The best headlines on yesterday’s FOMC and Powell presser belong to the FT:
‘No more Mr Nice Guy’: Fed chair signals tougher stance on inflation
- Fed’s Jay Powell refuses to rule out string of aggressive rate rises Hawkish stance from US central bank chair sparks sharp stock market sell-off
The WSJ’s is a close second:
- Fed Grabs the Market’s Punch Bowl Chairman Jerome Powell’s language sent stocks into reverse as it became clear that a series of rate hikes is on the way barring worse economic news
What struck me listening to the press conference was how many times Mr. Powell described the economy and the labor market as “very, very strong” and acknowledged that his, and “everybody else’s”, reading of inflation has proven wrong. A key sentence right at the beginning of the presser: “both sides of the mandate are calling for us to move steadily away from the very accommodative policies in place”.
Later:
- “there is quite a bit of room to raise rates without threatening the very strong labor market”.
- “the economy has underlying strength”
- “there is considerable uncertainty about the inflation outlook” but
- “inflation risk is still on the upside, it could be prolonged and even higher”
- “I don’t think it’s possible to say exactly how this is going to go,”
- “We will need to be nimble so that we can respond to the full range of plausible outcomes,”
- “long term growth requires price stability”
Clearly, they now know that they don’t know but he wants us to know that they now know who the real villain is: inflation.
Goldman Sachs:
Powell specifically highlighted two inflation risks that we also highlighted recently, the possibility of persistently strong wage growth and the possibility that further supply chain problems could emerge, perhaps related to China’s efforts to suppress the Omicron variant.
(…) the FOMC would move “steadily” away from its current highly accommodative policy stance.We take “steadily” to mean at least once a quarter, but with the option to go faster.
Comments from Chair Powell today reinforced our view that high inflation could push the FOMC to consider hiking at consecutive meetings this year, and that the risks around our baseline forecast of four hikes in 2022 are therefore tilted to the upside. The market also took Powell’s comments as hawkish, and 2-year yields rose 13bp during and after his press conference.
While Powell did not directly address hiking at consecutive meetings, he hinted at the possibility of a faster pace in three ways. First, he emphasized that the economy is in a very different place than when the FOMC hiked last cycle. Second, he acknowledged the uncertainty about the inflation outlook and said that monetary policy needs to be in a position to address different outcomes, including one in which inflation runs higher. Third, he said that the FOMC would move “steadily” away from its current policy stance, avoiding the term “gradual” used last cycle.
From my lens, the economy and the labor market are not that strong, certainly not “very, very strong”. You can blame Omicron and call it transitory, but Covid-19 will be soon 2 years old. We cannot simply assume it will simply pass.
We know that holiday sales were weak raising the risk of an inventory overhang. We know that very high inflation is quickly eroding spending power. And if Goldman Sachs is half right in its forecast of a 4% drop in real disposable income this year, the economy could get much, much weaker.
But never mind the economy, we now know that the U.S. monetary policy is firmly focused on fighting inflation. At least that’s what Powell and friends are saying.
But the WSJ editorial board is not so sure of that resolve:
The Federal Reserve on Wednesday showed new determination to fight rising prices, but the fledgling inflation hawks are only learning to fly. The central bank’s moves were modest given inflation of 7%, and it isn’t clear how much resolve the central bank will have if asset prices keep falling in response to the prospect of rising interest rates.
As expected, the Federal Open Market Committee signaled an end to its bond purchases and a rate increase in March from near-zero today. This is hardly monetary tightening. The Fed could have gone cold turkey on bond buying, but it chose to keep assisting asset prices for a half dozen more weeks or so.
Chairman Jay Powell stated clearly in his press conference that the economy no longer needs this monetary accommodation. Yet he ducked questions about whether the FOMC would consider a 50-basis-point increase in March, rather than its usual 25 points. The bigger bazooka is what previous chairmen have fired when inflation was this high.
John Authers:
The central bank has also shown that it can live with the amount of equity market turbulence that it’s created so far. The strength of the reaction to Powell’s press conference was driven in large part by the prior speculation that the market selloff would force him into offering a “dovish olive branch” and walk back some hawkish speculation. That he deliberately and conspicuously refused to rule out any of the options that worry the market showed that the “strike price” of the Fed’s “put option” under the stock market (in other words, the index level at which the Fed would feel compelled to ease up) is lower than traders had thought.
Meanwhile, in the real world:
- “Bank of America increased base salaries for its managing directors in investment banking and markets to $500,000 from $400,000, according to people with knowledge of the matter. Directors are getting a bump to as much as $350,000 this year from $250,000.
- “The needs of our employees were paramount in our mind.” — KPMG U.S. CEO Paul Knopp to Nathan on how inflation factored into the company’s decision to announce pay increases for the second time in three months.
I would venture to say that there was also increasing poaching by competitors…
The fact is that compensation is not only boosted at the lower end of the pay scale…
Also in the real world:
- Imports Drop at Southern California Ports as Ship Backup Grows Combined inbound volume fell 14% in December at the ports of Los Angeles and Long Beach as the queue of vessels waiting to unload surpassed 100 ships and reached a record 109 ships in early January. Ships can’t unload quickly because terminals are full of containers. Truckers can’t pick up loads due to a shortage of drivers and the steel trailers used to pull boxes. Warehouses near the ports and at nearby logistics hubs are short workers and don’t have space for more deliveries.
- The Case for $100 Oil: More Driving, Less Drilling Wall Street’s summer forecast calls for $100 oil. Dwindling inventories in the developed world, rising demand and doubts about OPEC’s output are supporting predictions for higher crude.
(…) “The oil market is heading for simultaneously low inventories, low spare capacity and still low investment,” Morgan Stanley analysts wrote in a research note, lifting their price forecast for the summer quarter by $10 a barrel, to $100 for Brent and $97.50 for West Texas Intermediate.
Goldman Sachs raised its estimate for the period by $20 a barrel, also to $100 for Brent and slightly less for U.S. crude.
Bank of America predicts that West Texas Intermediate will hit $117 by July and that Brent will reach $120. (…)
November traffic in the U.S. wound up the highest in a decade, with 12% more miles traveled than a year earlier, when the Delta variant was rampant, and 2.8% more than in November 2019, before the pandemic, the Federal Highway Administration said this week.
As air traffic recovers and still-restricted economies reopen around the world, supplies will be stretched thin, analysts say. Goldman anticipates that by summer the developed world’s oil inventories will have drained to their lowest level in two decades. (…)
Angola, Nigeria and Iraq have production problems. Russia has blamed lower output on delays in developing oil fields. (…) Saudi Arabia, among the few exporters that can quickly increase production, has declined to make up for its market allies’ unmet quotas. (…)
With larger energy producers under pressure from investors to stick to their drilling budgets and return excess cash to shareholders, smaller, closely held producers led the rebound in drilling last year. Without the scale, bargaining power and quick-to-pay-off gushers of larger firms, smaller producers bear the brunt of rising costs for oil-field services and are unlikely to repeat last year’s production growth spurt, analysts say. (…)
Copy-paste among central bankers:
Bank of Canada Says Rate Increases Are Coming The Bank of Canada held its main interest rate steady at 0.25%, but said rate increases are on the horizon to deal with elevated inflation and an economy running at or near full tilt.
(…) He characterized the decision to drop forward guidance as a “significant” shift in policy — a bid to sound hawkish even as he bucked market expectations for a rate hike.
“Everybody should expect interest rates to be on a rising path,” Macklem told reporters after the decision.
Still, he acknowledged the central bank wanted first to deliver an advance signal that borrowing costs are going to rise as part of a “deliberate series of steps.” (…)
U.S. New Home Sales Strengthen in December
New single-family home sales rose 11.9% (-14.0% y/y) in December to 811,000 (AR) from 725,000 in November, revised from 744,000. During all of 2021, sales fell to 765,000 from 828,000 in 2020. December sales remained below the January 2021 peak of 993,000. The Action Economics Forecast Survey expected 763,000 sales in December.
By region, December sales in the Midwest rose 56.4% (-23.2% y/y) to 86,000 after falling 16.7% in November. In the South, sales rose 14.9% (-17.5% y/y) to 456,000 following a 1.5% November gain. In the West, sales edged 0.4% higher (2.1% y/y) to 242,000 following a 47.9% November surge. Falling by 15.6% (-34.1% y/y) to 27,000 were sales in the Northeast after they rose 10.3% in November.
The median price of a new home declined 9.2% (+3.4% y/y) in December to $377,700. It was the lowest price in six months. The average sales price of a new home fell 4.6% (+13.8% y/y) to $457,300. These sales price data are not seasonally adjusted.
The supply of new homes for sale fell to 6.0 months in December from 6.6 months in November. This compares with 3.8 months in December 2020. The median number of months a new home stayed on the market eased to 2.8 from 2.9 months in November. The record low was October’s 2.5 months. These figures date back to January 1975.
EARNINGS WATCH
We now have 100 companies in: the bat rate is 81% and the surprise factor +4.8% with only Industrials showing negative surprise (-1.4%).
Trailing EPS are now $207.31. Forward: $223.28.
Q1’22 growth is seen at +6.8%, down from +7.5% on Jan. 1.
Yesterday, Kimberly-Clark offered weaker than expected earnings guidance for the fiscal year thanks to rising input costs. “The company expects its cost of sales to rise by $750 million to $900 million for fiscal 2022. That would represent the second-highest annual growth rate in Kimberly-Clark’s 150-year history, analysts at KeyBanc write, after last year’s $1.5 billion leap in input costs.” (ADG)
SENTIMENT WATCH
- Goldman Sachs: “Our bear market risk indicator has increased and points to low future returns. While it has not reached danger zone levels that typically precede a bear market (a fall of at least 20%), it has reached levels which have typically been consistent with corrections and relatively low returns over the next one and five years”.
- Bridgewater Sees ‘Much Bigger’ Drop in Stocks Before Fed Blinks How much further is the Federal Reserve willing to let stocks slide? That’s the burning question of the moment for financial markets, and Greg Jensen, co-chief investment officer at Bridgewater Associates, has an answer: as much as 20% more.
(…) Anyone who expects the Fed to blink, as it did after the last pre-pandemic selloff in late 2018, is misreading the economy, Jensen said. Things were different then. Inflation was below the Fed’s 2% target and big companies were buying back shares instead of adding capacity, stockpiling supplies and raising wages. (…)
“Since the 1980s, problems have always been solved by easing. That was true fiscally and monetarily, and the countries that eased more did better than the countries that eased less,” he said. “We’re at a turning point now and things will be much different.” (…)
Jensen said he figures the 10-year Treasury yield has to reach 3.5% or even 4% — up from less than 1.9% today — before private investors are ready to absorb all the government debt that the Fed has been monetizing. (…)
(…) “There’s only a certain amount of cheap oil, cheap nickel, cheap copper, and we are beginning to hit some of those boundaries,” said Grantham, co-founder of Boston asset manager GMO. “Climate change is coming with heavy floods, serious droughts and higher temperatures — none of these make farming easier. So, we’re going to live in a world of bottlenecks and shortages and price spikes everywhere.”
Grantham, 83, insists that’s all inevitable because, along with the scarcity of raw materials, baby boomers are retiring, birth rates are declining, emerging markets are maturing and geopolitical tensions are flaring — all trends decades in the making and almost unstoppable. (…)
Breakup Plans; China Property Stocks Tumble: Evergrande Update
Chinese authorities are considering a proposal to break up China Evergrande Group by selling the bulk of its assets, according to people familiar with the matter. Developer stocks slumped after two firms announced plans to issue fresh equity.
Evergrande’s restructuring proposal calls for the developer to sell most assets except for its separately listed property-management and electric-vehicle units. The builder has told creditors it aims to issue a preliminary restructuring plan in the next six months and intends to treat all categories of bondholders equally, people familiar with the matter have said. U.S. investment firm Oaktree Capital is moving to seize a plot of land used as collateral by Evergrande, the Financial Times reported. (…)
