Year: 2023

Powell Says Fed Is Prepared to Speed Up Rate Increases Federal Reserve Chair Jerome Powell opened the door to a larger half-point rate increase this month and said officials are likely to lift rates higher than they previously expected to combat inflation in a stronger economy.

(…) “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Mr. Powell told the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” (…)

“The Fed is getting closer to accepting that they aren’t returning inflation to 2% within any reasonable time frame without inducing a hard landing,” said Tim Duy, chief U.S. economist at research firm SGH Macro Advisors. (…)

Mr. Powell wouldn’t have entertained the option of a half-point increase “without intending to follow through with that outcome” at the coming meeting, said Mr. Duy. “Only surprisingly weak data will prevent that outcome now.” (…)

“We’re looking at a reversal, really, of what we thought we were seeing to some extent,” said Mr. Powell. Last month, he said moving more slowly would better ensure the Fed didn’t raise rates too much. On Tuesday, he said, “nothing about the data suggests to me that we’ve tightened too much.”

(…) the breadth of the reversal, together with revisions to previous data, “suggests that inflationary pressures are running higher than expected at the time of our previous [rate-setting] meeting,” he added. (…)

Mr. Powell’s emphasis on the revisions acknowledged that the economy’s recent strength likely wasn’t limited to just one month (…).

By the end of Mr. Powell’s testimony, investors anticipated the fed-funds rate would rise to between 5.5% and 5.75% this year, and the probability of a half-point hike this month rose to around 63%, from 32% before the hearing.

• Full Steam Ahead for Jerome Powell The markets tremble, but the Fed Chair knows he can’t let up now.
• How Seasonality Affects Our View of Inflation, Jobs, as Explained With Hot Dogs Routine adjustments based on time of year can dramatically change how economic figures are perceived.

(…) Government statistical agencies use complex models developed over decades to account for these patterns to make month-to-month comparisons possible.

That arcane process received more attention recently as some economists questioned if strong seasonally adjusted hiring, price and spending data to start the year accurately reflect what’s going on in the economy.

On Tuesday, Federal Reserve Chair Jerome Powell told Congress that “some of this reversal likely reflects the unseasonably warm weather in January in much of the country.”

Pandemic-caused swings in the economy also have complicated recent seasonal adjustments, and figures at the start of the year can be hard to predict, economists say, because seasonality plays a big role. (…)

The pandemic and related lockdowns led to big changes in activity that didn’t follow normal patterns. Statistical agencies made manual changes to separate seasonal fluctuations from pandemic changes. New York Federal Reserve research noticed a similar trend after the 2007-09 recession. “For the subsequent few years, an ‘echo’ of the Great Recession took place as economic data kept exceeding the artificially low expectations for that time of year.”

Every year, in February, the Labor Department releases a new estimate of the seasonality of its consumer-price index. The most recent adjustment for the inflation measure was particularly large. Jonathan Wright, an economics professor at Johns Hopkins University who studies seasonality, estimated that the most recent seasonal adjustments had an impact on the inflation numbers that was nearly double what had been seen in the previous four years.

Those changes resulted in revised readings showing monthly price increases in the first half of the year were less than previously estimated, and price changes later in the year were larger than prior estimates.

“Typically they move barely enough to matter,” Mr. Wright said. “They are actually changing what we think happened in the year of 2022.”

• John Authers: Ka-Powell: The Fed Reset Continues

(…) Ed Yardeni of Yardeni Research raked through the Powell press conference from the beginning of last month to show that at the time he appeared to buy the case for a gradual “disinflation:”

The word ‘disinflation’ was uttered 11 times at Powell’s press conference on February 1. He was the only one who mentioned the word at his presser. He repeatedly acknowledged that inflation was moderating but still had a ways to go before reaching the Fed’s 2.0% target. Nevertheless, Powell sounded much less hawkish than during his previous presser on December 14, 2022, when the word was mentioned only twice, both times by reporters. In his congressional testimony today, Powell mentioned the word just once in his short prepared remarks with a hawkish spin

(…) Here’s Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, on risks that might pose:

The question that I have now is: Is the economy reaccelerating? Basically we saw some weakness in November and December, but now it looks like growth is picking up. If that continues in February then that’s a real risk to the Fed because if the economy is able to reaccelerate in January and February, that means even though they have higher interest rates by March — that’s still not restrictive enough to stop the momentum in the economy — and that means the fed funds rate can go much higher than we thought. Maybe go to 6% and stay there for a while. So that’s the risk to the market at this point.

(…)

Data dependent, huh? But the data itself is not dependable!

How about being words dependent?

From the recent S&P Global’s Services PMI (we all know the “goods” economy is in recession):

• S&P Global’s Services PMI rose from 46.8 to 50.6, signalling “only a marginal uptick in business activity, but an end to a seven-month sequence of contraction.”
• New business across the service sector continued to decrease during February. New export orders declined for the ninth month running midway through the first quarter, the pace of contraction was solid overall.
• The rate of job creation was the quickest since September 2022, despite being only marginal overall. Some companies noted that greater availability of candidates supported the upturn.
• Despite a softer increase in cost burdens, service providers raised their selling prices at a sharper pace in February. The rate of charge inflation was the quickest since October 2022 and strong overall. Survey respondents commonly noted that higher output charges were due to the pass-through of greater costs to clients.

My take:

• Demand is ok but not strong, and not strengthening.
• The labor market is ok but not strong and labor supply is improving.
• Upstream inflation is softening but downstream prices are not.

In all, a words-dependent Fed would conclude that its policies are having the desired effect on demand, the lags will keep biting for a while, but perhaps a few more rate hikes would finish the job on demand which would put an end to the easy pass-throughs.

There’s also “soft data”:

  

• The Paychex Small Business Wage data show that hourly earnings growth slowed further to 4.5% in February from +4.7% in January and its May 2022 peak of 5.2%. The one-month annualized growth (+3.7%) remained below four percent for the third consecutive month. Last 3 months a.r.: +3.5%.

I can insert some soft/hard data here:

Business sales and sales expectations have converged to nominal GDP’s final sales to private domestic purchasers (solid black) which slowed from 12.5% YoY growth in Q4’21 to 7.2% in Q4’22, likely on its way to the 4.5% range indicated by February’s business expectations.

But growth in real demand has slowed to less than 1.0% in Q4’22, its weakest reading (ex-pandemic) since 2007…

… Actually, since 1968, real domestic demand has never been below 1.0% YoY other than in a recession.

Trying to focus:

• Bloomberg’s Joe Weisenthal:

(…) the second part of the Warren question didn’t get as much attention, but it was something that should be top of mind for investors actually. Go to the 3:15 mark of the video. Basically the question was, once the Fed gets unemployment up to 4.6%, would it really stop there? As Warren put it: “Once the economy starts shedding jobs, it’s kind of like a runaway train.”

And she is right. As Alex Williams at Employ America noted in a blog post earlier this year, since WWII there have been 12 times that the unemployment rate rose by at least 1% in a year. And 11 out of 12 times, the unemployment rate increased by at least 1 percentage point more. So even setting aside what you think of asking the Fed chair about the employment costs of the tightening, it’s definitely a good question to ask about whether the Fed can stop the layoffs when they really gather steam.

It’s also a timely discussion to be having in a big week for labor market data. Today we get ADP and JOLTS. Tomorrow, we get initial claims, and then Friday is the non-farm payrolls report. It’s worth noting that while the market still seems tight and strong, some of the private sector measures are starting to turn. Yesterday, Nick Bunker at Indeed noted that job postings to the site continued to drop notably. Meanwhile the rate of hiring is also slowing per LinkedIn.

Who knows what this batch of data will bring. But if/when the labor market begins to turn at some point, then you should take heed of Elizabeth Warren’s question, and the momentum of unemployment once it gets going.

Meanwhile, the curve inversion is getting wild. At roughly negative 106, the 2-10 spread is now the most inverted since September 1981, implying that at some point out there, we’re gonna be seeing some pretty fast rate cuts whenever things turns around.

Wholesale sales rose 1.0% MoM in January; ex-petroleum: +0.6% MoM. Total YoY: +6.5%

South Korea Says U.S. Chips Act Subsidies Have Too Many Requirements Seoul’s Trade Ministry says there are too many strings attached for chip makers such as Samsung and SK Hynix to apply for federal funding intended to boost domestic production.

Jerome Powell to Testify to Congress on Outlook for Rates, Inflation

Federal Reserve Chair Jerome Powell is likely to caution on Capitol Hill that strong economic activity this year could lead U.S. central bank officials to raise interest rates more than they expected to combat high inflation.

Mr. Powell is set to testify for two days, starting Tuesday at 10 a.m. Eastern time before the Senate Banking Committee and continuing Wednesday before a House committee. They will be his last scheduled public remarks on interest-rate policy, and a final chance to shape market expectations, before the Fed’s next meeting, March 21-22. Officials begin their premeeting quiet period on Saturday. (…)

The St-Louis Fed’s GDP Nowcast is at -1.2% for Q1’23 while the Atlanta Fed’s GDPNow is flagging +2.3%. Presumably with the same database!

A casual observation says that Atlanta has been closer to the actual mark (black). Goldman Sachs just increased its Q1 GDP +2.0%. Its domestic final sales forecast is at +2.3%.

• February US jobs report preview – was January a fluke?

The blowout 517,000 jump in January payrolls caught everyone by surprise, coming in 200,000 higher than even the most optimistic forecasts out there. The unemployment was also better than predicted, falling to a 53-year low of 3.4%. The issue was it didn’t tally with any of the business surveys so to try to explain we looked at one-off factors that could have boosted the numbers.

The most obvious case is the 74,000 jump in government workers led by state and local government education workers. This was due to the ending of strike action by University of California Academics. This merely reverses job losses seen in November and December and means February will experience a return to much lower growth.

This does nothing to explain the strength in private payrolls though, which rose 443,000, so we looked at the raw data. The table below charts what has happened in each month for the past seven years (excluding 2020 where the pandemic disrupted the usual seasonal patterns).

Non-seasonally adjusted employment changes by months and year (millions of jobs)

Source: Macrobond, ING

This first thing to say is that the US economy certainly didn’t add 517,000 jobs in January. January is a month where millions of people lose their jobs. This is partly down to the end of the holiday season with people spending less on retail, leisure and hospitality with businesses typically laying off staff at this time. Then there is the weather impacting with winter temperatures and snow limiting the ability of people to work outside – so the likes of construction gets hit along with mining and oil and gas drilling.

According to the National Oceanic and Atmospheric Administration, January 2023 was the sixth warmest on record and was the warmest on record for the most North Easterly states with fewer snow days than the average over the past 20 years. This meant construction, mining and drilling has been less disrupted and people were out and about more, spending money.

Typically, 2.7-3.1mn jobs are shed in January. This year there were only 2.5mn jobs lost in January, so fewer lay-offs, but not massively so. It is therefore likely that labour hoarding in the form of reduced seasonal layoffs post the holiday season was responsible for the strength, but ‘generous’ seasonal adjustment factors appear to have provided an additional boost to generate the seasonally adjusted 517,000 gain.

What about the February jobs report?

So far we have only had the ISM reports with the manufacturing index falling into contraction territory while the service index jumped four points to its highest level since December 2021. Nonetheless, the relationship month to month with payrolls has been poor. On Wednesday we will get the ADP private sector report, which the market expects to rise to 200,000, but remember that the 106,000 outcome for January gave very misleading signals. We will also get the job vacancy data from the JOLTS report for January, which is forecast to drop by more than 400k. This would still leave it pointing to far more job vacancies than there are Americans to fill them.

Given the mixed messaging we have pencilled in a 200,000 jobs gain for February but we have little confidence in that forecast given the seasonal adjustment factors and unusual weather patterns. The consensus remains tight with a range of 100,000-325,000 so there is the risk of another big miss, both to the upside and the downside.

Note that February was also warmer than normal, in the top 10% warmest Februarys on record.

• LinkedIn Workforce Report | United States | March 2023

With over 199 million LinkedIn members in the United States, we have unique insight into the real-time dynamics of Americans starting new jobs and moving to new cities. This month’s LinkedIn Workforce Report looks at our latest national data on hiring and migration trends through February 2023.

• Largest hiring declines seen since April 2020: Nationally, across all industries, hiring decreased 6.5% in February compared to January. This is the largest month-over-month decrease we’ve seen since April 2020, though we don’t expect declines of this magnitude to occur on a regular basis going forward. Year-over-year hiring decreased 27.9% – and hiring has now declined for 10 consecutive months. Additionally, our Workforce Confidence Index data from February showed worker confidence in finding and holding a job declined to its lowest level since 2021, consistent with the decline we’re currently seeing in the LinkedIn Hiring Rate.

• Hiring in Government Administration, Consumer Services, Education continue to show resilience: Hiring increased month-over-month in 4 of 20 industries – this is a decrease from the 9 industries that saw hiring gains in January. The industries which saw the biggest month-over-month gains were in Real Estate (+3.7%), Education (+2.1%), and Accommodation (+1.3%). The biggest month-over-month declines were in Manufacturing (-10.7%), Technology, Information and Media (-9.6%), and Construction (-9.2%). Since the hiring slowdowns that began last Spring – April 2022 – the industries that have continued to show the most resilience are Government Administration (-10.1%), Consumer Services (-11.5%), Education (-12.8%). Education was the only industry where hiring remains above pre-pandemic levels. And the Technology, Information and Media industry continues to see declines – with hiring in the sector now just 3.8% above its pandemic low in May 2020.

• Hiring across all metros below pre-pandemic levels: Hiring increased month-over-month in 4 of 20 metro areas we track; this is a decline from the seven metros that saw gains in January. While we saw hiring increases month-over-month in select cities, none of the metros had hiring above pre-pandemic levels. (…)

Housing Market Momentum Stalls as Spring Approaches Rising interest rates are again squeezing affordability and driving mortgage applications to their lowest levels in decades.

Chinese Exports Pull Back Again, Hampering Post-Covid Recovery The export engine that propelled China’s recovery through much of the Covid-19 pandemic sputtered to start the year.

Exports from the world’s second largest economy fell 6.8% during the first two months of 2023 from a year earlier, extending a string of year-over-year declines stretching back to October, data from China’s customs bureau showed Tuesday. (…)

The decline in exports for January and February, which China releases together to smooth out irregularities tied to the Lunar New Year holiday, was less than the 9.9% decline in December and better than the 9% pullback expected by economists surveyed by The Wall Street Journal.

The better-than-expected result likely reflects what appears to have been a one-off boost from the lifting of pandemic restrictions, according to economists from Capital Economics, who say that the outlook for exports could deteriorate again, with foreign demand still in the dumps.

Chinese imports, meanwhile, fell by a larger-than-expected 10.2% in the January to February period, worse than December’s 7.5% year-over-year decline and the 5.1% pullback forecast by surveyed economists. That indicates China’s reopening hasn’t translated into increased infrastructure investment, at least for now.

As a result, China’s trade surplus swelled to $116.88 billion, larger than the $78.01 billion surplus in December. (…)

During the first two months of the year, Chinese exports to Southeast Asia rose 9% from a year earlier, according to Chinese customs data, while shipments to the European Union and the U.S.—China’s second and third-largest trading partners—fell 12.2% and 21.8%, respectively. (…)

In South Korea, a bellwether for global trade, exports shrank for a fifth straight month in February, partly because demand from China remained weak. Outbound shipments from South Korea fell 7.5% last month from a year earlier, though the decline wasn’t as bad as January’s 16.6% drop. Exports of semiconductors plunged 42.5% as global demand for electronics continued to falter. (…)

Last week’s PMIs confirm weak demand for goods from most areas but South-East Asia:

• USA: A further drop in new order inflows contributed to the continued overall decline in manufacturing sector health in February. The rate of contraction was little-changed from that seen in January and was strong overall. Foreign demand conditions also weakened further, with new export orders falling for the ninth month running. The pace of decrease quickened from January and was solid overall.
• Eurozone: New orders fell for a tenth successive month as client destocking, inflation and general economic uncertainty weighed on sales performances.
  A notable and stronger drag on demand came from international markets, as evidenced by a quicker decline in new export orders during February.
• Japan: New sales fell for the eighth month running, and at the fastest pace since July 2020. Firms commented that orders were dampened by weaknesses in domestic and global economic conditions. Export orders also fell at a steeper rate that was the fastest for 31 months, and meant that foreign demand for Japanese manufactured goods had fallen consistently for a year.
• ASEAN: New order inflows rose for the second consecutive month, and at a quickened pace.
• China: Total new business expanded for the first time in seven months, and at the quickest rate since May 2021.
  Companies noted an improvement in foreign demand for Chinese manufactured goods, with new export orders rising for the first time since July 2022.

The bigger story from China is the 10.2% drop in imports after -7.5% in December. Domestic demand remains weak.

DIVERSIFY?

I am no Warren Buffett but I also believe that if you have done your research thoroughly and have properly assessed managements and your margins of safety (valuations), portfolio concentration actually decreases risk. He said:

Risk comes from not knowing what you are doing so wide diversification is only required when investors are ignorant.

You only have to do a very few things in your life so long as you don’t do too many things wrong.

In his latest comments to shareholders, he admits that most of his capital allocation decisions have been ‘no better than so-so’, and that his outstanding results were because of a few ‘truly good decisions’. And few terrible ones, thanks to his focus on valuations (margin of safety), I would add.

Leverage Shares

China’s Xi Jinping Takes Rare Direct Aim at U.S. in Speech Leader blames Washington-led ‘containment, encirclement and suppression’ for challenges at home

Chinese leader Xi Jinping issued an unusually blunt rebuke of U.S. policy on Monday, blaming what he termed a Washington-led campaign to suppress China for recent challenges facing his country.

“Western countries—led by the U.S.—have implemented all-round containment, encirclement and suppression against us, bringing unprecedentedly severe challenges to our country’s development,” Mr. Xi was quoted by state media as saying on Monday. (…)

The accusation of U.S. suppression of China’s development over the past five years comes as Mr. Xi faces charges from investors that China’s economy has been damaged by his policies, including the emphasis on national security. (…)

The English-language version of Mr. Xi’s speech reported by Xinhua didn’t refer to containment or the U.S. Instead, it quoted him telling fellow officials to “have the courage to fight as the country faces profound and complex changes in both the domestic and international landscape.” (…)

The accusations by Mr. Xi against the U.S., delivered to an audience that includes politically connected businesspeople, appeared in part to be an effort by Mr. Xi to shift blame away from his own policymaking, including tough Covid controls that have weakened the economy and pressure on technology companies that cost the industry some of its dynamism. (…)

“In the coming period of time, the risks and challenges that we face will only increase and intensify ever more,” Mr. Xi was quoted as saying by Xinhua.

Chinese officials have long warned the U.S. against what they call Cold War thinking, and Mr. Xi appeared to make a similar point in his November summit with President Biden, according to China’s official summary of the meeting. (…)

• China’s Foreign Minister Says Ties With U.S. Risk Going Off the Rails In blunt briefing, Qin Gang warns Washington against indulging ‘new McCarthyism,’ defends Beijing’s ties with Moscow

(…) “If the United States does not hit the brakes but continues to speed down the wrong path, no amount of guardrails can prevent derailing and there will surely be conflict and confrontation,” said Mr. Qin, who was named foreign minister in late December after serving as China’s ambassador to the U.S. “Who will bear the consequences? Such competition is a reckless gamble.”

It isn’t the first time China has warned the U.S. about the risk of conflict if the countries’ relationship isn’t handled well, although Chinese officials have tended to speak more elliptically about the risk of conflict. (…)

“China and Russia have found a path of major country relations featuring strategic trust and good neighborliness, setting a good example for international relations,” Mr. Qin said. “The more unstable the world becomes, the more imperative it is for China and Russia to steadily advance their relations.” (…)

• India, Wary of China, Expands Trade Ties With the West The nation is gradually pivoting from its nonaligned, protectionist history, though obstacles remain

(…) India wants more protection from China, and freer trade with everyone else. That’s a lot like the U.S., except India starts with high barriers and is lowering them for friends while the U.S. starts with low barriers and is raising them on China. It is a more selective model of free trade than the universal model idealized since the early 1990s. (…)

• Canada’s PM Justin Trudeau ordered a review of allegations China interfered in Canada’s elections, appointing a special investigator. The issue will also be studied by a group of lawmakers cleared to see top-secret intelligence.

KEEP UP WITH THE ACRONYMS

The TINA — “there is no alternative” to stocks — trade is giving way to TARA, TAPAS and even TIARA, according to Goldman Sachs, Deutsche Bank and Insight Investment, respectively. Translations: there are reasonable alternatives, there are plenty of alternatives, and there is a realistic alternative, Axios’ Hope writes.