in July, however, +$79.3 billion versus a trailing 3-month average of $62.6 billion. This means bond fund investors have finally reinvested (almost all) the $273 billion they took out in March; inflows from April through June total $187.9 billion.
Why is this happening? US equity fund investors have been cutting their stock positions for many years, so this is just part of that trend. The time when mutual/exchange traded fund flows matched the direction of stock prices has been over a decade-plus.
Bottom line: the only time to worry about stocks is when US equity fund flows turn positive, as this is a very good contrarian indicator. July’s outflows are very bullish for US equities.
#3: Retail money market fund (MMF) balances – what is commonly called investment “dry powder” – have stabilized in recent weeks after climbing by $158 billion from February to May and topping out at $1,138.7 billion. They are now slightly lower at $1,136.7 billion.
Why is this happening? Here is a history of retail MMF balances back to 2000, which shows how they rise going into a recession (gray bar) and fall thereafter. They do, however, tend to remain at elevated levels for several months before beginning their decline at the start of the next expansion.
Bottom line: by this measure there is certainly amply capital sitting in brokerage accounts (and earning little/no interest), but history says it will be sitting on the sidelines the rest of the year. Dry powder, yes, but likely for 2021 – 2022.
ICI Money Flows: https://www.ici.org/research/stats