FOMC Minutes:
Fed Leaves Gradualism Behind With Urgency on Rates, Assets
Fed warns faster rate rises may be needed to tame soaring inflation
The Fed Hasn’t Caught Omicron Yet Stocks sold off sharply on somewhat hawkish Fed minutes from a December meeting when the Covid-19 variant was less of a factor.
(…) When officials met in the middle of last month, the discussion was mostly focused on how persistent inflation and labor-market strains might prove, and how that might prompt the central bank to raise interest rates “sooner or at a faster pace than participants had earlier anticipated.” With investors more on edge over the Omicron variant, stocks fell sharply.
Omicron featured very little in the minutes, though, and to the extent it did, didn’t appear to have much effect on policy makers’ thinking. The minutes noted that several meeting participants said that “they did not yet see the new variant as fundamentally altering the path of economic recovery.” (…)
Slower economy = lower demand = slower inflation? or
Tighter global supply chains = higher inflation?
2022 has received one last kick from 2021, and traders in the stock market don’t seem to like it. The Federal Open Market Committee last met to consider monetary policy on Dec. 15. Everyone knows what they decided. But the minutes of that meeting, with much more information on how the decision was made, didn’t come out until 2 p.m. Wednesday in New York. The effect on both bond yields and share prices was immediate, with the former surging while stocks sold off.
Why such angst? There’s a lot in the minutes, with much useful information for students of the economy and monetary policy. You can find the full version here. For those less interested in such studies, the passage of three sentences that accounted for more or less all of the market reaction read as follows:
it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate. Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures.
- Trading in the 10-year note provides a decent thumbnail sketch of the financial hivemind’s expectations for economic growth and inflation over the next decade. It’s telling us that Omicron’s economic disruption, like its health impact, looks fairly mild. A similar dynamic occurred during previous pandemic episodes, like Delta, where yields rose to pre-episode levels as fears over the virus’s impact on the economy eased. (Axios)
Data: FactSet; Chart: Axios Visuals
December PMIs might provide some light on the most recent trends:
US services providers registered another steep expansion in business activity at the end of 2021, according to the latest PMITM data. The upturn eased slightly to the slowest for three months, but was supported by a sharper increase in new business. The rise in new orders was the fastest for five months, as demand conditions strengthened. Although firms sought to expand workforce numbers to tackle strong growth in backlogs of work, labor shortages and challenges retaining staff hampered progress, with employment rising only marginally. Nevertheless, hopes of further upticks in demand drove business confidence to the highest since November 2020.
Meanwhile, soaring wage bills and greater supplier prices led to the steepest increase in cost burdens on record. Charges also rose markedly, albeit at the softest rate for three months amid reports of competition for customers.
The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 57.6 in December, down from 58.0 in November, but broadly in line with the earlier released ‘flash’ estimate of 57.5. The latest data signalled a sharp upturn in service sector business activity, despite the pace of growth easing to a three-month low. The expansion was driven by stronger client demand, according to survey respondents.
Contributing to the sustained upturn in output was a faster rise in new business during December. Service providers recorded the sharpest increase in client demand since July, amid new customer acquisitions and contract gains.
At the same time, new export orders grew at a solid pace. Although the rate of expansion in foreign client demand softened from November, it was stronger than the 2021 average.
Greater new business and increased backlogs of work led firms to expand their staffing numbers during December. That said, labor shortages and difficulties retaining workers hampered the rate of job creation, which was only marginal overall. Overall, the pace of employment growth eased to the slowest for three months.
Sustained pressure on capacity led to another strong rise in backlogs of work at the end of 2021, albeit one that was the slowest since September. Anecdotal evidence suggested the increase was due to labor and input shortages, alongside a further sharp uptick in client demand.
Meanwhile, service providers recorded the steepest increase in input prices on record (since October 2009) in December. The series-record rise in cost burdens was commonly attributed to greater transportation and distribution fees. That said, many firms stated that upward pressure on expenses from higher wage bills was a key factor, as companies sought to retain current staff and encourage new workers.
Despite a sharper uptick in costs, service providers signalled a softer rise in output prices. The rate of charge inflation was, however, little-changed from October’s series high. Where firms sought to ease hikes in charges, this was linked to competition.
Buoyed by stronger client demand and hopes of an end to pandemic and supply-chain uncertainty, the degree of optimism at service providers regarding the year-ahead outlook was the highest since November 2020. Some firms were also more upbeat on hopes of improving labor market conditions.
The IHS Markit US Composite PMI Output Index* posted 57.0 in December, down slightly from 57.2 in November. The latest data signalled a steep increase in private sector business activity, albeit largely driven by the service sector as manufacturing production rose at a relatively muted pace.
At the same time, new business rose sharply amid a pick-up in service sector client demand. Overall new order growth was the quickest for five months. New export orders, meanwhile, increased for the second month running amid greater client demand at manufacturers and service providers.
Input shortages, transportation delays and upticks in labor costs drove the rate of private sector input price inflation to a fresh series high in December. Although manufacturing firms recorded a moderation in cost pressures, input prices rose faster at service providers. Overall selling prices also rose steeply, albeit at the slowest pace for three months.
Challenges hiring suitable workers and retaining current staff blighted the private sector again, as employment growth slowed to only a marginal pace. Material and labor shortages exacerbated pressure on capacity as backlogs of work rose strongly.
Following a brief acceleration in November, economic growth in the euro area eased to a nine-month low during December, resuming a slowdown trend amid a resurgence of COVID-19 infections. This had a notable effect on the service sector, restricting increases in both activity and new business. Meanwhile, manufacturing output growth remained subdued as supply-related disruptions continued to impede production schedules.
After accounting for seasonal factors, the IHS Markit Eurozone PMI® Composite Output Index fell to 53.3 in December, down from 55.4 in November, to signal the softest expansion in combined manufacturing and services output since March.
The direction of growth differed by sector, with a slowdown in the eurozone’s dominant services sector to blame for a weaker improvement at the composite level. An unchanged rate of expansion in manufacturing output from November – and therefore the second-weakest in one-and-a-half years – meant the upturn at goods producers remained subdued relative to the 2021 average.
While difficulties in obtaining inputs was once again noted as a major headwind for manufacturers, a resurgence in the pandemic across the eurozone was a considerable drag on activity and demand in the services sector. So much so that, for the first time since July, manufacturing output growth outpaced that for services.
In a similar vein to the aggregate euro area data, Composite Output PMIs by country all declined during December. As a result, slower rates of growth were seen in Ireland, France, Spain and Italy, while the level of business activity in Germany was broadly stagnant over the month.
According to December survey data, demand for goods and services across the eurozone rose at the slowest pace since March. Incoming new business from international clients was especially dented by the emergence of the Omicron variant and the resultant surge in COVID-19 cases in some areas. New business from overseas rose at the slowest rate since January, although data showed that growth was exclusive to manufacturers as services firms registered a decline.
Nevertheless, there was a slight improvement in business optimism during December, rising from November’s ten-month low. Both sectors recorded stronger levels of confidence.
This also coincided with a strong increase in employment across the eurozone. Overall, the rate of jobs growth was the weakest since May, but it remained well above its historic average. Increased staffing numbers was a reflection of growing demands on businesses and the subsequent strain this had placed on capacities. Backlogs of work increased for a tenth successive month during December.
Finally, survey data for prices showed still-substantial inflationary pressures at the end of 2021. Output charges and input costs increased at the second-sharpest rates on record, surpassed only by those seen in November.
The IHS Markit Eurozone PMI® Services Business Activity Index fell to its lowest level since April in December. At 53.1, down from 55.9 in November, the latest survey data signalled a renewed slowdown in growth at eurozone services firms as increasing COVID-19 infections weighed on the performance of the sector.
Falling new business from foreign clients – the first time since May – was a strong drag on overall growth in new business during December. Demand for services did continue to rise, marking an eighth successive monthly increase, but the latest expansion was the slowest over this period.
Nevertheless, service providers continued to expand their workforce numbers amid a further increase in backlogs of work. That said, jobs growth slowed to a seven-month low.
Lastly, rates of input cost and output price inflation slowed from November, but were both substantial overall and the second-fastest on record.
Chinese service providers signalled a strong end to 2021, with firms registering faster increases in both business activity and overall new work. Improved sales and efforts to increase capacity led to a further rise in staffing levels. Nonetheless, backlogs of work continued to increase and at the quickest rate for nearly two years. Cost pressures eased, with both input costs and output charges rising at weaker rates. However, uncertainty over the pandemic weighed on business confidence regarding the year ahead, with sentiment slipping to a 15-month low in December.
The headline seasonally adjusted Business Activity Index increased from 52.1 in November to 53.1 in December, to indicate a stronger rise in services activity at the end of 2021. Output has now increased in each of the past four months, with the latest rise solid overall. Companies that registered higher activity levels often mentioned that improved market conditions, new product releases and higher sales had supported growth.
Total intakes of new business also rose for the fourth successive month in December. The rate of expansion quickened from November’s three-month low, but was moderate overall. Some firms indicated that the pandemic, and measures to contain the virus, had weighed on new orders.
| Services companies also registered a further increase in new orders from abroad. That said, the rate of growth was similar to those seen in the prior two months and marginal. |
Improved demand conditions and efforts to increase operational capacity led to an increase in Chinese service sector employment for the fourth month running. Though only mild, the rate of job creation was the quickest seen since May.
Although staff numbers increased, backlogs of work expanded for the fifth time in the past six months during December. The rate of accumulation was the quickest seen since February 2020, albeit modest overall. When explaining the latest rise in unfinished work, companies generally commented on higher intakes of new work, though some firms also mentioned that the pandemic had hampered their ability to fulfil orders.
As has been the case since July 2020, average input costs increased in the final month of 2021. The rate of inflation softened since November, but was nonetheless solid overall. Firms often cited increased costs for raw materials and staff. At the same time, charges set by services companies rose only modestly in December, with the rate of inflation edging down to a four-month low. Higher fees were generally associated with the pass-through of higher costs to clients.
Although Chinese service providers remained highly upbeat regarding the 12-month outlook for business activity, overall sentiment softened since November. Notably, the degree of optimism was the lowest seen since September 2020, largely due to concerns around how long it will take to bring the pandemic under control globally.
We also got new car sales:
U.S. light-vehicle sales in December came in at 12.44MM units SAAR (expected: 12.7MM units), the second month of sequential decline. Q4: 12.8MM, down from Q3’s 13.4MM and Q2’s high of 16.9MM units. Full year 2021: 14.93MM units, +3.1% from pandemic-impacted 2020, and well below the five-year average ended 2019 of 17.2MM units.
And this Reuters Graphics chart confirms the sharp slowdown in retail sales post Thanksgiving:
Hence this sentence in the FOMC minutes:
These participants noted, however, that a measured approach to tightening policy would help enable the Committee to assess incoming data and be in position to react to the full range of plausible economic outcomes.
Also note that the meeting took place Dec 15. Much has happened since, on the Covid front and perhaps on the economic front. The Fed is still firmly in reactive mode with a rather poor track record.
Meanwhile, from the WSJ:
- T-Mobile in August increased base pay to $20 an hour from $15, and raised wages by an average of 19% for existing customer care staff.
- The financial services company United Services Automobile Association, or USAA, in October raised its minimum wage to $21 from $16, and expanded its perks to include coverage of some adoption, surrogacy and fertility-treatment fees, said Pat Teague, the company’s chief human resources officer.
- Alorica Inc., which provides third-party customer service support, offers different pay scales dependent on location, last year raised average minimum wages between 15% and 20% when it saw companies in other service industries do the same, said Colleen Beers, the company’s president of North America and Europe operations.
Germany Mulls Heating Compensation to Ease Pain of Price Surge
“We have to do something,” Finance Minister Christian Lindner said Thursday in a speech at a gathering of his Free Democratic party in Stuttgart. “I promise that, with the means I have available, we will provide such solidarity-based support for the people who are particularly affected.”
European natural-gas prices have resumed their rally this year after more than tripling in 2021. The escalating cost of energy has hit households, sending bills rocketing, and forced multiple industries to curtail output.
Central to the crisis has been a lack of sufficient supply from Russia. Gas flowing to Europe via key pipelines from the country has sunk to the lowest for this time of year since at least 2015, just as temperatures are set to drop. (…)
Alongside the surge in heating costs, Lindner said Germany is watching inflation closely.
RISK DOWN…
… But it may not be “risk-off” just yet. The largest caps keep pulling the wagon, so far. 
