Year: 2023

Fed Officials Were Divided Over a June Rate Pause After the most recent rate increase, several policy makers thought further hikes “may not be necessary,” according to the minutes of their May meeting.

“Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary,” said the minutes of their May 2-3 meeting released Wednesday.

Others believed they would need to lift rates in the months ahead because they expected “progress returning inflation to 2% could continue to be unacceptably slow,” the minutes said. (…)

Some Fed officials have expressed anxiety that the economy and inflation haven’t shown more visible signs of slowing. But they have also become uncertain about whether to keep lifting rates because of the potential fallout from three bank failures since March, including a credit crunch as banks face higher funding costs.

Fed Chair Jerome Powell has largely kept the rate-setting committee united since inflation surged two years ago, with only one dissent since the central bank began unwinding its pandemic-era stimulus policies at the end of 2021. The minutes illustrated how it could grow more difficult, however, to maintain a strong consensus in the coming months. (…)

Fed officials revised their postmeeting statement this month to suggest much less conviction about the need for further rate increases. Some of them said they didn’t want market participants to interpret those changes as signaling that the Fed was considering rate cuts or that further increases had been ruled out, according to the minutes. (…)

The minutes showed the Fed’s staff continued to expect a recession would begin around the fourth quarter of this year as the lagged effects of rate increases and banking strains slowed economic activity. (…)

The May flash PMIs signalled continued economic momentum as a strong and strengthening service sector more than offsets weak demand for goods.

At 55.1, the S&P Global Flash US Services Business Activity Index signalled a strong expansion in service sector output midway through the second quarter. The rate of growth in activity was the fastest for just over a year, with firms linking the upturn to greater demand from new and existing clients. (…)

New orders rose at the fastest rate since April 2022, with the pace of expansion also exceeding the series average. Contributing to the sharper increase in total new orders was a renewed rise in new business from abroad. New export orders grew for the first time in a year, and at a solid rate.

Overall consumer demand should remain solid given the healthy labor market:

Service providers noted an increased ability to bring in new staff during May, as employment rose at a quicker pace. The rate of job creation was the fastest for ten months, with firms recording broadly unchanged levels of unfinished business as a result of greater capacity improvements. This followed back-to-back expansions in backlogs of work in March and April.

[Manufacturing] firms continued to hire new workers as the availability of candidates improved. Employment growth was solid overall and the quickest since last September.

But sustained demand comes with stubborn inflation, particularly on services:

Inflationary pressures remained historically elevated across the service sector in May. Although easing, rates of increase in input prices and output charges were faster than their respective series averages. Companies often stated that greater wage bills drove inflation, as firms sought to pass-through higher cost burdens to clients.

This surely helps a lot:

Nationally, the average price per gallon of regular gasoline has been $3.53 throughout May 2023, compared to $4.60 a year ago. (Axios)

Data: Energy Information Administration, GasBuddy. Chart: Kavya Beheraj/Axios

As to the potential impact of the “banking crisis”:

Banking Crisis Is Over, Top Executives Say Threats to the global banking system have ebbed, but the industry might be forced to curtail lending and revamp business models in an era of higher interest rates.

(…) “What’s not been solved yet is what is the funding model that will work going forward.”

Barclays Chief Executive Officer C.S. Venkatakrishnan added that the acute crisis has passed but that many banks will be forced to change their business models—including possibly by curtailing lending. “I think the phase of initial discovery is over and I think there’s going to be a little bit of a longer-term discovery and adjustment,” he said. (…)

Doubts about the health of banks are leading some households and businesses to turn to lenders and investors outside of traditional banks that aren’t covered by banking regulations. Money-market funds, for instance, have drawn big inflows at the expense of bank deposits.

“I do think there’s a very big question here that needs to be solved and it should be solved because…you don’t want more of this business going into the shadow-banking sector,” [UBS] Kelleher said.

Changes in biweekly Loans and Leases are now relatively stable, even at smaller banks:

Deposits are not falling faster than before SVB:

Deposits are gradually returning to trends as excess savings are being used or redeployed:

Not to say that all is great in the credit market following a 500bps jump in interest rates. Richard Bernstein Advisors (RBA) warn:

• Defaults accelerating: Beware the coming credit crunch

(…) Charts 1 and 2 highlight how the weakest companies are feeling the heat of tighter lending standards and higher interest rates. The first chart clearly shows that repeat bankruptcies – those companies that have defaulted before and have now defaulted a second time – are nearly at all-time highs. An underlying poor business takes precedent over restructuring debt and wiping out equity holders.

The second chart should concern private credit managers. Note that small private companies (the types of companies found in private credit portfolios) are defaulting at an alarming rate compared to larger public companies. Small companies are typically the canaries in the credit mine.

Right on cue, earlier this month (May 13/14) 7 large companies defaulted. And if RBA’s proprietary default model is any guide, bankruptcy filings should get worse.

One looming concern overhanging the corporate bond market is the structure of the Collateralized Loan Obligation (CLO) market. CLOs have historically been the biggest buyer of leveraged loans, owning upwards of 2/3 of the entire loan market. As reinvestment periods end and CLO new issuance falls, the CLO’s demand for bank debt is scaling back. The combination of decreasing demand and higher rates on floating rate debt and a profit recession imply conditions couldn’t be worse for the lowest-rated corporate debt.

Yellen Says U.S. ‘Almost Certain’ to Miss Early June Payments Unless Debt Limit Is Raised The Biden administration isn’t working with investors on how to respond to a potential default on the U.S. debt, Treasury Secretary Janet Yellen said, adding the focus remains on raising the debt ceiling.

• Fitch Considers U.S. Rating Downgrade Ratings firm said failure to raise the debt limit would erode U.S. creditworthiness

Fitch said Wednesday evening it had placed the U.S. triple-A credit rating on “rating watch negative.” While the ratings firm said it still expects Democrats and Republicans to reach an agreement on raising the debt limit, it said there was a greater risk it could fail to do so in time. Treasury Secretary Janet Yellen has said the U.S. could begin missing payments as soon as June 1.

“​​The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness,” Fitch said.

Fitch said that a missed payment after June 1 would likely be inconsistent with a triple-A rating. The ratings firm also said that potential workarounds—such as invoking the 14th amendment to ignore the debt limit—would undermine U.S. creditworthiness. (…)

• Is the safe haven still safe?

Last March, RBA published an interesting analysis:

Treasury bonds have long been considered the financial markets’ “safe haven” asset. That remains generally true, but investors should appreciate the risk of default is causing the financial markets to re-assess Treasuries’ superiority as a safe haven relative to other assets. (…)

The markets re-priced Treasuries to account for the downgrade of US debt by Standard & Poors in 2011. The cost to the US government has more consistently been between 100-200 bps higher yield relative to German Bunds than it was prior to the downgrade (see Chart 1).

In other words, the 10-year T-note yield has carried a consistent risk premium to German Bunds since the downgrade of US government debt in 2011. Because all US debt prices off US Treasuries’ yields, the downgrade and subsequent increased risk premium means US corporate, municipal, and mortgage debt has also had an imbedded risk premium and higher associated interest costs.

One should not downplay the potential damage of a growing risk premium despite generally lower absolute interest rates. US rates actually fell in absolute terms after the US downgrade because the economy weakened. The chart points out, however, that the US nonetheless experienced relatively higher rates which ultimately detracted from US competitiveness. (…)

Investors seem shocked by the recent bank failures, but there could be a significantly more meaningful financial event looming.

The notion that 2011’s near-default was a non-event has proven totally false. Of course, financing costs would have been much higher if there actually had been an extended government default, but the US economy has nonetheless paid higher interest costs and experienced slower growth because of 2011’s fiasco.

Investors should appreciate another near-default or actual default could similarly result in a meaningful secular relative increase in US relative interest costs and slower US relative economic competitiveness and growth. (…)

Germany Enters Recession in Blow to Europe’s Economy Second straight quarter of contraction in eurozone’s largest economy might prompt greater caution by central bankers

(…) Germany’s statistics agency said Thursday that gross domestic product—a broad measure of the goods and services produced by an economy—was 0.3% lower in the three months through March than in the final quarter of last year. It had previously estimated that the economy flatlined in the first quarter, having contracted by 0.5% in the final quarter of last year.

The agency said a 1.2% fall in household consumption was the main reason for the contraction, as households saw their spending power eroded by a surge in food prices. In March, German households were paying 21.2% more for their food purchases than a year earlier. (…)

Business surveys have pointed to a return to growth in Germany during the second quarter. But the impact of higher borrowing costs and a weak expansion in many of its main export markets point to the possibility of a renewed contraction in the three months through September. (…)

Should the estimates for growth in other eurozone members be unchanged, the new measure of GDP for Germany suggests the currency area’s economy as a whole contracted slightly in the first quarter. The European Union’s statistics agency currently estimates it grew at an annualized rate of 0.3%, after shrinking by 0.2% in the final quarter of last year. 

From May’s Eurozone flash PMI:

Eurozone business output grew for a fifth straight month in May, according to the latest HCOB flash PMI survey data produced by S&P Global, pointing to robust economic growth so far in the second quarter. The rate of expansion moderated in response to a near-stalling of new business inflows, however, and the upturn grew increasingly uneven.

Strong service sector growth contrasted with a steepening loss of factory output, linked in turn to a widening divergence in demand growth for goods and services.

Relative to other Eurozone economies, Germany is more goods and more China sensitive.

• It Just Had an Energy Crisis, Now Europe Faces a Food Shock Inflation as a whole is falling, but food prices are rocketing, forcing consumers to tighten their belts and presenting a new policy challenge for governments still reeling from a spending spree to support households through the pandemic and an energy crisis.

China Warnings Flash Across Global Markets China’s muted economic rebound are reverberating around the globe.

(…) Recent data suggest gross domestic product growth this year will be closer to the government’s target of about 5%, contrary to expectations of a large overshoot formed earlier in the year. The figures also show a lopsided rebound that’s being led by consumer services, while industrial activity lags far behind. (…)

In the crisis-ridden property market, sales are slowing after an initial rebound. Combined with the persistent financial troubles of real estate developers, that’s hampering new projects in a sector which accounts for about 20% of China’s GDP after including related sectors. Infrastructure spending is being constrained by the hefty debt loads of local governments, symbolized this week by an 11th hour bond repayment by a state-owned firm.

Disappointing construction activity is weighing heavily on many commodities markets. Copper — long considered a barometer of an economy’s health because of its wide range of uses — has dived below $8,000 a ton while iron ore has breached $100, unwinding all of the gains made after Beijing called time on its Covid Zero policies late last year.

China is the world’s biggest buyer of items like crude oil and copper, and its vast steel industry accounts for well over half of global iron ore demand. (…)

• China’s New Covid Wave Set to See 65 Million Cases a Week

China is likely to see its Covid-19 wave peaking at about 65 million infections a week toward the end of June, according to a senior health adviser, while authorities rush to bolster their vaccine arsenal to target the latest omicron variants.

XBB has been fueling a resurgence in cases across China since late April and is expected to result in 40 million infections a week by the end of May, before peaking at 65 million a month later, local media outlet the Paper reported Monday, citing a presentation by respiratory disease specialist Zhong Nanshan at a biotech conference in the southern city of Guangzhou.

His estimate provides rare insight into how the much anticipated second wave may play out, with immunity among the country’s 1.4 billion residents waning nearly six months after Beijing’s sudden dismantling of Covid Zero curbs saw coronavirus run rampant. In the wake of the pivot to living with the virus, the Chinese Center for Disease Control and Prevention stopped updating its weekly statistics earlier this month, leaving a question mark over Covid’s impact.

The 65-million-case estimate from disease modeling indicates the resurgence is likely to be more muted compared with the previous wave unleashed late last year and into January. Back then, a different omicron sublineage probably infected 37 million people every day, sending residents scrambling for limited supplies of fever medicine, overwhelming hospitals and crematoriums.

China is also preparing to roll out new vaccines that will target XBB. The country’s drug regulator has already given preliminary approval to two and another three or four “will be cleared soon”, Zhong said. “We can lead the pack internationally in developing more effective vaccines.” (…)

Swedish Housing Starts Slump 55% in Latest Sign of Crisis

FLASH PMIs

US output growth hits 13-month high in May but divergence widens between manufacturing and services

The headline S&P Global Flash US PMI Composite Output Index registered 54.5 in May, up from 53.4 in April, to signal a solid and faster expansion in private sector business activity. The rise in output was the sharpest since April 2022, but led by service providers, who reported stronger demand conditions.

Although manufacturers registered growth in production, it was only marginal and slowed from the previous survey period. The slight upturn was linked to improvements in capacity amid greater workforce numbers. Some noted the more timely delivery of key inputs, allowing greater processing of unfinished work, but growth was constrained by a lack of new orders.

Total new orders rose for the third month running in May, with the rate of increase quickening to the steepest for a year. Mirroring the trend for output, service providers drove the latest upturn in new business as manufacturers saw a renewed contraction in sales.

The fall in manufacturing new orders was the fastest since February as firms noted challenges securing new business as customers continued to work through their existing stocks.
At the same time, total new export orders decreased further, thereby extending the current sequence of decline to 12 months. Moreover, the rate of contraction was the quickest in 2023 to date despite a renewed expansion in service sector new business from abroad. Issues relating to competitiveness and weak demand from key export S&P Global Flash US PMI Composite Output Index
destinations reportedly weighed on new export sales.

Price pressures across the US private sector diverged during May, as manufacturers recorded a fall in input prices for the first time in three years. Service providers continued to register a marked increase in cost burdens, albeit the rate of increase softening to the slowest for five months. Where a rise in operating expenses was noted, this was often linked to greater wage bills, with some instances of higher supplier prices also mentioned. Lower demand for some inputs and improved supplier performance drove the decrease in costs at goods producers.

Output charges, however, continued to rise midway through the second quarter. The rate of charge inflation eased to the slowest for three months, though remained elevated by historical standards of the survey. Goods producers saw a notable slowdown in selling price inflation, with the rate of increase only marginal and the softest since July 2020, contrasting with resilient strong increases in service sector charges.

Despite challenging demand conditions in the manufacturing sector, employment growth remained solid in May. Total private sector workforce numbers increased at the fastest pace since July 2022 as companies stated that a greater ability to hire and increased availability of candidates supported job creation.
Greater capacity allowed firms to work through their backlogs of work during May, as orders-in-hand fell for the first time in three months. (…)

Nonetheless, business expectations for the coming year improved in May. Goods producers were more upbeat than their service sector counterparts. Optimism stemmed from broad-based hopes of a pick-up in demand conditions and plans to invest in new products and marketing.

At 55.1, the S&P Global Flash US Services Business Activity Index signalled a strong expansion in service sector output midway through the second quarter. The rate of growth in activity was the fastest for just over a year, with firms linking the upturn to greater demand from new and existing clients.

Stronger demand conditions also supported a steeper rise in new business at service providers. New orders rose at the fastest rate since April 2022, with the pace of expansion also exceeding the series average. Contributing to the sharper increase in total new orders was a renewed rise in new business from abroad. New export orders grew for the first time in a year, and at a solid rate.

Inflationary pressures remained historically elevated across the service sector in May. Although easing, rates of increase in input prices and output charges were faster than their respective series averages. Companies often stated that greater wage bills drove inflation, as firms sought to pass-through higher cost burdens to clients.

Service providers noted an increased ability to bring in new staff during May, as employment rose at a quicker pace. The rate of job creation was the fastest for ten months, with firms recording broadly unchanged levels of unfinished business as a result of greater capacity improvements. This followed back-to-back expansions in backlogs of work in March and April.

Service sector firms remained optimistic of an increase in business activity over the coming year. The degree of confidence picked up to the highest in a year amid hopes of sustained increases in client demand.

The S&P Global Flash US Manufacturing PMI posted 48.5 in May, down from 50.2 in April, to signal a renewed deterioration in manufacturing operating conditions. The decline in the health of the sector was only marginal, but stemmed from weak demand conditions and a reduced need to hold inputs following improved delivery times and lower new order inflows.

Although output continued to increase in May, the rate of expansion slowed to only a marginal rate. Production growth was often linked to greater workforce numbers and the timely delivery of inputs which allowed firms to work through backlogs of work.

Demand conditions weakened notably, however. The fall in new orders was solid overall and the quickest for three months. Previous hikes in selling prices, alongside sufficient stocks at clients, reportedly drove the downturn in new orders. Weighing on total sales was a steeper decline in new export orders. Overseas sales decreased at a sharp rate that, with the exception of the initial pandemic period, was the fastest since May 2009.

Nonetheless, firms continued to hire new workers as the availability of candidates improved. Employment growth was solid overall and the quickest since last September. Increased capacity aided firms’ efforts to process incomplete work. Backlogs fell sharply and at the fastest rate in three years.

There was a notable turnaround in inflationary pressures at manufacturers midway through the second quarter, as input prices fell for the first time since May 2020. Supplier delivery times improved further and to the greatest extent on record, as demand for inputs dwindled. The downward adjustment in input buying among goods producers spurred suppliers to reduce some component prices.

Lower cost burdens were reflected in output charges, which increased at the slowest rate since July 2020. Although still passing on some previous hikes in supplier prices to customers, efforts to remain competitive and drive new sales dampened the pace of increase.

Manufacturers signalled stronger optimism regarding the outlook for output over the coming 12 months in May. The degree of confidence was the highest for a year as firms sought to invest in new product development and hoped for an uptick in client demand.

Bloomberg’s Joe Weisenthal:

The Bloomberg Economic Surprise Index is around its highest level in over a year.

Yesterday we got the Philadelphia Fed Non-Manufacturing Survey, and it was very representative of the overall vibe. The headline number was -16.0, so really rough. And yet the employment sub-index actually improved, New Orders improved, and businesses continue to expect pricing power and hot inflation.

(…) on the Urban Outfitters call yesterday, CEO Richard Hayne said in his prepared remarks: “We currently see no signs of change in customer behavior, no indication that customers are shopping less frequently, buying pure items, or trading down. Indeed so far in May, total retail segment comps are in line with the first quarter results, and we believe the total retail segment comps in Q2 could look very similar to Q1 print.”

Eurozone: Flash PMI at three-month low as steepening factory downturn offsets services revival

Eurozone business output grew for a fifth straight month in May, according to the latest HCOB flash PMI survey data produced by S&P Global, pointing to robust economic growth so far in the second quarter. The rate of expansion moderated in response to a near-stalling of new business inflows, however, and the upturn grew increasingly uneven.

Strong service sector growth contrasted with a steepening loss of factory output, linked in turn to a widening divergence in demand growth for goods and services.

Inflation trends also varied by sector. Resurgent post-pandemic demand buoyed pricing power in the services sector, allowing the pass through of higher costs – notably wages – on to customers to result in a steep and accelerating rate of selling price inflation for services. In manufacturing, however, weak demand and lower raw material prices, linked to surplus supply, pushed selling prices lower for the first time since September 2020.

Business confidence in the outlook meanwhile sank to a five-month low, dropping further below the survey’s long-run average amid growing concerns about the economic outlook, albeit still above last year’s lows. Sentiment was especially weak in manufacturing but also cooled in the service sector.

  

Japan: Strongest rise in private sector activity since October 2013

The headline au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index™ (PMI)® increased from 49.5 in April to 50.8 in May, signalling the first improvement in operating conditions since October 2022.

There were renewed increases in both output and new orders, with both variables rising at the strongest rate for 13 months. Moreover, manufacturers signalled that supply chain issues that had plagued the sector for the past three years had showed signs of improvement, as suppliers’ delivery times shortened for the first time since January 2020, albeit only fractionally.

There was also reduced, but still strong pressure on the price front during May. Average cost burdens rose at a strong pace, that was nonetheless the softest since February 2021 while output charges increased at the slowest pace for four months.

  

Debt-Limit Talks Stall as Time Runs Short to Avert US Default

• McCarthy, Graves Signal Impasse in White House Debt Talks
• Spending Fight Is Main Event in Debt-Ceiling Talks Conservatives are pushing the House Speaker Kevin McCarthy for deep reductions, while Democrats are offering a spending freeze.

(…) “We are not putting anything on the floor that doesn’t spend less than we spent this year,” McCarthy reiterated on Tuesday. (…)

Democrats say the GOP demand to cut spending is unreasonable, particularly after the White House has signaled it could agree to freeze discretionary spending next year and potentially cap future increases for two years.

House Minority Leader Hakeem Jeffries (D., N.Y.) noted freezing spending was a position many in his party “might even be uncomfortable with.” But he said House Republicans rejected that “because they want to impose draconian cuts.” (…)

Democrats have criticized Republican negotiators for seeking an increase in military spending even as they are insisting on broader spending cuts. The GOP also rejected the White House’s proposal to allow Medicare to negotiate the price of a wider range of drugs, a measure the administration pitched as a way to reduce the deficit. Some in the administration are struggling to see a path forward in the talks, according to people familiar with the matter. (…)

Members of the House Freedom Caucus, founded to use hardball tactics in pursuing conservative goals, say McCarthy shouldn’t accept anything short of the GOP proposal.

“I don’t think these guys are backing off 2022” levels, said Rep. Mark Green (R., Tenn.), speaking of his fellow House Freedom Caucus members. Rep. Bob Good (R., Va.), another caucus member, said he was “wedded to the bill that we passed as it was passed,” adding: “You should not interpret any wiggle room.”

Any spending reduction would mark a rare occurrence. In 2011, Congress cut discretionary spending to $1.059 trillion from $1.085 trillion the year before, according to Office of Management and Budget data, reflecting a debt-ceiling deal during the Obama administration. Discretionary spending has largely marched higher since.

In January, to win the speakership, McCarthy promised conservatives he would seek to return spending to 2022 levels. He also agreed to change House rules to allow any single member to force a vote on ousting him as speaker, part of concessions that empowered rank-and-file members and could leave McCarthy vulnerable. (…)

New Home Sales at 683,000 Annual Rate in April

The previous three months were revised down, combined.

Sales of new single‐family houses in April 2023 were at a seasonally adjusted annual rate of 683,000, (…) 4.1 percent above the revised March rate of 656,000 and is 11.8 percent above the April 2022 estimate of 611,000.

The median price is down 15.3% from the peak in 2022, and the average prices is down 11.9% from the peak. (…)

• You have to fish where the fish are. So, would-be homebuyers are casting their lines in the market for new homes, Axios Matt writes.

Data: U.S. Census Bureau, National Association of Realtors; Chart: Axios Visuals

• Homebuilders also appear more willing to cut prices to move their inventory of houses. So far this year, the median price of a new home is down 12%, compared to a 6% increase for existing homes.
  In the latest survey from the National Association of Home Builders, 30% of respondents said they had cut prices in April.

Inflation Has Peaked—Get Ready for Deflation Price increases would have eased without the Fed’s tightening, which we will soon see was overkill.

By Donald L. Luskin CEO of TrendMacro:

(…) The record increase in the money supply caused by $6 trillion in pandemic relief payments in 2020 and 2021 unleashed the present inflation.

The aggressive tightening regime the Fed has undertaken, including an unprecedented four back-to-back 75-basis-point rate increases, deserves little credit for the recent decrease in inflation. The drop has been caused primarily by the sharp slowing in money-supply growth resulting from the end of federal pandemic stimulus payments. (…

Money-supply growth, driven by stimulus payments, peaked at 27% year-over-year in February 2021, the highest since 1959, when the data began. The payments wound down substantially in the third quarter of 2021 and ended entirely in the fourth. The 1½-year lag between the peak in money growth and the June 2022 peak in inflation is in line with historical experience. (…)

The Fed didn’t really get into inflation-fighting mode until June 2022, with the first 75-basis-point rate increase—the same month inflation peaked at 9.1%. If the historical norm of approximately a 1½-year lag between policy and result holds, then we haven’t begun to see any effects the Fed’s actions have had on inflation since it started hiking rates 14 months ago. (…)

With the cessation of stimulus payments, money-supply growth fell to normal levels—then into a contraction. That is due not only to the end of stimulus payments but also to the sharply higher interest rates engineered by the Fed, which younger generations of savers have never seen before.

Higher rates have caused the largest savers to shift from demand deposits, which are still paying near-zero rates at the large banks most people use, to time deposits, such as certificates of deposit, that pay closer to market rates. There is nothing wrong with a saver locking up his money for a year, but when a large saver does it, it is no longer counted as “money” in M2, the most commonly used measure of money supply, because consumers can’t immediately spend it. When spending slows, all else being equal, so does inflation.

Slowing money growth now is interacting with higher rates, and the result is contraction. M2 has shrunk 4.63% in the past year. This is the only contraction in U.S. history, so there is a lot we can’t predict here, but it would be extraordinary if such a contraction didn’t result in deflation, just as the large money-supply increase two years ago resulted in inflation. (…)

Because policy changes operate with lags, we won’t experience deflation for months. When it arrives, it will be too late for the Fed to act. (…)

The first chart is nominal M2 (left log scale) and its YoY growth:

Next is real M2 and its YoY growth showing several periods of negative growth, two of which rather important (1974-75, 1980):

The third chart plots the YoY changes in CPI and real M2 showing no deflation other than briefly in 2009:

Related, but really unrelated, the Cleveland Fed daily nowcasts of inflation suggests that core inflation is stable in May in the +0.4% MoM range. Core CPI was +0.41% in April. April core PCE is out this Friday.

The monthly +0.4% prints (+5.0% annualized) have been sticky in the past year:

Share Buybacks Continue at Torrid Pace While Investors Sit on Sidelines U.S. companies have announced $600 billion of share repurchases so far this year.

Companies in the Russell 3000 have unveiled plans to buy back more than $600 billion in shares this year, in line with last year’s record pace, according to data from research firm Birinyi Associates. In all, they announced $1.27 trillion of share repurchases and completed $1.05 trillion in buybacks in 2022, both all-time highs, according to Birinyi.

That activity has offered an important source of support for the stock market. Data on fund flows show many of the traditional buyers of stocks have been net sellers of late. Some have moved into less risky investments like money-market funds amid concerns that the economy is on the brink of a recession. (…)

A handful of the biggest companies are responsible for a disproportionate share of total buybacks. Apple, Alphabet, Meta Platforms and Microsoft were the biggest buyers of their own shares in the first quarter, according to S&P Dow Jones Indices Data. Apple led the way, spending $19.1 billion during the period.

Those and other megacap technology stocks are powering the broader market’s gains again as well. Meta shares have more than doubled in 2023; shares of the other three companies have risen at least 30%. (…)

Client-flow data from Bank of America’s equities trading desk underscore the outsize demand from companies compared with other investors this year. Although the bank’s clients have purchased a net $8.5 billion of equities this year in aggregate through mid-May, they actually sold $25.3 billion excluding their buyback activity.

“Corporate client buybacks as a percentage of S&P 500 market cap remain above 2022 highs at this time,” Bank of America analysts wrote in a May 16 report. (…)

Buybacks have been subject to a 1% tax since Jan. 1, which President Biden proposed quadrupling to 4% during his State of the Union address in February. The new tax appears to be doing little to discourage the practice thus far. (…)

Many of the biggest share repurchasers, like Apple and Microsoft, are still sitting on massive cash piles. Other, smaller companies may feel the pinch sooner. The average cash balance of S&P 500 companies has dropped by 13% over the past 12 months, according to the Goldman report. (…)

Ed Yardeni’s chart shows that S&P 500 companies used 90% of their operating earnings on dividends and buybacks in Q4’22. The norm pre-GFC was 60-75% outside of recessions until ZIRP made cash useless…

Xi Jinping calls for deeper ties between China and Russia