Payroll employment rises by 467,000 in January; unemployment rate changes little at 4.0%

Why US workers will return to the labour market The Fed should take care how much and how quickly it raises interest rates in the post-Covid economy

With the participation rate 1.5pp below its pre-pandemic level, that’s 3.5mn missing workers aggravating the shortages and the resulting wage pressures.

Using the employment/population ratio, it’s 4.5mn workers short of the pre-pandemic level.

Based on the JOLTS data, there are now 10.9mn job openings, 3.7mn more than in December 2019, enough to accommodate every sidelined worker willing to re-enter the labor market.

Megan Greene argues in the FT that the missing workers will return and that the Fed should be careful in its assessment of the labor market.

• The biggest reason is Covid: the Census Bureau reported a record 8.8mn people weren’t working because they were caring for someone with Covid or had symptoms themselves.
• Some 1.5mn full-time equivalent workers, nearly 15 per cent of unfilled jobs are suffering from “long Covid”.
• Households’ financial cushion is wearing thin and many “young enough retired” people will eventually come back.
• Many Americans are on the sidelines for mental health issues which should ease along with the stress of the pandemic.
• A 2mn shortfall in working-age immigrants should reverse under Biden.
• Higher wages will draw many back.

But, the 8.8mn Covid-restricted people is far from a hard number. As the Census Bureau explains, “These data are experimental, users should take caution using estimates based on subpopulations of the data – sample sizes may be small and the standard errors may be large.” Note that the actual number of unemployeds was 6.3mn in December 2021.

That said, there are people Covid-restricted but we don’t really know how many. Ms. Greene says that “caretaking responsibilities have disproportionately fallen on women”, yet the participation rate for women is down 1.4pp compared with -1.6pp for men.

The other points are likely valid but their numbers and timing are highly uncertain. Interestingly, the declines in participation rates have been fairly uniform by age group other than for the 2 extremes:

• Total: -1.5pp
• 16-19: -0.5
• 20-24: -1.2
• 25-54yrs: -1.1
• 55+: -1.8
• 65+: -2.0

As it stands now, the participation rate is rising, but very, very slowly.

BTW, “Thirty years ago, America’s prime-age work rate was “nearly 10 percentage points above Europe’s. Now Europe’s is a couple of points higher than America’s.” (WSJ)

SERVICES PMIs

USA: Business activity growth slows notably amid Omicron outbreak and softer demand conditions

US service providers signalled only a marginal expansion in business activity at the start of 2022, according to the latest PMI^TM data, as growth momentum waned notably. The rate of increase in output was the slowest in the current 18-month sequence of growth. The spread of the Omicron variant hampered the upturn in new business as well, as domestic and foreign demand conditions weakened. Firms were able to expand their workforce numbers further, however, which helped to soften the degree of pressure on business capacity. As a result, backlogs of work rose at the slowest pace since August 2021.

Although there were signs that cost pressures eased during January, companies were able to pass on higher costs to clients through the fastest rise in output charges for three months.

The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 51.2 at the start of the year, down notably from 57.6 in December, but up slightly on the earlier released ‘flash’ figure of 50.9. The upturn in business activity was muted in the context of marked expansions seen throughout 2021, as the spread of the Omicron variant of COVID-19 hampered business operations and demand conditions weakened. The rise in output was the slowest in the current sequence of growth which began in August 2020.

Although to a lesser extent than activity, incoming new business also lost growth momentum in January. Service providers indicated the softest increase in new orders for four months, as companies mentioned that demand was dampened by renewed COVID-19 restrictions and customer cancellations.

Business confidence regarding the outlook for output remained strongly upbeat in January. Although the level of sentiment slipped from December, it was the second-highest since June 2021. Optimism was commonly linked to hopes of a further uptick in client demand and a reduction in disruption caused by new COVID-19 variants.

At the same time, new export orders increased for the third month running. Despite easing slightly, the rate of growth in new business from abroad was modest overall.

Service sector businesses recorded a faster rise in employment in January. The increase in workforce numbers was solid overall as firms hired more staff due to a further upturn in new orders. Companies noted, however, that the spread of the Omicron variant of COVID-19 added to the challenges faced in hiring staff.

Additional staff helped firms work though their outstanding business, as the rate of growth in backlogs of work slowed to the softest in five months. Nonetheless, the rise in incomplete business was solid overall and still among the fastest on record (since October 2009).

Meanwhile, input costs rose markedly at the start of 2022. Service providers stated that higher input prices stemmed from upticks in logistics, labor and material costs. There were signs that overall price pressures eased, however, as the rate of cost inflation softened to the slowest for three months.

Firms continued to pass-through higher costs to clients where possible. Moreover, the pace of charge inflation quickened to the second-sharpest on record.

The IHS Markit US Composite PMI Output Index posted 51.1 in January, down notably from 57.0 in December. The upturn was the slowest since July 2020 as manufacturers and service providers registered a considerable slowdown in growth momentum.

The expansion in new business also softened, but remained solid overall. The rate of increase was the slowest since December 2020 as the Omicron wave weighed on demand conditions. A decline in manufacturing export orders dampened private sector growth in new business from abroad.

Cost pressures eased in January, as the pace of input price inflation softened to the slowest since March 2021. The rate of output charge inflation, however, was broadly unchanged from December, and marked overall.

Despite reports of challenges retaining and finding staff, private sector firms continued to add to their workforce numbers during January. Subsequently, the rate of growth in backlogs of work eased to the slowest since June 2021.

• Technology sector signals a decline in business activity for first time since July 2020

(…) The latest survey pointed to renewed declines in business activity in the Consumer Services (47.9) and Technology (48.5) sectors. Consumer service providers widely noted that the Omicron variant had led to shrinking demand and customer cancellations due to COVID-19. That said, the rate of decline was softer than those seen in earlier stages of the pandemic. The reduction in Technology sector output was the first since July 2020, which reflected persistent supply chain difficulties and more subdued demand conditions.

Industrials (50.1) was close to stagnation in January, with the latest reading signalled the weakest output performance since July 2020. Similarly, rates of production growth eased considerably since December in both the Basic Materials (52.3) and Consumer Goods (50.5) categories, with the former posting its slowest upturn for more than a year.

• U.S. ISM Services Index Continues Lower in January The ISM Index of Services Activity weakened significantly during January to 59.9 from 62.3 in December

(…) The prices index eased to 82.3 after improving to a record 83.9 in December. An increased 63.1% (NSA) of respondents reported price increases versus 57.4% in December, while 1.7% reported price declines. (…)

Eurozone growth loses further momentum at start of 2022

Economic growth across the eurozone eased further at the start of the year, latest PMI® data from IHS Markit showed, as the Omicron variant of COVID-19 constrained activity, most notably across the service sector. That said, the growth slowdown was tempered by some renewed strength in manufacturing output, which grew at the fastest pace since last September.

Meanwhile, having receded slightly at the end of last year, January survey data revealed a re-acceleration of inflation across the euro area.

After accounting for seasonal factors, the IHS Markit Eurozone PMI® Composite Output Index registered 52.3 in January, down from 53.3 in December and indicative of a weaker rate of expansion in private sector output across the eurozone. Overall, the latest data pointed to the weakest increase in business activity since the headline index moved back into growth territory last March.

The weaker expansion in January reflected softer growth among service providers, as manufacturing output increased at a faster pace. The latest data marked back-to-back months in which the euro area’s goods-producing economy has outperformed its service-providing counterpart.

As has been the case since last April, Ireland saw the fastest growth of combined manufacturing and services output across the monitored eurozone nations, with the expansion here unchanged from December’s strong pace. Meanwhile, Germany recorded somewhat of a rebound in business activity during January, moving back into growth territory following December’s fractional decline. On the other hand, momentum was lost in France, Italy broadly stagnated and Spain registered its first contraction since last February.

Latest survey data for the eurozone showed continued growth in private sector order books at the beginning of the year. Sub-sector data showed rising new business across both manufacturing and services, although it was the former which registered the faster increase. A slower improvement in demand for services weighed on the strength of the overall upturn, which was the weakest in the current 11-month sequence of growth.

Nevertheless, employment growth accelerated in January and remained above its historical average by a notable margin. The improved rate of job creation was solely driven by manufacturers however, as hiring growth at services firms moderated.

Meanwhile, operating capacities continued to be stretched across the eurozone, reflecting issues relating to staff availability, shortages of materials and products, as well as additional intakes of new business. The rate of backlog accumulation was solid, albeit the slowest in nine months.

Looking ahead, businesses expect activity levels to rise in the coming year. Optimism towards the outlook improved in January to its strongest since last October.

Finally, latest survey data showed a re-intensification of price pressures across the euro area, with rates of input cost and output price inflation accelerating. The increase in cost burdens was only fractionally quicker than in December, but was faster than anything seen by the survey prior to last November (when it hit a record high). In turn, selling charges were raised more aggressively, and the rate of inflation here was only a fraction below last November’s survey peak.

The IHS Markit Eurozone PMI® Services Business Activity Index registered 51.1 in January, down from 53.1 in December. While this was still above the 50.0 no-change mark, and therefore consistent with growth, it signalled the softest expansion in euro area services output since last April.

The slower increase in business activity coincided with weaker new order growth during January. The improvement in demand was the softest seen across the current nine-month sequence of expansion. Nevertheless, backlogs of work continued to rise, and at a quicker pace.

To enhance operating capacities, additional staff were hired in January. The rate of job creation was slightly weaker than previously, but was still faster than the historical average.

Input costs rose substantially in January, and to an extent which was the second-quickest on record, surpassed only by last November’s peak. Meanwhile, selling price inflation accelerated to a fresh series high.

U.S. Productivity Rebounds in Q4’21, Holding Down Unit Labor Costs

Nonfarm business sector productivity advanced at a 6.6% (SAAR) pace in Q4’21 following its drop at a 5.0% rate in Q3. A 3.5% increase in Q4 had been expected in the Action Economics Forecast Survey. The actual Q4 amount was 2.0% above Q4’2020, and for all of 2021, productivity gained 1.9% after a rise of 2.4% in 2020.

Nonfarm business output surged at a 9.2% annual rate in Q4, following Q3’s modest 2.0% increase. The Q4 amount was 7.0% above a year ago. For all of 2021, output expanded 7.4%, rebounding from the 4.4% drop in 2020. Hours worked increased at a 2.4% annual rate in Q4 (4.9% y/y), less than the 7.3% pace in Q3; for all of 2021, they gained 5.4% after dropping by 6.6% in 2020.

Compensation per hour rose at a 6.9% annual rate in Q4 (5.1% y/y), following Q3’s 3.9% rate of increase. For all of 2021, it was up 5.2% from 2020, when it grew 7.0%.

In Q4, the advances in compensation and in output per hour combined to yield a very modest 0.3% annualized increase in unit labor costs (3.1% y/y); that followed a notably stronger 9.3% advance in Q3. The Q4 amount was close to the Action Economic forecast consensus of a 1.0% pace of advance. The overall increase in unit labor costs for 2021 was 3.3%, less than the 4.5% in 2020.

In the manufacturing sector, productivity edged downward at a 0.8% annual rate in Q4 (1.0% y/y), following Q3’s 2.6% rate of decline, that was revised from a 1.0% rate of decline reported before. For all of 2021, manufacturing productivity gained 3.1% after 2020’s marginal 0.1% increase. Output itself rose at a 4.8% annual rate in Q4 (4.4% y/y) after Q3’s 4.1% increase. For all of 2021 it was up 6.5%, reversing 2020’s 6.5% decrease. Hours worked in manufacturing increased at a 5.6% annual rate in Q4 (3.4% y/y) after 6.9% in Q3; the 2021 total was up 3.3% after a 6.6% drop in 2020.

Factory sector compensation gained 3.4% in Q4 (4.2% y/y), somewhat stronger than the 2.7% in Q3. For the year, it gained 4.5%, following 6.8% in 2020. Unit labor costs rose at a 4.2% rate in Q4 (3.2% y/y), following 5.5% in Q3. The annual amount increased 1.4%, markedly slower than the 6.6% advance in 2020.

Wholesale Prices Rise Further in First Half of January

Wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) increased 0.8% in the first 15 days of January compared to the month of December. This brought the Manheim Used Vehicle Value Index to 238.0, a 46.0% increase from January 2021. As was the case in each of the last three months, much of the reported increase was a result of the seasonal adjustment. The non-adjusted price was statistically unchanged from December. (…)

Using a rolling seven-day estimate of used retail days’ supply based on vAuto data, we see that used retail supply is now at normal levels, at 50 days. Wholesale supply has also improved, above the normal level of 22, at 25 through mid-January. (…)

As Inflation Soars, Central Banks Scramble to Lift Rates Europe’s central banks signaled growing concern about soaring inflation and a determination to quench it by raising interest rates.

(…) The Bank of England raised its key interest rate for a second consecutive meeting, to 0.5%, saying it expected annual inflation to accelerate above 7% within months. It also said it would begin slowly reducing the size of its bondholdings. Four of nine members of the bank’s rate-setting committee wanted a bigger rise, to 0.75%, citing widening and more persistent price pressures than expected.

“We have not raised interest rates today because the economy is roaring away,” Mr. Bailey said at a news conference. He said officials were pushed to act because spiraling energy costs and surging goods prices risk fueling broader inflationary pressures in the British economy.

“An increase in bank rate is necessary because it is unlikely that inflation will return to target without it,” he said, referring to the BOE’s benchmark rate. (…)

In Frankfurt, the European Central Bank kept its key interest rates unchanged, but at a news conference President Christine Lagarde left the door open to an interest-rate increase later this year, a turnabout from her position seven weeks ago. (…)

“The situation has indeed changed…There was unanimous concern around the table of the Governing Council about inflation numbers. Inflation is likely to remain elevated for longer than expected,” Ms. Lagarde said. She signaled that a policy shift might be unveiled as soon as the ECB’s next policy meeting on March 10. (…)

In Europe, economic growth slowed sharply at the end of last year, and the recent surge in inflation largely reflects higher energy costs, analysts said. Unlike the U.S., where wages are soaring, negotiated wages in the eurozone increased 1.36% year-over-year in the third quarter, a record low since the euro was introduced in 1999, according to ECB data. (…)

• Euro zone firms see wages rising by 3% or more, ECB says

Euro zone companies expect wages to rise by 3% or more this year as workers demand to be compensated for inflation and it becomes more difficult to find staff such as builders and software engineers, the European Central Bank said on Friday.

The ECB spoke to 74 large companies operating in the euro area outside the financial sector in mid-January, finding that labour market conditions were getting tighter and wages were rising or expected to do so after a near freeze in the past two years.

“Typically, contacts said they expected average wage increases to move from around 2% in the recent past to 3% or possibly more this year,” the ECB said in a report. (…)

Just under half of companies reported an increase in activity in the final quarter of last year, a smaller proportion than in the previous round of the survey three months ago.

As for prices, the share of companies reporting an increase fell but remained greater than half of the total.

“Many contacts said that prices were being adjusted more frequently than in the past to avoid margins being squeezed and that prices would continue rising through much of 2022,” the ECB said. (…)

• Goldman Sachs expects two ECB rate hikes
• Eurozone retail sales tanked in December as restrictions hit shops

Oil Frackers Brace for End of the U.S. Shale Boom Limited inventory leaves the industry with little choice but to hold back growth, even amid high oil prices

(…) Big shale companies already have to drill hundreds of wells each year just to keep production flat. Shale wells produce prodigiously early on, but their production declines rapidly. (…) Scott Sheffield, chief executive of Pioneer, said the combination of investor pressure and limited well inventory means he cannot drill as he once did. “You just can’t keep growing 15% to 20% a year,” he said. “You’ll drill up your inventories. Even the good companies.” (…)

Mr. Sheffield said he expects U.S. oil production to grow around 2% to 3% a year, even if oil trades from $70 to $100 a barrel.

Many drillers say they will never return to pre-pandemic production growth levels of up to 30% a year, in part due to rising costs for raw materials and labor, a lack of available financing and the enormous number of new wells it would require. (…)

Since the end of 2016, the number of remaining top-tier drilling locations across five major U.S. oil regions has been cut from more than 68,000 to less than 35,000, Rystad estimates. (…)

AMAZON PRIMED!

• Amazon Profit Leaps Despite Labor, Supply Crunch The company’s profit nearly doubled as it controlled labor and supply costs better than expected and saw gains in its cloud-computing and advertising businesses.
• Amazon Shares Surge Premarket After Bumper Earnings

I normally don’t do company analysis here but I am amazed at how the media and analysts are reacting to AMZN’s Q4:

The above headlines are from the WSJ.

Here’s Goldman Sachs’ narrative:

AMZN’s Q4 ’21 earnings report produced a solid set of results and addressed directly many of the key investor debates in the past few months (mix of supply chain, macro/pandemic normalization & tough comp dynamics), including an eCommerce business that had a strong holiday period & Q1 commentary much better than investor fears. In addition, continued broad based strength in AWS (both revenue & margins) & a forward operating income guide proved better than investors expected.

[AMZN is] our top large cap idea for 2022 & see AMZN as a core long-term holding for Internet investors as the company has exposure to multiple long-term runways – online shopping, cloud computing, digital advertising, streaming media, AI driven computing etc. – that can sustain 15%+ growth while also producing margin expansion in the coming years.

ZeroHedge is more critical:

• Fourth-quarter revenue grew 9% year over year to $137.4 billion—barely in line with Wall Street’s forecasts. The company also projected growth of 3% to 8% year over year for the first quarter, below the 11% expected by analysts.
• Online stores—the company’s largest operating segment—saw revenue fall for the first time since it began reporting results for that unit in 2016.
• Operating income for the fourth quarter came in at nearly $3.5 billion—51% above Wall Street’s targets.

Maybe it’s the beat that’s creating all that positive buzz.

Well, good thing there was a beat because even with this beat, AMZN’s operating income is down 50% YoY. So much for “bumper earnings”! (next two charts from Amazon’s Q4 presentation.)

These charts are from ZeroHedge:

“If it weren’t for AWS’s $5.293BN in profit, AMZN would have a negative profit margin across its legacy operations.”

So, the last 2 quarters for the largest and highly efficient online retailer were unusually bad from both a sales and margins standpoint (keep in mind that retail inflation was 3.7% in Q3 and 5.4% in Q4.)

Amazon also issued Q1 guidance yesterday:

First Quarter 2022 Guidance
• Net sales are expected to be between $112.0 billion and $117.0 billion, or to grow between 3% and 8% compared with first quarter 2021. This guidance anticipates an unfavorable impact of approximately 150 basis points from foreign exchange rates.
• Operating income is expected to be between $3.0 billion and $6.0 billion, compared with $8.9 billion in first quarter 2021. This guidance includes approximately $1.0 billion lower depreciation expense due to increases in the estimated useful lives of our servers and networking equipment beginning on January 1, 2022.

One full month into the quarter, Amazon’s management sees sales up between 3% and 8%, an amazing spread that probably reflects a soft January an uncertainty on both volume and inflation. They also expect operating income to be down between 33% and 66%.

P/E: 56x! And it’s GS’s top large cap pick for 2022. It ain’t mine…

BTW: The “bumper earnings” come from “a pre-tax valuation gain of $11.8 billion included in non-operating income from our common stock investment in Rivian Automotive, Inc., which completed an initial public offering in November.”

Ford reported a similar bumper gain yesterday:

Ford Posts $17.9 Billion in Full-Year Net Income, Gives Upbeat Outlook The U.S. auto maker’s results benefited from several special items, including an $8.2 billion gain on its investment in startup Rivian Automotive.

1. We shall now see how the various earnings aggregators will treat these paper profits.
2. Be prepared for mark-to-market in future quarters:

Meta Erases $251 Billion in Value, Biggest Wipeout in History The Facebook parent plunged 26% Thursday on the back of woeful earnings results, and erased about $251.3 billion in market value. That’s the biggest wipeout in market value for any U.S. company ever.

Chinese property group Shimao feels chill of sector’s liquidity crisis Developer sucked into bond market sell-off following Evergrande collapse

Yesterday was Groundhog Day:

• Punxsutawney Phil: Six more weeks of winter
• Shubenacadie Sam: Six more weeks of winter
• Fred la marmotte: Six more weeks of winter
• Manitoba Merv: Six more weeks of winter
• Balzac Billy: Six more weeks of winter
• Lucy the Lobster: Six more weeks of winter

Of course, there is always the outlier:

• Wiarton Willie: Early spring

Also an outlier:

• Markit: Six more months of winter:

MANUFACTURING WINTER

The IHS Markit manufacturing PMI for January showed output growth deteriorating markedly. The sub-index covering production fell to 50.5 from 53.8 in December, its lowest since the recovery form the first COVID-19 lockdowns began in July 2020. The news was followed by the ISM survey’s output gauge also falling, down to its lowest since June 2020. However, at 57.8 compared to 59.4 in December, the ISM index is still indicative of production rising at a substantial rate whereas the IHS Markit index is signalling almost no growth. For both surveys, any index reading above 50 means more companies reported higher output during the month than reported lower output.

While the signals form the surveys in terms of the direction of travel is clearly downwards, the extent of the slowdown and overall health of the goods producing sector being indicated is clearly very different.

To get an idea of why the ISM index is higher than the IHS Markit index we only have to look back at the survey history.

The ISM and IHS Markit gauges moved in similar cycles of similar magnitudes between 2007 and 2015, both serving equally well as accurate lead indicators of changes in the official data (charted here using the three-month-on-three-month rate of growth in the manufacturing component of industrial production, as this better captures the underlying trend in the official data than monthly percentage changes. To illustrate further, the ISM index averaged 54.5 between mid-2007 and the end of 2016 compared to an average IHS Markit reading of 53.2. These averages occurred over a period in which the average quarterly rate of growth of manufacturing output was -0.2% (and the average month-on-month change was +0.05%). Thus, both surveys therefore tend to have overstated performance to some degree over this period, averaging above 50 when output trended very slightly lower, though the ISM more so than the IHS Markit index.

Since 2016, however, the divergence has widened. The ISM output index has averaged 57.5 over the past six years while the IHS Markit index has averaged just 53.4. Yet over this period the average quarterly rate of change of manufacturing output has been just +0.1% (and the average month-on-month change was also +0.1%). The ISM index has therefore notably overstated growth relative to the official data to an increasing degree in recent years, contrasting with a more stable (and therefore more predictable) relationship of the IHS Markit data with the official growth rate.

These updated findings corroborate existing work from the legacy Macroeconomic Advisors team, which also found a statistical break between the ISM data and official industrial production numbers in 2017, with no such break evident in the IHS Markit numbers.

We remain uncertain as to what has caused the ISM survey to overstate official data, but it is clear that some allowance should be made by analysts when interpreting these survey data.

Most analysts tend to follow the ISM in the U.S.. They are likely to be surprised in coming months if Markit again proves more accurate, potentially meaning negative output growth in the first half of 2022. Monday’s release revealed “muted client demand”, and a “reluctance among some clients to place orders”, taking new order growth to a 16-month low.

This is not only a U.S. phenomenon as “the number of companies reporting that backlogs of work rose in January due to rising demand pressures was the lowest recorded for just over one and a half years.”

That would be unfortunate timing given that “January saw rising energy prices driving manufacturing prices higher to an extent not seen since 2008, alongside an unprecedented upward pressure from staff costs.”

Trying to protect profit margins, “globally, the rate of selling price inflation accelerated to the fourth highest in over a decade of survey history, exceeded only by prior pandemic highs to suggest that upward pressure on consumer prices inflation looks likely to remain historically elevated in coming months.”

Meanwhile, in China,

New orders likewise fell back into decline amid the January Omicron restrictions, fueled by the largest drop in export orders recorded by the survey for 20 months. Ominously, the January survey also showed that the drop in new orders caused backlogs of uncompleted work to fall at a rate not exceeded since the height of the global financial crisis in 2008-9. This depletion of manufacturing order books hints at the build-up of excess capacity relative to demand, and in turn caused increasing numbers of firms to scale back workforce headcounts. The resulting decline in factory employment was the largest recorded since the early stages of the pandemic in April 2020.

(…) it is the impact of reduced production in China which will be of concern for policymakers in other countries, with restricted trade likely to add to supply chain woes, and will add weight to suggestions that the inflationary pressures of the supply crunch could persist well into 2022.

OPEC, Allies Agree to Pump More Oil Amid Supply Concerns The producers agreed to a small, planned increase in output amid soaring oil prices, with concerns over supply heightened due to a possible Russian invasion of Ukraine.

The Organization of the Petroleum Exporting Countries and a coalition of Russia-led oil producers said they agreed to raise their collective production by another 400,000 barrels a day in March. The boost is in line with what the cartel, called OPEC+, agreed to last year as part of a plan to raise output to pre-pandemic levels. (…)

Some delegates said Russia is unlikely to approve any additional supplies as it benefits politically from higher oil prices, which could deter the U.S. from imposing sanctions that would hit Moscow’s energy sector. Saudi Arabia also fears such a move could jeopardize its alliance with Russia, a cornerstone of the OPEC+ grouping, they noted. (…)

An internal OPEC report that was prepared for a technical meeting on Tuesday pointed to a global supply surplus of 1.4 million barrels a day in the first quarter, rising to 1.7 million barrels a day in the second if the group continued to add 400,000 barrels a day and crude consumption rises as planned. But OPEC+ in December pumped 824,000 barrels a day below its publicly stated targets, according to the report.

Several members, including top African producers Nigeria and Angola, are struggling to add back their share of the group’s pre-pandemic output following years of underinvestment, the OPEC report shows. Even Russia in December pumped below its OPEC+ quota for the first time since the group cut output, due to slower-than-expected development of some fields, according to the cartel’s data. (…)

In reality, much higher oil prices is in nobody’s interest at the moment.

Deutsche Bank shows that, “of the 20 US economic cycles since 1914, this is the strongest recovery in commodity prices on record at this stage: it eclipses the two 1970s cycles largely due to the spikes back then occurring beyond year three of the 1970- and 1975- expansions (and also has a broader commodity composition beyond energy). In other words, this is not your grandparents’ 1970s inflation shock: it is way worse (for now).” (via ZeroHedge)

One commonality that defines commodity markets at this juncture is that deficits have exceeded expectations and led to a sharp drawdown in inventories well below pre-Covid levels. (…) As physical assets, commodity returns depend on activity levels being above supply levels, and not rates of economic growth. (…) Supply uncertainty remains high, from Iran to Russia’s oil production shortfalls to the impact of the European energy crunch on distillates and base metals markets to la Nina risks on Brazilian soybeans. Commodity forward curves are currently either steeply backwardated or less contango-ed than normal, underscoring the bullish environment commodities find themselves in relative to history. (Goldman Sachs)

• World Food Prices Are Climbing Closer Toward a Record High The United Nations’ index of prices rose 1.1% in January, pushed up by more expensive vegetable oils and dairy. The gauge is edging closer to 2011’s all-time high, and unfavorable weather for crops and the fallout from an energy crisis threaten to keep prices high going forward. (…)

Bulk Shipping Rates Extend Slide on Weak Demand From China

(…) Shipping rates for every type of vessel from oil tankers to container vessels have fallen since October, easing inflationary pressure even as commodity prices climb. Still, freight rates remain well above normal, with the price to ship a container from China to the U.S. roughly six times higher than the five-year average. (…)

More supply issues…

Is ‘long Covid’ worsening the labor shortage?

Millions of COVID-19 patients have developed a range of debilitating symptoms that last for months or even years. They are being diagnosed with “post-acute sequelae of COVID-19”—or more colloquially, long Covid. Yet we know little about these people—how many there are, why they stay sick, or what the impact is on their lives. Among these knowledge gaps is the fact that public health and economics experts have almost no understanding of long Covid’s economic burden.

This piece explores data suggesting that long Covid is contributing to record high numbers of unfilled jobs by keeping millions of people from getting back to work. (…)

The Centers for Disease Control and Prevention estimates that through October 2021, just over 100 million Americans between the ages of 18 and 64 have contracted COVID-19. And studies suggest that between 27% and 33% of COVID-19 patients still experience symptoms months after infection. That means 31 million working-age Americans—more than one in seven—may have experienced, or be experiencing, lingering COVID-19 symptoms. (…)

In the U.K., which is doing a much better job collecting data than the U.S., more than 70% of people with persistent COVID-19 symptoms have been sick for more than three months, and more than one-third have been sick for at least a year. This chronicity is consistent with other post-viral illnesses, which behave similarly to long Covid and often last for years. (…)

Two studies of long Covid patients found that 23% and 28%, respectively, were out of work due to long Covid at the time of the study. That suggests there may have been about 1.1 million Americans not working due to long Covid at any given time.

Additionally, some long Covid patients reduced hours rather than taking time off: 46% according to a study in The Lancet. That is another 2.1 million workers. If those workers reduced their hours by only a quarter, that would increase the labor market impact to 1.6 million full-time equivalent workers. In other words, under reasonable assumptions given the data available, long Covid could account for 15% of the nation’s 10.6 million unfilled jobs. (…)

Axios: “Studies estimate long COVID hits anywhere from 5% to 60% of COVID patients. Many of the patients we’re seeing are in the 40-year-old range. They’re people who are still working … then they got COVID,” Monica Verduzco-Gutierrez, director of the COVID Recovery Clinic at University Health in Texas.”

…coupled with demand headwinds:

Financial Progress Still Eluding Americans Americans’ belief that they are making financial progress has yet to recover after falling last year, with 41% saying they are better off than a year ago.

Forty-one percent of U.S. adults now say they are better off financially than a year ago. That is up slightly from 35% in January 2021 but still well below the record-high 59% reporting they were better off in January 2020, right before the start of the coronavirus pandemic.

An identical 41% of adults now say they are financially worse off than a year ago, also up from 36% in 2021. Meanwhile, the percentage volunteering that their financial situation is the same has dropped 10 percentage points to 18%.

The result of these changes is that “net” financial progress — that is, the percentage better off minus the percentage worse off — has held at or near zero for each of the past two years, compared with net-positive financial progress from 2015 to 2020. (…)

Lower-income Americans’ assessments of their personal financial situation have changed the most over the past three years.

• After plunging from 45% in 2020 to 23% in 2021, the percentage of adults in households earning less than $40,000 annually saying they are better off financially than a year ago has bounced back to 47%.
• Fewer lower-income Americans now (41%) than a year ago (56%) think their finances are worse today. However, more lower-income Americans say they are worse off than did so in 2020 (34%).

By contrast, middle- and upper-income adults’ positive perceptions of the recent trend in their finances are flat, with 33% and 48%, respectively, saying they are better off. But the percentages of these groups saying their finances are worse have jumped substantially.

Lower-income Americans are also the most optimistic about their household income over the next year, with 71% expecting to be better off, similar to their outlook each of the past two years. At the same time, optimism has waned among middle- and upper-income Americans, and now about six in 10 in each group are optimistic. (…)

So, what about the $2.6T in excess savings? Where ever they are, they are not being used just yet:

HIKES

• A hawkish Bank of England raises rates and there’s surely more to come The fact that four out of nine Bank of England rate-setters voted for a 50bp rate rise at the February meeting shows that policymakers are keen to act pre-emptively amid high headline inflation rates. We now expect further rate rises in March and May
• Brazil Central Bank Raises Benchmark Lending Rate to 10.75% Brazil’s central bank raised its benchmark interest rate by 1.5 percentage points as expected, and signaled a smaller rate increase at its next meeting.

Housing Market in a ‘Speculative Fever,’ Canada Regulator Says Property prices in Canada are set to fall as rising interest rates bring an end to a “speculative fever” in the housing market, the country’s banking regulator said on a podcast. “In some markets, where you had really rapid increases in prices, you could see a fall of 10%, 20%,” Routledge said.

EARNINGS WATCH

As of Tuesday, we had 214 reports in, a 77% beat rate and a +4.6% surprise factor. These numbers will likely change when yesterday’s reports are accounted for.

As you may know

PayPal tumbled 25%, its worst one-day performance on record, after it posted lower earnings and higher expenses and scrapped an ambitious growth strategy. Investors also punished Meta Platforms and Spotify, which reported their latest quarter results after the markets closed. Meta shares dropped 20% after it posted rising revenue but a sharper-than-expected decline in profits as it ramped up spending to execute the pivot to the metaverse. Spotify, already embroiled in controversy, lost 12% post-market after it wouldn’t provide annual guidance, despite adding more users and reporting a surge in advertising revenue for the quarter that ended Dec. 31.

Importantly, Refinitiv released its first tally of Q1’22 pre-announcements. The negative/positive ratio doubled from Q4’21 at the same time. Interestingly, only 24 companies have formally pre-announced so far, down from 37 at the same time last quarter.

As reported Monday, Goldman Sachs’ own tally is that “of the 44 companies that provided formal FY1 EPS guidance, 23 (52%) have guided above consensus and 21 (48%) have guided below.” I suspect GS includes all companies its analysts follow while Refinitiv only cares of S&P 500 companies. That would mean that of the 20 non-S&P 500 companies having guided, 17 were positive and 3 were negative.

SENTIMENT WATCH

Evercore’s Ross Has Bought ‘Every Dip’ for Two Years But Not Now The S&P 500 is no longer oversold, commodities are rising as the dollar strengthens, credit spreads — the extra yield over Treasuries investors demand to lend to a company — are breaking higher and action in stocks like Alphabet Inc. is worrisome, said Rich Ross, a technical analyst at Evercore. He has a “high conviction” that this is consistent with a level of 3,800 on the S&P 500 — about 17% below current levels.

EXCESS SAVINGS

Here’s where some excess savings are being used:

Jeff Bezos’s New Superyacht to Force Dismantling of Dutch Bridge

Jeff Bezos’s massive new superyacht is nearing completion, but getting it to its owner will require taking out a bridge.

The 417-foot-long sailing yacht, code-named Y721, is being built by Alblasserdam, Netherlands-based Oceanco. For the boat to reach the ocean, it will have to pass through Rotterdam, and navigate a landmark steel bridge known as De Hef. A lift bridge, De Hef’s central span can be raised more than 130 feet into the air, but that’s still not high enough to accommodate the yacht’s three giant masts. (…)

Rotterdam council project leader Marcel Walravens defended the city’s decision to allow the bridge to be dismantled, telling local broadcaster Rijnmond it was the “only alternative” to complete what the municipality considers “a very important project” economically. (…)

The enormity of the yacht’s sails will make it unsafe to land a helicopter onboard, so Bezos has commissioned a support yacht equipped with a helipad to trail alongside. 

Surging levels of personal wealth pushed superyacht sales to record levels last year. A total of 887 such ships were sold in 2021, a 77% jump from a year earlier and more than double the number in 2019, according to a report from maritime data firm VesselsValue. Boat builder Burgess reported more than 2 billion euros ($2.3 billion) in superyacht sales last year.

The new definition of helicopter money!