U.S. JOLTS: Job Openings Rate Improves in October

The Bureau of Labor Statistics reported that on the last business day of October, the total job openings rate rose to 6.9% from 6.7% in September, revised from 6.6%. The rate hit a record 7.0% in July of this year. The job openings rate is calculated as job openings as a percent of total employment plus jobs that have not yet been filled.

The level of job openings surged 4.1% (60.5% y/y) to 11.033 million from 10.602 million in September.

The level of hiring fell 1.3% (+7.1% y/y) as the hiring rate held steady at 4.4%. The rate remained well above the 3.8% low this past January. The overall layoff & discharge rate remained at the record low of 0.9% for the third straight month. The quits rate eased to 2.8% from the record 3.0% in September and compared to the most recent low of 1.6% in April 2020. The level of quits rose 24.0% y/y to 4.157 million. The JOLTS figures date back to December 2000.

The private-sector job openings rate returned to the record 7.4% after falling to 7.1% in September. It has improved from a 3.6% low in April 2020. The highest rates were in leisure & hospitality (10.3%) and professional & business services (7.9%). The government sector job openings rate fell to an elevated 4.0% from 4.3%. The level of private sector job openings rose 5.2% to 10.118 million, up nearly two-thirds y/y. The number of government job openings fell 7.5% (+30.6% y/y).

The private sector hiring rate fell to 4.8% in October, the lowest rate since May. A hiring rate of 8.0% in leisure & hospitality accompanied a 5.0% rate in construction. In the government sector, the hiring rate was 1.7%. The level of private sector hiring declined 1.7% in October (+7.1% y/y) to 6.10 million. The government sector jobs level rose 7.1% (7.4% y/y) in October.

This Inflation Defies the Old Models Neither supply or demand by itself is increasing prices; it’s an unusual combination of both

(…) this inflation was made possible only by strong demand interacting with restricted supply. The U.S. hasn’t seen anything like this combination except, perhaps, in the aftermath of World War II. Then, Mr. Biden’s Council of Economic Advisers has noted, pent up demand coincided with war-induced shortages. This makes the solution elusive: fixing supply is largely beyond the means of the White House and Fed, but treating the problem as one of only demand could damage the economy. (…)

Many economists note the boost to inflation is concentrated in goods. That’s because the pandemic diverted consumer spending away from services such as restaurant meals toward goods such as groceries. Nonetheless, the unusual dynamics are spreading to services as well. (…)

The unusual origins of this inflation mean the solution isn’t straightforward. Ideally it will recede painlessly as distortions to demand and supply self-correct. Rising semiconductor output will eventually cure the shortage of cars. A receding virus and less generous federal relief should coax some workers to fill job vacancies. Households may have all the furniture, exercise equipment and pizza they want.

But that process could take a while; meanwhile, higher inflation could become self-perpetuating through price and wage-setting behavior. Then, the solution to this unfamiliar inflation becomes painfully familiar: higher interest rates and perhaps a recession.

John Authers: Markets Overestimate a ‘Powell Pivot’ at Their Peril This isn’t 2018, when inflation wasn’t even a worry. The central bank can’t afford to back off meaningful rate hikes this time.

(…) On the Fed’s greater haste, the Bloomberg analysis of the probabilities implied by fed funds futures show how expectations have shifted in the last two months. As recently as November, there was seen to be minimal chance of a rate hike before June. Now, the chance of a hike at May’s meeting is well over one in two, and there is one-in-three chance of a rise as early as March (…).

But longer-term yields have fallen, significantly, despite ongoing elevated inflation forecasts. (…)

So the implicit expectation is that by moving more quickly and aggressively, the Fed will save itself from having to hike too far and make rates so expensive that they slow down the economy. Hence, many are now braced for a Fed announcement next week that it will accelerate its taper — probably even double the amount that it cuts back asset purchases each week, and be finished as early as March, rather than the more relaxed schedule taking until June.

Something along these lines wouldn’t have too great a market impact. But how safe is the assumption that the Fed won’t be hiking long into the future? (…)

To put this in historical perspective, over the four decades since price rises peaked under Paul Volcker, inflation has quite often exceeded the fed funds rate (meaning that the real fed funds rate is negative), but all hiking cycles have ended with the fed funds rate above inflation. (…)

With inflation proving a tougher nut to crack than in decades, this further argues for pushing up real rates well into positive territory. Such an outcome is not reflected by present market calculations.

(…) most of the FOMC don’t think rates will go beyond 1.8% by the end of 2024. That’s higher than the market implicitly expects, but gives some comfort that the Fed doesn’t think it will need to keep piling on pain until rates exceed inflation. (…)

[William Dudley, former governor of the New York Fed,] adds that the market estimate of a 1.5% highest rate is “well below what common sense would dictate.” (…)

The Fed is arguably a long way behind the curve. The U.S. recovery has hummed along far more impressively than in Europe or Asia, and yet the stimulus that the economy has received is far greater. If we take broad “M2” money as a yardstick for the amount of liquidity in the economy, it’s clear that the Fed has trodden on the accelerator for much longer than other central banks. (…)

This suggests that the Fed may well have to do far more work to slow things down than other central banks. It might also imply that the strength of the American recovery owes a lot to the Fed’s exceptional generosity. (…)

While the Fed has only just embarked on tapering, the other four big central banks have already cut back very significantly on asset purchases:

All this suggests that the Fed will need to work very hard to rein in liquidity and calm inflation down once more. So why would markets expect Jerome Powell and his colleagues to relent early? The most popular case is that they will be forced into a “Powell pivot” and step back if they find themselves triggering a fall in the stock market, or a sharp economic downturn. This blueprint is taken from what happened in late 2018. But it ignores the fact that there is plenty of room for assets to fall from the current dizzy levels, and that inflation is now a very serious problem while it wasn’t even an issue three years ago. If the Fed loses its nerve, we could expect a fall for the dollar, which would worsen inflation. In very strong language, Howell argues the following:

Some policy catch-up looks inevitable, but, like in the 1970s, we believe the current Fed lacks the necessary fortitude to tackle the inflation problem. Consequently, inflation will persist, with the US dollar potentially in the firing-line. We recognise that Chair Powell is probably not a Paul Volcker on
inflation, but we also worry that President Biden is a Jimmy Carter for the dollar.

That might be taking things a little too far. But the risks are serious enough, and plenty of people are warning about them. There is a very real chance that Powell will soon have to get everyone ready for fed funds rates to keep rising until they are comfortably above the rate of inflation. That will not be popular.

Fiera Capital’s strategists last week boosted their 12-18 months expectations for inflation from 3.5% to 4.5% in their Stagflation scenario (40% probability). Their reflationary recovery scenario (50%) has inflation at 4.0%.

They also boosted their short-term rates forecast by 50 bps, targeting 1.75% in their stagflation scenario. Their U.S. equity outlook is strongly negative under all scenarios after having been very bullish for many years.

But what about productivity gains many expect to keep inflation low enough. The Employment Cost Index shot up 3.7% YoY in Q3 and Unit Labor Costs are now rising in the 4-6% range.

Richard Bernstein yesterday tweeted: “Technology improves productivity and fights inflation” is total bunk. Current quarter #productivity among worst in history and #trend productivity virtually unchanged in 70 years.

China’s Factory-Gate Inflation Softens in November China’s factory-gate inflation ebbed in November after hitting a 26-year high, which economists say will give policy makers more room for easing to bolster a slowing economy.

The producer-price index rose 12.9% from a year earlier in November, down from 13.5% growth in October, which was the fastest increase since 1995, according to data released by the National Bureau of Statistics. (…)

Meanwhile, China’s consumer-price index rose 2.3% from a year ago in November, accelerating from October’s 1.5% increase, and rose above 2% for the first time in more than a year.

The rise in consumer inflation was mainly driven by food prices, which increased 1.6% year over year in November, after falling 2.4% in October, the statistics bureau said. (…)

U.S. Light Vehicle Sales Remain Firm in November

Firm?

The Autodata Corporation reported that light vehicle sales during November of 13.12 million units (SAAR) were unchanged (-18.4% y/y) versus October. Despite the m/m stability, sales were 29.1% below the April peak of 18.50 million units.

Trucks’ share of the light vehicle market eased to 79.5% last month from 80.3% in October. That share has improved from a low of 48.1% during all of 2009.

Passenger car sales rose 3.5% (-31.3% y/y) in November to 2.68 million units after a 2.3% October decline. Purchases of domestically-produced cars rose 11.2% last month (-32.0% y/y) to 1.89 million units after a 3.0% October gain. Down for the sixth straight month, sales of imported autos weakened 11.2% in November (-29.5% y/y) to 0.79 million units following an 11.9% October drop.

Sales of light trucks eased 0.9% (-14.3% y/y) in November to 10.43 million units after rising 8.3% in October. Purchases of domestically-made light trucks fell 1.8% in November (-13.9% y/y) to 8.08 million units. Offsetting this decline, sales of imported light trucks rose 2.2% last month (-15.8% y/y) to 2.35 million unit but remained 28.8% below April’s record 3.30 million units.

Imports’ share of the U.S. vehicle market fell last month to 23.9%, the lowest percentage since January. It had risen to a September high of 27.9% from 19.9% in 2015. Imports’ share of the passenger car market declined to 29.5% from 34.4% in October. Imports’ share of the light truck market edged higher to 22.5% after plummeting to 21.8% in October. These figures were down from 25.2% in September.

Bank of Canada Leaves Key Interest Rate Unchanged at 0.25%

ING:

The Bank of Canada left monetary policy unchanged today, but the accompanying statement confirmed expectations that 2022 will see the central bank raise interest rates in response to strong growth, record employment and elevated inflation. The forward guidance remains that the timing of the first hike will come “in the middle quarters of 2022”, but we see the possibility of a first move in March with three further moves in each of the subsequent quarters.

The central bank is forecasting GDP growth of 4% in 2022 and 3.75% in 2023 on the back of strong consumer demand, business investment and a recovery in exports to the US. High prices are also going to be supportive for activity in the natural resource sector of the economy, which accounts for 10% of economic activity. (…)

Canada employment is above pre-Covid levels, outperforming the US (millions)

Source: Macrobond, ING

After all, employment is already above its pre-pandemic peak with November’s 153,700 jump meaning there are now 185,800 more people in work than there were in February 2020. Job vacancies are also at record highs, suggesting employment growth will remain robust. With incomes rising and household savings built up through the pandemic providing an additional resource to fund expenditure we see demand continuing to run hot through next year.

This is likely to mean inflation imminently breaks above 5% and stays there throughout the first quarter. However, the BoC have only slightly tweaked their inflation assessment from inflation being likely to “ease back to around the 2% target by late 2022” to “ease back towards 2%”. We are more wary that supply chain strains and labour shortages could keep inflation more elevated for longer.

With the BoC having pointed to the prospect of earlier rate hikes and abruptly ending QE at the October policy meeting we changed our own forecast to four 25bp rate hikes in 2022 – one in each quarter. The emergence of the Omicron variant is a cause for concern, but the tone of the BoC statement suggests that even if it does lead to some consumer caution the case for policy tightening remains strong. As such, we see no reason to change our four-hike view for 2022.

The Canadian dollar was trading marginally weaker after the rate announcement, but the impact is proving very contained and short-lived given the lack of surprises in the statement. Some of the recent CAD strength is likely being fuelled by the notion that the BoC is ready to respond to inflation pressures with tightening, assuming the global picture does not significantly worsen. We think today’s statement did very little to dent this notion, allowing CAD to continue benefiting from the rebound in global sentiment.

We think USD/CAD may extend its decline to 1.2500 by the end of the year, although that is heavily reliant on further improvements in the Omicron-related sentiment. 

Market Can Weather Evergrande Crisis, China’s Central Banker Says People’s Bank of China Gov. Yi Gang said the central bank was committed to a level playing field for investors and that broader problems with debt at Chinese property developers should be dealt with according to market principles.

Financial stress at China Evergrande Group EGRNF -7.13% and a few of its peers won’t cause longer-term damage to the Hong Kong market, and broader problems with debt at Chinese property developers should be dealt with according to market principles, China’s top central banker said. (…)

Mr. Yi added that the Chinese central bank was committed to a level playing field for investors. “Companies issuing bonds overseas and their shareholders will be urged to properly handle their debt issues and meet their debt obligation in accordance with law and market principles,” he said. “This is a market event. It should be handled in the market-oriented way, based on law.”

“The rights and the interest of creditors and shareholders will be fully respected, in accordance with their legal seniorities,” the central banker said. (…)

• China Reopens Funding Spigot for Property Developers The move is enabling some companies to tap into an obscure form of debt financing that helps pay their suppliers.

(…) In China, supply chain asset-backed securities are created by bundling together developers’ payment obligations to their suppliers, which include sellers of building materials and contractors. Large property firms such as China Vanke Co. , Kaisa Group Holdings Ltd. and Evergrande often have hundreds of small suppliers.

In essence, property developers get suppliers to sell their account receivables—the right to collect money from the developers—to factoring companies. A factoring company gives suppliers cash upfront, typically paying them amounts that are less than what the developer owes them. Small suppliers often have little choice but to accept the payment terms.

In a typical supply-chain securitization, a factoring company bundles the suppliers’ receivables into securities that are sold to investors in China. The transaction is initiated by a developer, and the cash raised from the bond sale helps the factoring company buy the supplier receivables. When the developer pays its bills, that money goes to holders of the bonds. (…)

Real-estate developers, however, can only use the deals to refinance existing debts, the bankers added. (…)

In effect preventing a supplier crisis.

Beijing Reins In China’s Central Bank The PBOC was never independent but it has tried to establish good communication with markets. Xi Jinping’s financial shake-up is changing that.

(…) In recent weeks, Communist Party discipline inspectors from China’s top anticorruption agency have visited the central bank’s headquarters in central Beijing. Officials briefed on the matter said the inspectors asked questions, reviewed documents and brought an unusually stern message: Beijing has little tolerance for any talk of central-bank independence; the monetary authority, just like any other part of the government, answers to the party. (…)

China’s leadership has come under pressure to tamp down turmoil in the property sector, which is now threatening to severely cut into services and manufacturing activities. A senior economic adviser to Chinese leaders said China’s much slower-than-expected economic expansion in the third quarter, at 4.9%, led top leaders to decide to bolster support for the economy despite the central bank’s preference to maintain a more conservative policy stance. (…)

In an article posted on the discipline commission’s website last month, Xu Jia’ai, head inspector of the PBOC, said his team of inspectors had given party lectures across the central bank to strengthen the party’s leadership at the bank.

“In the past period, the foundation for comprehensive and strict governance of the party in the financial sector was weak,” Mr. Xu said, “and the tendency of financial ‘specialism’ and the central bank ‘exceptionalism’ was prominent.”

The message, said some who attended the lectures, was that whatever macro-policy discipline the central bank tries to maintain would be secondary to the need to deliver what the party leadership asks.

Amazon Fined $1.3 Billion in Italian Antitrust Case Italy’s antitrust regulator said Amazon harmed competitors by favoring third-party sellers that use its logistics services, ramping up scrutiny of tech giants by antitrust regulators globally.

Covid Spurs Biggest Rise in Life-Insurance Payouts in a Century Death-benefit payments rose 15.4% in 2020 to $90.43 billion, mostly due to the pandemic, according to the American Council of Life Insurers. It’s the sharpest rise since 1918.