Powell Says Economy No Longer Needs Aggressive Stimulus He said he was prepared to begin raising interest rates to cool the economy and was optimistic supply-chain bottlenecks would ease this year to help bring down prices.
(…) But he told lawmakers at his Senate confirmation hearing that if inflation stayed elevated, the Fed would be ready to step on the brakes. “If we have to raise interest rates more over time, we will,” he said. (…)
Mr. Powell said Tuesday that officials had been surprised not only by the intensity of certain price pressures last year but also by a drop in the number of Americans seeking jobs despite a high number of openings. While that isn’t a reason for current elevated inflation, a smaller labor force “can be an issue going forward for inflation, probably more so than these supply-chain issues,” Mr. Powell said. (…)
“To get a long expansion, we are going to need price stability. And so in a way, high inflation is a severe threat to the achievement of maximum employment.” (…)
“What we have now is a mismatch between demand and supply,” said Mr. Powell on Tuesday. The main question for the Fed this year boils down to better aligning supply and demand, he said, which is something the central bank can help achieve by cooling the labor market. (…)
Pretty clear now: inflation is back in the driver’s seat, maximum employment on the back seat.
BTW:
1- U.S. retirements—whether forced or by choice—surged during the pandemic, led by older White women without a college education, according to the St. Louis Fed. Overall, there were 3.3 million, or 7%, more retirees as of October 2021 than in January 2020, a number that exceeds the expected demographic shift of baby boomers leaving the workforce. (Bloomberg)
2- Prices for transportation continue to rise. Trucking prices are going up, and shipping rates from Shanghai to Los Angeles are up over the last month, after a slight dip in 4Q. (Axios)
China Lockdowns Hit Factories, Ports in Latest Knock to Supply Chains Toyota, Samsung and Volkswagen are among companies with production affected as economists warn of more challenging bottlenecks ahead.
(…) The potential consequences are more severe this time, economists warn, because of the highly contagious nature of Omicron, which has been detected in some areas of China. (…)
A week’s delay of essential trade at the Ningbo port, about 685 miles south of Tianjin, could affect trade valued at $4 billion, including the exporting of $236 million in integrated circuit boards and $125 million in clothing, according to a study by the Russell Group, a supply-chain consulting firm. A container terminal at the Ningbo port was shut down for two weeks in August after a single case was detected. (…)
(…) Thirteen of China’s 31 provinces saw income from selling land-use rights drop more than 20% in 2021 from a year earlier, Tianfeng Securities Co. analysts including Sun Binbin wrote in a note Wednesday. (…) Another 10 had falls of 20% or less and only six provinces, including Beijing, Shanghai, and Zhejiang, saw revenue from land sales grow. (…)
More than a quarter of land parcels offered by local governments went unsold in September as no developer submitted bids, the highest rate since at least 2018, according to data compiled by China Real Estate Information Corp., which tracks auctions across 128 Chinese cities. The rate declined to 16% last month, CRIC figures showed, after regulators loosened financing curbs on the property sector.
Instead of selling land to cash-strapped developers, local governments may be forced to rely more on purchases by local government financing vehicles, according to the Tianfeng report – effectively selling to themselves. These LGFVs are companies set up by governments that raise money and pay for various projects, but their finances aren’t included on official balance sheets. Quite a few regions did this last year, the analysts wrote. (…)
This is from China based J Capital:
The chaos has started in smaller cities: We spoke with property agents who are seeing sharp declines in property prices in Tiers 3-5. Tier 2 is weakening but Tier 1 holding up. We find it hard to envisage a soft landing when the key growth markets, Tier 3-5 cities, are in freefall.
Property transactions are still up but are falling fast: New starts are also the lowest since 2017. To us, that means a fall in steel demand in 2022 of at least 5% – about 100 mln tons of iron ore. We expect iron ore to drop in price by around 25%
- Omicron, Supply-Chain Troubles to Slow Growth, World Bank Says Bank forecasts 4.1% growth in 2022, down from 5.5% last year. The report projects growth to slow further, to 3.2%, in 2023.
(…) U.S. growth is expected to slow to 3.7% from 5.6%, according to the forecast, which projects China to slow to 5.1% from 8%. (…) Japan, Indonesia, Thailand, Malaysia and Vietnam are among countries expected to strengthen in 2022. (…)
RBC’s McKay Calls for ‘Rapid Action’ on Rates to Tame Inflation McKay said he does not think the recent acceleration of inflation was transitory. He sees some signs of a wage-price cycle taking root that has already pushed up costs permanently.
(…) Markets are pricing in at least five Bank of Canada rate hikes this year, beginning as early as Jan. 26, when policy makers will unveil their first rate decision of 2022. Central bank officials have indicated they’re poised to begin raising rates early this year to quell the price pressures after keeping the key policy interest rate at a historic low of 0.25% since March 2020. (…)
As costs soar, some Japanese companies do the unthinkable: raise prices
Years of stagnant prices and wages have made Japan Inc nervous about charging more for fear of alienating shoppers and losing market share. Traditionally, firms have chosen belt-tightening in the face of rising costs.
While the overall rise in prices is still modest, more firms are opting for increases, led by market leaders often with speciality products, as commodities and transport costs soar due to the COVID-19 pandemic and a weakening yen makes fuel and imports costly. (…)
Now may be an “easier time” to raise prices because costs are generally going up for everyone, he said.
“Some of our competitors are doing it as well.”
“Our internal streamlining could no longer address the rise in steel prices,” said Hideki Kubo, a spokesperson. (…)
Goods sold to other businesses are seeing bigger price increases than those sold directly to consumers, according to official data.
Wholesale inflation, which reflects the prices firms charge each other for goods, rose to a record 9% in November, while the core consumer price index ticked up 0.5% from a year earlier, the highest in nearly two years.
Final goods prices rose just 4.6% in November even as raw material costs spiked 74.6%. (…)
U.S. Small Business Optimism Index Edges Up in December The NFIB Uncertainty Index rose to the highest level in three months.
Seasonally adjusted, a net 48 percent reported raising compensation, up 4 points from November and a 48-year record high reading. A net 32 percent plan to raise compensation in the next three months, unchanged from November’s record high reading. (…)
Among owners reporting lower profits, 29 percent blamed the rise in the cost of materials, 22 percent blamed weaker sales, 17 percent cited labor costs, 10 percent cited the usual seasonal change, 8 percent cited lower prices, and 4 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 63 percent credited sales volumes, 11 percent cited usual seasonal change, and 15 percent cited higher prices.
Apartment Demand Hits a Record in 2021
In the 30 years RealPage has been tracking the U.S. apartment market, demand has never been higher than it was in 2021. The market absorbed more than 673,000 units in the calendar year, blowing away previous records for apartment demand. When compared to the annual demand tallies from the past five years, a stark contrast emerges. The demand figure for calendar 2021 is almost twice as large as the volumes seen in the past five years. Even the five-year absorption peak from 2018 was about half of today’s tally at nearly 345,000 units. In 2020, when the market suffered from the rippling effects of the COVID-19 pandemic, demand eased to 300,000 units before skyrocketing in 2021. Solid absorption in the past year has led to very low vacancy rates and record high rent growth, and developers are scrambling to feed new apartment supply to the market at a rapid pace.
- Homebuilder Comments in December: “Still a ton of demand for new homes”
- Housing Analysts Already See Blistering Start to the Market in 2022
From Raymond James:
Housing fundamentals never stronger. Housing vacancy rates and inventory availability (both new and resale) will start 2022 at fresh record lows. Household formation remains at multi-decade highs, thanks to booming economic growth, surging household income, and millions of untethered employees embracing a new work-from-home lifestyle. Domestic population migration only continued to accelerate over the course of 2021. The steady flow of people into Sun Belt cities and suburbs is creating deepening housing shortages and even larger growth opportunities for homebuilders.
We’ll need to see how higher interest rates impact demand.
RISK DOWN
In the past week, I have documented the “risk down” trend seeing investors getting out of the riskiest areas of the market. That leaves the largest of the large caps. Using the CPMS/Morningstar database, as of yesterday’s close:
In the S&P 500 Index:
- 211 (42% in number, 40% in aggregate weight) stocks are down 10% or more. So 40% of the index is in correction mode or worst.
- 137 (27% in number, 18% in aggregate weight) stocks are down 15%+.
- 86 (17% in number, 11% in aggregate weight) are in bear market mode, down 20%+.
In the CPMS/Morningstar Universe of 2019 stocks:
- 1282 (63%) stocks are down 10% or more. So
40% of the index is in correction mode or worst. - 1001 (50%) stocks are down 15%+.
- 763 (38%) are in bear market mode, down
20%+.
The top 10 largest weights in the S&P 500 are AAPL, MSFT, GOOG, AMZN, TSLA, FB, NVDA, BRK.B, JPM, JNJ. Together, they account for 32.4% of the index. Let’s look at their fundamental attributes versus the entire S&P 500 Index:
The top 10 stocks are 10-30% more expensive but currently grow at a slower pace. FYI.
Philips shares slide as shortages and recall hit profits
Philips shares (PHG.AS) plunged more than 11% on Wednesday morning after the Dutch health technology company hiked the cost of its massive recall of ventilators and said earnings would take a big hit from global supply chain shortages.
The supplier of hospital equipment and personal health devices said it expected fourth-quarter core profit to drop almost 40% to about 650 million euros ($739 million), as it continued to scramble for memory chips and other parts. (…)
Van Houten said the supply chain problems had intensified over the fourth quarter, and were not expected to disappear in the first months of 2022. But he maintained guidance that growth would resume over the course of the year. (…)
The adjusted margin on earnings before interest, tax and amortisation (EBITA) is now expected to fall to about 12% from 13.2% in 2020, against a previous forecast for a modest rise. (…)
A NEW WATCH? RECESSION WATCH
Jeffrey Gundlach Sees ‘Recessionary Pressure’ Building With Inflation
Jeffrey Gundlach said “recessionary pressure is building” in the U.S. economy with persistent inflation spurring Federal Reserve Chairman Jerome Powell to roll back easy-money policies.
The Fed “seems pretty far behind the curve when you consider wage growth,” the billionaire money manager of the DoubleLine Total Return Bond Fund said Tuesday during a webcast. “We’re going to be more on recession watch than we have been.”
He added that the central bank may only be able to boost the policy rate to just 1.5% before it inflicts economic pain. It’s currently near zero, with a number of forecasters — including Goldman Sachs Group Inc. — anticipating that hikes will eclipse the 2% mark.
Gundlach, 62, said he was right to predict high inflation, that it might have topped 7% in 2021 and that it could “peak out” in the first half of this year.
Consumer sentiment has worsened and bond yields “are no longer sending a don’t worry, be happy signal,” he said. The market is starting to flash signs of a “weaker economy ahead,” he said, while stopping short of predicting that a recession is imminent.
- Gains in entry-level wages could push wages higher overall, and he cited JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon’s observation that there is huge pressure on the U.S. labor market
- Home prices are still “going up a lot” and mortgage financing can still appear cheap, Gundlach said
- Gundlach expects European markets to outperform if the U.S. market corrects. For value buyers, “the message is clear,” he said
FYI: