Month: February 2024

Investors Are Almost Always Wrong About the Fed Wall Street is clinging to hopes for interest-rate cuts despite inflation fears.

Investors are more convinced than ever that interest rates are coming down later this year. Their record on these things, however, isn’t great.

Wall Street has been caught offside in both directions while betting on the path of interest rates over the past few years. Few thought the Federal Reserve would get anywhere near 5% in the first place. Now traders keep ramping up bets that rate cuts are just months away, only to see that day recede with each batch of strong economic data. (…)

Investors use futures markets to bet on the direction of central-bank policy. Right now, those show traders betting that the Fed will cut rates by more than a percentage point this year, much more than Fed officials are projecting. 

Investors’ expectations for rates tend to be anchored to their recent memory. For nearly a decade after the 2008-09 financial crisis, for example, investors repeatedly (and wrongly) bet that rates would soon return to precrisis levels, according to an analysis by Bespoke Investment Group.

More recently, Wall Street didn’t expect the Fed to take rates to near 5.5%, or that it would hold them there for so long. When the Fed said in December that it expected to lower interest rates three times this year, investors bet on six cuts. After Chair Jerome Powell nixed the idea of lowering rates in March, they shifted their wagers to May.

The economy keeps beating expectations, preventing those bets from paying out. Last week’s blockbuster jobs report further enhanced the outlook. The Atlanta Fed now models inflation-adjusted growth as likely being 3.4% in the first quarter—well above levels that would suggest a need for rate cuts.

Wage growth, tracked by the Atlanta Fed, is at 5% as of January. The pace that prime-age workers are increasing their wages has yet to break below 5.4% since 2021. That worries investors and policymakers, because rising worker pay can feed inflation, keeping rates higher.

The healthy labor market also fuels consumer spending, in turn powering the economy. A retail-sales index from Johnson Redbook increased 6.1% last week from the same period a year earlier. (…)

As inflation falls, inflation-adjusted—or real—rates rise. Real rates are often considered a proxy for financial conditions in the economy because inflation factors into the cost of borrowing for households and businesses. Worried that real rates would rise so high that they discourage business activity to the point of sparking a recession, Fed officials have signaled that they could cut benchmark interest rates to avoid a substantial slowdown.

But one Fed official recently pushed back on the notion of cutting for the sake of real rates. Minneapolis Fed President Neel Kashkari argued that long-term real rates—measured via yields on 10-year Treasury inflation-protected securities—have only increased by a net 0.6 percentage point or so over the past year.

Because companies and individuals tend to borrow long-term to finance home purchases or new projects, that implies less drag on the overall economy than the real fed-funds rate suggests. (…)

A significant worry is what happens if inflation stays hot. Wall Street is now convinced that long-term yields are headed lower, but the latest reading of the consumer-price index came in at 3.4% and not everyone is certain it will continue to cool. That would keep rates high and potentially spark a destabilizing selloff in the bond market that could spread to stocks.

Bonds were already under pressure late last year because deficit spending prompted a surge in Treasury issuance that some investors worried would overwhelm demand. The U.S. presidential election is likely to signal more spending ahead, Papic said, bringing fears of rebounding inflation and higher bond yields back to the fore.

“The biggest risk to the stock market right now is the bond market,” Papic said.

Monitoring Changes in Inflation with Leading Economic Indicator Purchasing Managers’ Index ™(PMI)

In this research, we assess the track record of PMI as a leading indicator for inflation, relying on the leading indicator properties of PMI price indices – the Input Prices Index and Output Prices Index. These PMI series can provide signals for Inflation 3-6 months in advance of official CPI statistics and are used by investors and corporations for early signals into inflation and interest rate dynamics.

S&P Global’s price data suggest that inflation is flattening around 3% (PMI data are plotted with a 4-month lead).

The ISM’s measure of price pressures uses “prices paid” by corporate respondents, indicating trends in input costs eventually passed through to clients. A more upstream indicator of potential downstream pressures.

“ISM Prices Paid often leads the headline #CPI yet economists have paid no attention to the fact Prices Paid troughed in December…2022!!” (@RBAdvisors)

On wages, the Atlanta Fed Wage Tracker’s 3-m moving average is at 5.0%, down from 5.2% in December.

On a monthly basis, it fell from 5.4% to 4.7%.

These are unweighted.

Overall weighted wage growth rates have been steady at 5.2% since August 2023. The weighted series is constructed after weighting the sample to be representative of each month’s population of wage and salary earners in terms of sex, age, education, industry, and occupation groups.)

Job switchers: +5.6%, down from 5.7% in December but really flat since August.

Job stayers: +4.7%, down from 4.9%, roughly unchanged since October.

The next CPI report is next Tuesday. Many will be looking for the so far elusive rent relief in official data. Zillow’s data show “new rents” up 0.32% in December, down from 0.36% in November but in line with October.

Zillow’s data says that CPI-Rent remains 10.2% below “market”.

Manhattan Apartment Leases Surge, Keeping Rents From Sliding Leasing jumped and rents rose from a year earlier for the first time since October.

The median price on new leases was $4,150, up 1.3% from January 2023 and $100 more than this past December, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate reported Thursday. A total of 3,922 rental agreements were signed last month, up 14% from a year earlier and the third straight annual increase.

New Yorkers have been seizing on apartment costs that have come down from the summer’s records. The intense demand — somewhat unusual for the dead of winter — has helped push up rents at a time when they might be expected to level off. While Manhattan’s median remains below the all-time high of $4,440 reached in July, it’s still well above pre-pandemic levels. (…)

Outer boroughs are seeing robust demand as well. New leases almost doubled from a year earlier in Brooklyn, where the median rent was little changed at $3,500. In northwest Queens — the neighborhoods closest to Manhattan — lease signings jumped 31% from the previous January, while the median rent slipped 5% to $3,200. Listing inventory declined in both boroughs.

In China, Deflation Tightens Its Grip Consumer prices fall at steepest pace in more than 14 years, intensifying fears that deflation could become entrenched

China’s deflation problem is getting worse, a stark symptom of a deepening economic malaise that spells trouble for the global economy.

Consumer prices fell for the fourth straight month in January, tumbling 0.8% year-over-year—the steepest decline since 2009, according to the country’s National Bureau of Statistics. Producer prices, which fell every single month last year, declined again in January as companies further slashed prices to find buyers. (…)

Signs of deflationary pressure in China are multiplying. Prices for fruit, vegetables and meat all tumbled in January. Prices for pork—a staple of the Chinese diet—were down 17.3% year-over-year.

Core consumer-price inflation, which excludes volatile prices for food and energy, slowed to a 0.4% annual rate from 0.6% previously.

Producer prices fell 2.5%, extending a run of declines into its 16th straight month.

It isn’t just goods. Services prices are also weakening, rising 0.5% on the year, half the rate notched a month earlier. (…)

Deflation can be a difficult economic problem to overcome. Falling prices eat into corporate profits and prompt consumers to delay spending in anticipation of bigger bargains tomorrow. That leads companies to cut prices and put off hiring and investment, further depressing spending and worsening the deflationary cycle. (…)

Income growth has slowed, making it harder for consumers to service their debts while maintaining spending. Workers are settling for lower-paid jobs in a tight labor market, and some data suggest salaries for new hires are falling.

Corporate profits are sliding, so companies with millions of yuan in debt are wary of investment and hiring. (…)

China has experienced periods of falling consumer prices before, notably in 1998 when a financial crisis ripped through Asia and in 2009 in the aftermath of the subprime mortgage bust in the U.S. that triggered bank bailouts worldwide.

In both those instances, China’s policymakers responded forcefully, flooding the economy with easy money by cutting interest rates and dishing out cheap loans. Growth and inflation soon returned.

But in juicing growth, they created a housing bubble that leader Xi Jinping is now determined to deflate. The result is a policy response that has been far more muted than in the past, with modest cuts to borrowing costs, smaller injections of cash into the financial system, and a jumble of piecemeal housing policies such as loosening restrictions on second home purchases in some big cities. (…)

Bloomberg:

Core CPI, which strips out volatile food and energy costs, rose 0.4%, slower than December and the weakest rise since June last year. Pork prices dropped 17%, helping drag down food prices by 5.9%, which was the biggest decline on record in data back to 1994.

ING:

The biggest drag in non-food inflation remains in transportation & communication (-2.4% YoY), where a decline in vehicle and communication device prices continued to suppress inflation.

In our view, the deflation argument is overstated, and the base effects makes January’s data look worse than they are. Sequential data paints a more upbeat picture. In MoM terms, headline CPI rose 0.3%, food CPI rose 0.4%, and non-food CPI rose 0.2%. While a far cry from the above-target inflation levels seen in many other economies, these numbers do not imply China is stuck in a deflationary spiral.

Furthermore, China’s pork cycle also indicates that the drag from pork prices will also fade in the coming months. While still a major drag in January’s data, pork price inflation has actually risen for the past two months, and the December 2023 MoM change in the pig stock was the largest decline since March 2022. With expected demand for the Lunar New Year holiday in February, this could return to positive growth in next month’s release.

As such, considering the more favourable base effects for February’s data, we see a high likelihood that January’s data could mark the low point for YoY inflation in the current cycle.

NBS commented that the deeper CPI deflation was mainly driven by floating holiday effects – Lunar New Year was in January for 2023, but in February for 2024.

China’s passenger vehicle sales fall 14.1% in Jan m/m Battery electric vehicle sales sagged 37% in January m/m

Mexico takes China’s crown

For the first time in 20 years, “made in Mexico” is outpacing “made in China.”

Mexico is now the top producer of goods shipped to the U.S., according to U.S. Census Bureau data released yesterday.

Together, American consumers buy from three major foreign sources: Mexico, China and Canada.

The U.S. absorbs more than $3 trillion worth of international goods a year. Those three countries account for more than a third of that total.

Data: U.S. Census Bureau, Bureau of Economic Analysis. Chart: Axios Visuals

Are Chinese stocks a value trade or a value trap? When an asset is declared ‘uninvestable’ it is often time to buy

Since 2015, always lower highs, but same lows … since 2009.

US Treasury’s Biggest-Ever 10-Year Auction Garners Solid Demand Auction for $42 billion awarded at 4.093%, below pre-sale rate

The notes were awarded at 4.093%, compared with a yield of about 4.105% moments before 1 p.m. New York time, the bidding deadline. The lower yield indicates stronger demand than traders anticipated. The auction result also broke a streak of tails — or a weaker result for the previous four monthly sales. (…)

Tuesday’s $54 billion auction of three-year notes also drew a lower yield than the one that had been predicted by trading at the bidding deadline, a positive sign. The US Treasury will complete its quarterly debt refunding Thursday with the sale of $25 billion of 30-year bonds. (…)

CBO Warns 2025 Debt Interest Costs to Exceed World War II Levels

(…) Net interest payments will climb to 3.1% of gross domestic product next year, the highest level in records going back to 1940, and then go on to hit 3.9% in 2034, the CBO said in its latest outlook for the federal budget.

“Net interest costs are a major contributor to the deficit, and their growth is equal to about three-quarters of the increase in the deficit from 2024 to 2034,” CBO Director Phillip Swagel said in a statement. (…)

Federal Reserve Chair Jerome Powell said last week that “it’s probably time, or past time” for politicians to work on getting the government “back on a sustainable fiscal path.” (…)

US debt held by the public is expected to reach $45.7 trillion, or 114% of GDP by 2033, according to the CBO’s latest forecasts. That’s actually down from the 118% projection for 2033 released a year ago.

But the nonpartisan arm of the US legislature also forecasts the average rate of interest the government pays on its debt will rise to 3.4% over the next 10 years, from the 3% predicted last year. (…)

“By next year, we’ll spend more on interest than on defense and nearly all other national priorities.” (…)

Medicare spending is expected to grow to 4.2% of GDP in 2034 from 3.1% in 2023, and Social Security outlays increase to 5.9%, from 5% last year. (…)

Wednesday’s CBO forecasts show the budget deficit reaching $1.58 trillion this year — down from $1.68 trillion 2023 — but swelling over time to $2.56 trillion by 2034. (…)

One particular assumption looks already under severe strain: that individual tax cuts included in former President Donald Trump’s 2017 Tax Cuts and Jobs Act will expire, as scheduled, at the end of 2025. That assumption boosts revenues from 2026 in the CBO’s projections.

But some Republicans, including Trump, have already vowed to make the cuts permanent. Biden has said he would extend the cuts for those earning less than $400,000 a year, but would match that with new revenue.

America’s Most Expensive Home for Sale Hits the Market for $295 Million If it fetches that asking price, the roughly 9-acre compound in Naples, Fla., would shatter the U.S. home sale record.

CONSUMER WATCH

Credit Card, Auto Loan Delinquency Rates Rise in NY Fed Report Those rates climbed above pre-pandemic levels at end of 2023

American households took on more debt at the end of last year, and some of those loans are increasingly going bad, according to data from the Federal Reserve Bank of New York.

Although overall US delinquency rates remain below pre-Covid levels, those for credit cards and auto loans are now higher. About 8.5% of credit card balances and 7.7% of auto loans moved into delinquency in the fourth quarter, the bank said in a report Tuesday.

“Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” said Wilbert van der Klaauw, economic research advisor at the New York Fed. “This signals increased financial stress, especially among younger and lower-income households.” (…)

In particular, consumers aged 30 to 39 are struggling with delinquencies on credit-card debt, possibly because they’re contending with student loans as well, the researchers said. However, missed student-debt payments won’t be reported to credit bureaus until later this year, thanks to a leniency program from President Joe Biden’s administration.

While the proportion of consumers indicating a debt collection service is trying to obtain a payment has been declining in recent years, the average collection amount is generally on the rise. The share of credit-card balances that were at least 90 days delinquent approached 10% at the end of 2023, rising more than two percentage points in a year.

In the five years leading up to the pandemic, the amount borrowed for an auto loan increased by less than 1% per year, the New York Fed said. But in 2021, when car prices skyrocketed, the average amount of a newly originated loan rose by 11%, followed by another 10% in 2022 to an average amount of nearly $24,000.

Even though car prices and new loan amounts have been falling in the past year, higher interest rates have kept monthly payments elevated and led to more consumer distress, the researchers said.

Aggregate US household debt balances increased by $212 billion in the fourth quarter of 2023 to $17.5 trillion. More than half the gain was driven by mortgage debt and almost a quarter was from credit cards, according to the New York Fed.

Home equity line of credit balances jumped $11 billion as borrowers chose to tap into existing equity rather than refinancing mortgage rates. Although the interest rates on HELOCs are high, many consumers don’t want to give up their low mortgage rates, the researchers said.

In the aggregate, no crunch yet:

Source: Federal Reserve Board and Wells Fargo Economics

Wells Fargo just published a detailed analysis of household debt and concluded:

Total household debt in the United States currently stands 36% above its level of mid-2008, when excessive personal debt was an important factor that caused the financial crisis. Every major category of household debt (i.e., residential mortgages, student loans, auto loans and revolving credit) has grown in recent years.

But household income has risen even more — it is up 85% over the same period — so the household debt-to-disposable income ratio, commonly referred to as “leverage,” is lower today than it was at the start of the housing bubble.

Furthermore, the ability of households to service their debt obligations is better today than it was in 2008. Mortgages account for 70% of total household debt, and the downward trend in mortgage rates that was in place between 2008 and 2021 induced many households to refinance at lower rates.

Consequently, the debt service ratio, which measures the percent of disposable income that households need to devote to interest and amortization payments on debt obligations, has receded by more than three percentage points since 2008 and currently sits near its lowest level in at least 30 years.

Younger and less affluent households, who tend not to be homeowners, may be more exposed to higher interest rates than their home-owning counterparts with fixed rate mortgages. The recent increase in delinquency rates on auto loans and revolving credit, as well as the rise in student loan delinquencies that seems inevitable, indicates that some households are starting to experience some financial stress.

Spending by these households on goods and services could downshift in the near term. That noted, the financial position of the household sector, in aggregate, appears to be generally solid at present. Consequently, a debt-induced retrenchment in aggregate consumer spending in the foreseeable future does not look very likely, in our view.

TRUST BUT VERIFY

I like David Rosenberg, having known him since his Merrill days. He covers a lot of data ground and is not shy of clearly expressing his views. A one-handed economist as Harry Truman liked them. Plus he writes a full note daily, not a walk-in-the park, I can tell you.

But sometimes another hand can be handy, if only to keep the first one open. The right hand is not always right.

David, still in recession mode, and increasingly skeptical of official data, yesterday:

Then take a look at Simon Properties, who reported yesterday. All the numbers were just fine from an occupancy rate and rent per square foot basis and the company boosted its dividend. But get this: “Reported retailer sales per square foot was $743 for the trailing 12 months ended December 31, 2023, a decrease of 1.3% compared to 2022.” This is the largest mall owner in the United States, and it just told us that its retailers saw a negative -1.3% sales performance last year! But the government’s data on retail sales show a +5.6% YoY increase in 2023 retail sales, and this is why everyone, including Jay Powell, believes that the consumer is in such great shape.

First, the government’s data show 2023 retail sales, ex-food services, up 2.1%. Ex-gasoline stations: +3.7%. Not +5.6%.

Two, Nonstore retailers, nearly 20% of all non-gasoline sales, recorded an 8.0% jump in sales last year, leaving brick-and-mortar retailers (ex-food services) up only 0.8%.

We also know that off-price retailers such as ROSS and TJX are ringing same store sales of 5%+.

This leaves Department Stores sales officially down 2.7% in 2023 and Apparel store sales up 1.6%. That jibes with Simon’s –1.3%.

This is why everyone, including Jay Powell, believes that the consumer is in such great shape, unlike department stores and their hosts.

Sorry David, as handy as you are, I verify.

Today’s WSJ neatly illustrates why the American consumer is in good shape. The immaculate disinflation helps a lot.

MegaCap-8 Continue To Impress

From Ed Yardeni:

The MegaCap-8 now accounts for a record-high 28.3% of the S&P 500’s market capitalization. They currently account for 18.5% of S&P 500 forward earnings and 10.8% of its forward revenues.

Among the MegaCap-8 companies, all but Nvidia have reported their Q4 earnings so far. These seven MegaCap-8 companies collectively recorded earnings growth of 44.7% y/y and revenues growth of 11.4% y/y. Analysts had been expecting earnings and revenues to rise 36.6% and 9.7%, respectively.

Back in early December, the MegaCap-8 had surpassed its prior record-high forward profit margin of 21.4%, registered nearly 12 years earlier on January 4, 2013! It has moved even higher since then to 21.7% in early February.

At a forward P/E of 28.3 currently, the MegaCap-8 aren’t cheap, but they are cheaper than during the pandemic. With and without them, the S&P 500 forward earnings is 20.1 and 17.7.

FYI, 17.7 is the red line below:

Warning signs continue to trigger on the Nasdaq

A few times in recent weeks, we’ve noted nascent signs of odd behavior under the surface of superb index performance. This is really the first time since the October 2022 bottom that these issues have begun to appear with consistency.

There are more that are triggering. Due to many smaller and lower-quality stocks struggling while investors focus on spectacular gains available in some of the largest stocks, the list of securities falling to 52-week lows has been rising while 52-week highs are stagnant. (…)

When this happened in 1999, the Nasdaq rocketed higher, jumping nearly 40% over the next few months before the bubble was pricked. But other than that, these conditions tended to precede weak returns.

The table below shows returns in the Nasdaq composite after it closed at a 52-week high at least five times over the past three weeks, while the average ratio of stocks at new lows versus new highs averaged more than 1.5. In other words, the Composite was consistently hitting new highs, but there were half again more stocks on the exchange falling to 52-week lows than rising to 52-week highs.

The S&P 500 didn’t enjoy quite the upside in 1999, so its returns after these signals on the Nasdaq were even worse. Over the next two months, it managed to show a positive return only twice.

Since a relatively large number of stocks have hit new lows or new highs on any given day, the 50-day average of the HiLo Logic Index has spiked. It’s now the highest in over 20 years, indicating a split market that indicates unhealthy market conditions. (…)

Since October 2022, we’ve looked at a lot (a lot!) of supposed warning signs from financial and social media, analysts, and pundits. Not many, if any, showed a consistent predictive ability. Stocks continued to do what they should, given all the studies we looked at that summer and fall, and we couldn’t find any reliably good reasons to doubt why they couldn’t continue to follow through.

For the first time, that’s starting to change. While momentum in the indexes has been fabulous, and breakouts to new highs tend to lead to even more new highs, we are seeing some deterioration under the surface that begs attention. It’s not a glaring red light yet, but it’s certainly yellow, particularly on the Nasdaq. That exchange is stuffed with more speculative issues, many of which are struggling. It’s to a point now where it suggests a prudent swing trader snug up stop losses if they are fortunate enough to have long exposure to tech-heavy indexes.

Moody’s Cuts NYCB to Junk, Extending Sharp Decline The downgrade is the latest blow to the besieged bank seeking to shore itself up after acquisitions and property losses.

Moody’s cited “financial, risk-management and governance challenges” for NYCB, which reported a surprise quarterly loss and slashed its dividend last week, as the ratings firm downgraded the bank to Ba2 from Baa3. Fitch Ratings on Friday downgraded NYCB to the lowest possible investment-grade rating.

NYCB plunged 15% after hours. The stock hit its lowest close since 1997 on Tuesday, tumbling 22% on the day, having lost more than half its value since the loss was reported.

When it reported fourth-quarter results, the bank said it was shoring up its balance sheet after its acquisition of Signature Bank last year and losses on its commercial real-estate book.

The Signature deal and a separate one with Flagstar Bank in 2022 put NYCB past a key regulatory threshold of $100 billion in assets, subjecting it to stricter regulatory and capital standards. NYCB also said it had charged off two large loans and set aside millions for potential future losses. (…)

The SPDR S&P Regional Banking ETF and the KBW Nasdaq Regional Banking Index each shed roughly 1%.

NYCB has said its deposits are stable. (…)

NYCB said deposits were down around 2% from the previous quarter at the end of December. (…)

Fitch hasn’t seen “anything worth talking about” as far as deposit movements, the firm’s senior director, Mark Narron, told The Wall Street Journal on Monday.

“It’s primarily a profitability question,” Narron said. (…)

America Has Never Had So Many 65-Year-Olds. They’re Redefining the Milestone. A record number of people will turn 65 this year. Here’s how they are distinct from their predecessors.

(…) About 4.1 million Americans will reach 65 years old this year, reaching a surge that will continue through 2027, according to an analysis by Jason Fichtner, executive director of the Retirement Income Institute and chief economist at the Bipartisan Policy Center. That is about 11,200 a day, compared with the 10,000 daily average from the previous decade, he says. (…)

Nearly 20% of Americans 65 and older were employed in 2023, which is nearly double the share of those who were working 35 years ago, according to a recent report from the Pew Research Center. (…)

Close to two-thirds of 65 and older employees are working full time, compared with nearly half in 1987, he says. They’re earning more, too, with average hourly pay reaching $22 an hour in 2023, up from $13 an hour in inflation adjusted dollars in 1987, according to the Pew report. (…)

While significant disparities exist, the median net worth of those 65 to 74 was $410,000 in 2022, up from $282,270 in 2010 in inflation-adjusted 2022 dollars, according to the Federal Reserve’s Survey of Consumer Finances. (…)

Some of that 45% increase in net worth reflects rising values of homes and retirement accounts. Not all baby boomers have fared as well: Those 75 and older had a 13% gain in median net worth over the same period.

Today’s 65-year-olds have more to spend now, but fewer have pensions that offer protected monthly income. (…)