Real average weekly earnings
Universal value advisor
Like clockwork, as soon as the Fed gave in to constant market and media pressure to tighten it, the Fed announced an acceleration of the QE “t -er” and displayed much more restrictive “dots” (the gr -hical representation of the views of FOMC members where the Fed Fund will be in 2022, 23 and 24), the markets changed their sentiment. The bond gurus are now seeing a weakening economy (which we have been seeing for some time – see below) and a subdued Fed tightening cycle. At the same time, the stock markets don’t seem to know what might h -pen next and have become volatile and somewhat schizophrenic.
To be honest, there has been a stealth stock sale since late summer. The Nasdaq NDAQ consists of more than 3000 tickers; 1300 (more than 43%) are in the correction zone, ie more than 10% below their highs. The S&P 500 hit an all-time high on December 9th and its second-highest historical close on December 14th. The media boasted that the S&P had risen more than 25% since the beginning of the year. However, 210 of the more than 500 S&P 500 companies (42%) were also on correction ground.
Why markets are volatile
While the Fed’s “dot plots” are calling for a final interest rate of 2.125% for 2024, the futures markets have scaled back their views on real money bets to 1.24%. In his post-session press conference, Fed Chairman Powell painted a brilliant picture of the state of the US economy; certainly the “kiss of death!” Certainly, some of his optimistic rhetoric can be viewed as political. After all, the Fed and FOMC members are all -pointed by the executive branch. Meanwhile, the models of Wall Street economists like David Rosenberg, and clearly the rate movements in bond markets, say that a Fed Funds rate of over 1% will trigger a recession.
Incoming data
So far, the incoming data support the “softening” view:
- We have argued on several blogs that the “shortage” narrative that is still getting circulated in the daily media would boost Christmas shopping. The November National Retail Federation poll found that 60% of Christmas shoppers started their Christmas shopping early. Thus the increase in retail sales by + 1.8% in October (seasonally adjusted (SA)). We also think retail sales would be strong in November. (We were half right: + 0.3%). Notably, department store sales fell -5.4% in November and have contracted for two of the last three months. (And it can’t be an Omicron, as that wasn’t even discovered until it -peared in South Africa on November 26th, the day after Thanksgiving.) We still believe December sales (on an SA basis) will be dis -pointing as will GDP. [It -pears that Q4 GDP will be positive, but significantly lower than the 6.9% growth the Fed has penciled in; and we aren’t alone in that thought process.]
- Real weekly earnings fell by -2% year-on-year (see gr -h above). The November reading was negative (-0.4%) and is likely to remain so until 2022, when inflation cools. This means consumers can purchase -2% fewer physical items than they did a year earlier (unless they draw on their savings). The tax giveaways are now in the rearview mirror as the last one (cash advance against childcare income tax credit for 2021 taxes) is slated to end this month.
- In our last blog we talked about the weakness in auto sales in November. The media have referred to this as a chip “shortage”. But the US car factories are producing again and the domestic chip companies have also increased production. Chip shortages may have slowed sales earlier in the year, but not anymore. The real reason behind the poor auto sales is saturation of demand, as described in the University of Michigan’s Consumer Sentiment Surveys, that is, intentions to buy cars at a 40-year low.
- The Philadelphia and Kansas City Feds released their manufacturing surveys last week. The Philly headline fell more than -60% (15.4 versus 39.0) while Kansas City’s headline stayed at 24. In both surveys, prices paid and received were lower, as was the order backlog; Symptoms of easing inflationary pressures in manufacturing. Of further interest are the investment plans over the past few months in both surveys; not a good sign for future growth.
- Construction starts, on the other hand, were a positive surprise, but were mainly multi-family houses (+ 13% M / M; + 37% Y / Y). While single family home starts have increased (+ 12% M / M), they are still down -1% Y / Y. For those concerned about the impact of rents on the consumer price index (30% weighting), just as the Fed is ready to hike rates in mid-2022, we will likely see disinflation in the rental market as the huge supply by then , which is currently in the pipeline, goes online.
- And then there is China. The weakness there is reflected in the real estate sector, which accounts for a large part of China’s consumer wealth. So the “prosperity effect” is likely to play a role in Chinese consumer behavior. The gr -hic opposite shows both the decline in the MSCI China Index (a large and mid-c – index for Chinese stocks) and in the RE sector. Note the slump in both since the Evergrande fiasco. The recent r -id decline in major commodity prices is directly related to the weakness in China, the largest consumer and importer of commodities.
Cumulative Index Performance – Gross Returns
Bloomberg
- Data from the eurozone (especially Germany) are subdued and the UK looks ripe for a rel -se into recession.
- Given all of this, especially slower growth in China and globally, the r -id growth of the domestic economy in 2022 seems like the pipe dream of someone (Powells?) Who may be politically driven.
Labor markets
Powell also emphasized at his press conference how well the US labor markets have done. Perh -s he hadn’t seen the latest data (doubtful) or thinks the SA data accurately reflects the state of the markets (politics again!).
We start here by noting that the media seem less and less concerned about labor shortages and more and more concerned with inflation. Maybe it’s because companies are becoming less and less concerned. For example, the Kansas City Fed Manufacturing Survey rated employment problems at 18; they were 27 in November and 37 in October.
Also note that the right side of the attached gr -h shows an increase in the most recent Initial Unemployment Claims (ICs) in the first two weeks of December. ICs are a proxy for new layoffs.
State initial claims
Universal value advisor
Further unemployment claims
Universal value advisor
The associated increase in claims for permanent unemployment (Continuous Employment Claims, CCs) is also noteworthy. As the gr -h shows, they made a big jump up after Thanksgiving after falling for much of fall.
Our outlook for economic growth in 2022
We expect economic growth to slow down in 2022, with China ahead, Europe struggling, and the US not far behind. Emerging countries are also negatively impacted by falling raw material prices. Headline inflation will fall in the US, but “core” inflation, led by energy prices, will be more persistent than initially thought. This could prove problematic for the Fed. In many smaller countries, the central banks have already started to raise interest rates. With the latest rhetoric, the Fed has joined this crew (although it is still a long way from raising it). Notable exceptions are the ECB (European Central Bank) and the PBOC (Peoples Bank of China), both of which remain fairly reserved and accommodating.
While the current official position of the Fed is that the economy is quite strong and rates could rise by mid-2022, we believe that a weakening economy will dampen any rate hikes, and we would be surprised if the Fed Funds policy rate drops significantly would rise above 1%. this cycle (until 2024). The bond markets seem to agree with this view.
(Joshua Barone contributed to this blog.)
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