Powell Signals Fed Ready to Slow Rate Rises in December The Fed chair says a labor-market slowdown will be needed to bring inflation back to the central bank’s 2% target.
Federal Reserve Chair Jerome Powell provided a clear signal that the central bank is on track to raise interest rates by a half percentage point at its next meeting, stepping down from an unprecedented series of four 0.75-point rate rises aimed at combating high inflation.
Mr. Powell, in a speech Wednesday, said an overheated labor market needed to cool more for the Fed to be confident that inflation would decline toward its 2% goal.(…)
“My colleagues and I do not want to overtighten because…cutting rates is not something we want to do soon,” he said. “That’s why we’re slowing down and going to try to find our way to what that right level is.”
(…) he said that declines in rents and goods prices might be insufficient if firms don’t slow their hiring to bring the strong demand for labor into better balance with a shortfall in the supply of workers. (…)
The labor market “shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation,” Mr. Powell said. “Despite some promising developments, we have a long way to go in restoring price stability.” (…)
Mr. Powell repeated his earlier view that officials were likely to raise rates to a somewhat higher level early next year than they had anticipated in projections released after their September meeting, when most officials saw their benchmark rate rising to between 4.5% and 5%. (…)
The upshot is that Fed policy will seek to slow inflation and wage growth by reducing demand for workers, a subject that Mr. Powell addressed delicately on Wednesday. “For the near term, a moderation of labor demand growth will be required to restore balance to the labor market,” he said. (…)
FYI, during the Q&A, Powell said that a soft landing scenario is “very plausible”. “If we get good inflation data and we get evidence that — of all the things that I talked about, if all those things start to swing the other way, then we could very much achieve this.”
Powell obviously does not care of Rob Arnott’s findings (see yesterday’s Daily Edge):
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An inflation jump to 4% is often temporary, but when inflation crosses 8%, it proceeds to higher levels over 70% of the time.
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If inflation is cresting, inflation levels of 4 or 6% revert by half in about a year. If inflation is accelerating, 6% inflation reverts to 3% in a median of about seven years, threatening an extended period of high inflation.
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Reverting to 3% inflation, which we view as the upper bound for benign sustained inflation, is easy from 4%, hard from 6%, and very hard from 8% or more. Above 8%, reverting to 3% usually takes 6 to 20 years, with a median of over 10 years.
U.S. Growth Slowed in Fall, Beige Book Says Central bank’s business contacts saw greater economic uncertainty amid inflation and higher interest rates
(…) U.S. economic activity was “about flat or up slightly,” compared with a moderate average pace of growth cited in the prior report. The Fed said five districts reported slight or modest gains in activity and the other seven experienced either no change or slight-to-modest declines in activity.
Improving supply chains and weakening demand lead to a slowing pace of price increases. Consumers also increasingly sought discounts, the report said. (…)
Some layoffs were reported in the technology, finance and real-estate sectors but employment grew modestly in most of the country. Some businesses said they were reluctant to lay off workers because of recent hiring difficulties.
The Philadelphia Fed said wage growth had subsided but remained elevated with wage inflation becoming somewhat less widespread.
JOLTS: Job Openings Decrease Moderately in October; Hiring Eases Again
Job openings decreased 353,000 in October (-6.9% y/y) to 10.334 million, basically reversing their September increase of 407,000, according to the Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics. The September increase reflected a revision from a 437,000 increase reported last month. (…)
The decrease in job openings extended across several industries during the last year, largely reversing the increases seen in September. Construction job openings decreased (-5.3% y/y), as did manufacturing (-19.1%), trade, transportation & utilities (-16.5%), professional & business services (-12.2% y/y), and leisure & hospitality (-3.3% y/y). Even government job openings decreased year-on-year (-1.3%) The only major sector with a year-to-year increase was education & health services (+3.6% y/y), driven by an advance in health care and social assistance, (+4.8% y/y).
New hires declined 84,000 month-on-month (-6.9% y/y) in October after falling 238,000 in September, revised from 252,000. The latest decline was again widespread across industries including construction (-8.3% y/y), manufacturing (-10.8% y/y), trade, transportation & utilities (-7.9% y/y), professional & business services (-14.3% y/y), education & health services (-1.2% y/y) and leisure & hospitality (-4.2% y/y). Government hiring did increase (+9.6% y/y). (…)
Quits declined modestly, by 34,000 (-2.6% y/y), in October, the fifth decline in six months. The quit rate (number of quits as a percent of total employment) fell to 2.6% from 2.7% during the prior three months. (…)
Layoffs & discharges rose 58,000 (+3.4% y/y) to 1.387 million following a decline of 161,000 in September.(…)
MANUFACTURING PMIs
Eurozone manufacturing downturn continues in November but inflationary pressures ease further
The downturn in the eurozone goods-producing sector continued in November, although rates of decline in output and new orders were less aggressive when compared to the near two-and-a-half year records seen in October. There was also a further easing of inflationary pressures, in part due to weaker demand and reduced strain on suppliers.
Nevertheless, November survey data pointed to a solid reduction in output volumes. The level of incoming new orders also fell sharply once again as client demand in markets across the eurozone and other parts of the globe deteriorated. Input purchasing was subsequently reduced to the quickest extent since May 2020 and firms remained pessimistic in their outlook for the next 12 months.
The S&P Global Eurozone Manufacturing PMI® moved slightly higher in November to 47.1, from 46.4 in October. However, by posting another sub-50.0 reading – the fifth in as many months – the headline index signalled a further deterioration in the health of the goods-producing sector. All of the monitored eurozone nations (which combined account for roughly 90% of manufacturing activity in the euro area) recorded Manufacturing PMI readings below the crucial 50.0 mark. (…)
Manufacturing output levels fell in November for a sixth straight month. Deteriorating order books were a key reason for lower production, according to surveyed companies. While the rate of decline was solid, it was weaker than October’s 29-month record.
A similar trend was seen in new orders midway through the fourth quarter as the slump in demand for eurozone goods eased in severity. Nevertheless, the respective index was well below the 50.0 no-change mark and indicative of a sharp monthly fall. Survey respondents noted a hesitancy among their clients to place orders due to economic uncertainty, sufficient stock levels and high selling prices.
New orders fell at a much quicker pace than output, freeing up resources at eurozone manufacturers to clear work pending completion. This was evidenced by a decrease in the amount of orders outstanding in November, and one that was sharp overall. Still, eurozone manufacturers saw their stocks of unsold goods rise, and at a slightly faster rate. Some customers reportedly postponed orders.
To accommodate reduced production requirements, euro area manufacturers cut their purchasing activity at the sharpest rate in two-and-a-half years. However, this didn’t prevent an accumulation of input stocks, which rose for the fourteenth month running. In some cases, warehouses were filled due to the delayed delivery of previously purchased items.
As a consequence of falling input demand, pressure on suppliers eased in November. Delays on deliveries from vendors were at their least marked since August 2020 amid reports of improving material availability.
Easing supply-chain frictions helped alleviate cost pressures for eurozone manufacturers in November. The rate of input price inflation softened notably to its weakest in almost two years. Nonetheless, operating expenses were still elevated as factories grappled with high energy costs.
Softer input cost inflation fed through to output charges, with euro area manufacturers taking a less aggressive approach to their price setting. The overall rate of output price inflation, albeit sharp, was the weakest since March 2021.
Looking ahead, the latest survey data highlighted pessimism towards the 12-month outlook for eurozone manufacturers. Subdued demand conditions, high inflation, the European energy crisis and recession fears weighed on business sentiment. However, this didn’t deter companies from expanding their workforces, albeit to the weakest extent since February 2021.
China: Manufacturing conditions deteriorate slightly in November
Ongoing COVID-19 containment measures continued to weigh on the performance of China’s manufacturing sector during November. Firms registered a further fall in output, with the rate of contraction picking up slightly from October, amid a sustained reduction in sales. That said, the latest drop in new work was the weakest recorded in four months.
Pandemic restrictions and reduced production requirements also led firms to cut back on purchasing activity and contributed to a further drop in staff numbers. At the same time, there was a notable deterioration in supplier performance, which declined at the fastest rate since May. Looking ahead, optimism around the 12-month outlook for production remained subdued in the context of historical data, but improved to a three-month high. Prices data meanwhile signalled a slight acceleration in the rate of input cost inflation, while output charges fell fractionally.
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) rose from 49.2 in October to 49.4 in November, to signal a deterioration in the health of the manufacturing sector for the fourth month in a row. That said, the rate of decline was the slowest seen since August and only slight.
Factory output in China fell for the third month running in November, with the rate of reduction quickening from October, but remaining mild overall. Companies frequently linked the decline to the impact of COVID-19 restrictions on operations and customer demand.
New orders likewise fell further, though the rate of contraction eased to a marginal pace that was the weakest in four months. The pandemic, and subsequent difficulties in transporting goods, also weighed on foreign demand, which fell for the fourth month in a row. There were also reports that softer global economic conditions had dampened export sales. The rate of reduction was only slight, however.
Softer demand conditions and containment measures also weighed on employment in November. Though modest, the rate of job shedding was the quickest seen since the initial wave of the pandemic in February 2020, with some companies highlighting that workers were unable to return to work due to restrictions. Backlogs were stable, however, as muted sales helped to ease capacity pressures.
The latest survey also showed a renewed fall in buying activity, as firms looked to cut back on purchasing due to lower production requirements. Inventories of inputs subsequently declined slightly, while stocks of finished items fell fractionally.
Average vendor performance deteriorated at a solid and accelerated rate, with companies often blaming longer lead times on transportation delays and low inventory levels at suppliers.
At the same time, the rate of input cost inflation picked up in November. Though mild, the latest upturn in expenses was the quickest seen since June amid reports of higher costs for some raw materials such as metals and oil. Selling prices meanwhile declined at the slowest rate for seven months and only slightly, as firms tried to remain competitive.
Companies generally anticipate output to rise in the next year, with optimism underpinned by expectations that the pandemic will recede, allowing operations to normalise and a subsequent rebound in customer demand. Notably, the degree of positive sentiment reached a three-month high.
Japan: Renewed contraction in Japan’s manufacturing sector
For the first time since January 2021, overall business conditions in Japan’s manufacturing sector deteriorated in November amid strong drops in output and new orders, according to latest S&P Global PMI® data. Negative demand trends subsequently led firms to downwardly revise levels of buying activity and also focus on working through backlogged work: the rates of decline signalled by each index dipped to 26- and 25-month lows, respectively.
Despite easing from October, cost pressures remained severe in November, as indicated by a rate of selling price inflation that was among the strongest on record. Overall business sentiment, meanwhile, remained positive but weakened from October amid ongoing concerns surrounding future price hikes and global economic conditions. (…)
Reflective of the trends in output was a further contraction in order books. The decline was the fastest since August 2020 amid reports of cooling market demand and ongoing price pressures. Foreign demand also declined and at a pace that was the sharpest since July 2020. Panel members suggested that overseas clients were looking to downwardly adjust inventory levels.
The U.S. PMI is out later this morning. But yesterday, we learned that the Chicago Business Barometer, considered a leading indicator of the U.S. economy, collapsed in November.:
U.S. Chicago Business Barometer Tumbles in November
The ISM-Chicago Purchasing Managers Business Barometer declined to 37.2 in November after easing to 45.2 in October. An index level of 46.4 had been expected in the Action Economics Forecast Survey. (…)
The new orders measure declined to 30.7, the lowest level since June 2020 and down from 79.0 in May 2021. The production index weakened 35.9, the lowest level since June 2020 and roughly half the April 2021 high of 70.0. (…) The order backlog measure weakened to 36.1 from 47.3, also nearly a two-year low.
To the upside, the employment index rose to 47.1, its highest level in three months. (…) The inventories measure increased to 59.8 from 56.9. It was the highest level in three months but below the March 2022 high of 68.7.
Inflation pressures weakened in November. The prices paid index fell sharply to 66.2 from 74.8 in October. The reading stood far below its high of 94.1 in October 2021. A lessened 40% (NSA) of respondents reported higher prices paid while a steady 10% reported price declines.
Advisor Perspectives has a 50 year chart showing that such low levels only happen during recessions:
U.S. Pending Home Sales Continue to Fall in October
The Pending Home Sales Index produced by the National Association of Realtors fell 4.6% (-37.0% y/y) to 77.1 in October following an 8.7% September decline. The latest decline was the eleventh in twelve months. Pending home sales have fallen 39.8% since their August 2020 high.
Pending home sales declined in most regions of the country last month. Sales in the Northeast fell 4.3% (-29.5% y/y), following a 6.3% September shortfall. In the South, sales declined 6.4% (-38.2% y/y), after weakening 8.2% in September. Sales in the West declined 11.3% last month (-46.2% y/y), about as they did in September. Working higher were sales in the Midwest by 3.3% (-32.1% y/y), after an 8.7% September decline.
Advisor Perspectives produces a population-adjusted variant of YoY growth rates:
The actual level of home sales is back to its 2010 level:
OPEC+ Favors Maintaining Flat Production, Delegates Say Covid-19 lockdown measures in China, Russian oil sanctions worry the producer group
The 13-member Organization of the Petroleum Exporting Countries and a separate group of producers led by Russia—collectively as OPEC+—are leaning toward approving the same production levels agreed to in October, when they greenlighted a 2 million barrels a day output cut, the delegates said.
The move represents a shift in OPEC’s internal deliberations and comes after Saudi Energy Minister Prince Abdulaziz bin Salman raced to shore up unity in OPEC after some members clamored for a production increase of up to 500,000 barrels a day earlier this month, delegates said. Several OPEC producers, including Iraq and the United Arab Emirates, issued statements supporting the current production plan after hearing from Prince Abdulaziz, the delegates said. (…)
Still, OPEC members are likely to maintain flat production Sunday instead of increasing output as widespread lockdowns imposed across China to contain the country’s largest Covid-19 outbreak threaten to dim the prospects for world economic growth. OPEC delegates said Covid’s continued threat helped shift the debate away from a production increase. (…)
J.P.Morgan cuts 2023 S&P 500 earnings forecast by 9%
J.P.Morgan on Thursday cut its 2023 earnings forecast for S&P 500 (.SPX) companies, citing weaker demand and pricing power, margin compression, and limited buy-backs.
JPM strategists now estimate S&P 500 earnings per share for next year to be $205, down 9% from an earlier forecast of $225.
They also flagged that the S&P 500 index could “re-test” this year’s low of 3,491.58 in the first six months of 2023, as the U.S. Federal Reserve’s monetary policy tightening weakens fundamentals.
“This sell-off combined with disinflation, rising unemployment, and declining corporate sentiment should be enough for the Fed to start signaling a pivot, subsequently driving an asset recovery,” they said, adding that the index could claw back up to 4,200 by year-end, to reflect a near 3% upside from current levels.
Rising Tether Loans Add Risk to Stablecoin, Crypto Tether reports hadn’t disclosed that loans it issues are denominated and payable in the token. The rise in Tether’s lending add risk to the crypto world.
(…) In the most recent report, they reached $6.1 billion as of Sept. 30, or 9% of the company’s total assets. They were $4.1 billion, or 5% of total assets, at the end of 2021.
Tether calls them “secured loans” and discloses little about the borrowers or the collateral accepted. Alex Welch, a Tether spokeswoman, confirmed that all of the secured loans listed in the reports were issued and denominated in tether. The company said the loans were short-term and that Tether holds the collateral. (…)
The rise in Tether’s lending represents a broad risk to the crypto world. Stablecoins such as tether are anchors in the system. They are vital for trading many cryptocurrencies and are widely held by traders. The premise of tether—and other stablecoins—is that the issuer always will redeem one coin for $1. Issuers take pains to demonstrate they have ample funds available to do so.
The company’s reports show only U.S. dollar amounts for the loans and don’t say the loans were made in tether tokens. The reports also say the loans were “fully collateralized by liquid assets.” (…)
“If you do have reserves, why wouldn’t you show them?” (…)
The lending of tether tokens is at odds with some of the company’s other disclosures. Its website suggests that it only issues tether tokens when buyers hand over a currency such as the dollar. “Tether only issues new tether tokens when they are requested and purchased by customers,” the website says. It also says all tokens are backed 100% by Tether’s reserves. (…)
The big declines in crypto markets, exacerbated by the recent bankruptcy filing of cryptocurrency exchange FTX, mean that some collateral held by Tether could be worth less than it was when the loans were made. Celsius used bitcoin as collateral for its loan from Tether, according to Tether’s statement at the time. Bitcoin has fallen 63% this year. Tether doesn’t say what the loans’ market value is, or whether the collateral includes cryptocurrencies. (…)
Tether has also left it unclear whether any of its loans are to related parties, which can be a red flag for investors. Tether’s reports used to say that none of the loans were to affiliated entities. However, it dropped that language starting with its report for the second quarter of 2022. (…)
Because Tether’s loans are denominated in tether, their market value fluctuates with the price of tether—and thus so does the market value of the company’s reserves. “If tether falls, and they have loans that can be repaid in tether, then by definition it’s not backed up by a dollar,” said William VanDenburgh, an accounting professor at College of Charleston in South Carolina, who has written about Tether and followed it closely. (…)
In addition to loans, Tether’s report showed $2.6 billion of “other investments” as of Sept. 30, which it reported with no accompanying disclosure of market value. In its Dec. 31 report, Tether showed $5 billion of “other investments (including digital tokens),” without providing a breakdown.
“They should be giving the fair value on all the underlying assets,” Mr. VanDenburgh said. “We don’t know if they can pay off dollar-for-dollar based on all their claims against them if they had a major run on the funds.”
Hmmm…