THE PUPPETS SHOW
So,
- this data-dependent Fed embarks on a well telegraphed and “transparent†tightening path, only to completely pivot after equity markets tank fearing recession.
- Data-dependency gives way to pre-emptive easing as FOMC voters fret about the trade war and a possible escalation that might create a recession. The last FOMC minutes used the words “risks†and “uncertainties†48 times.
- This pivot also gets justified by the stubborn inflation that, from the Fed’s lens, refuses to even attempt to point towards the magical 2.0% level.
- The Fed officially cuts by 25 points, telling us that the economy is still humming nicely and that this is merely a “mid-cycle†adjustment, 10 years into the recovery.
- Investors and Trump both loudly express their disagreement with the Fed’s action and words.
- For good measure, reading Powell’s trembling lips, Trump goes against his advisors and announces 10% tariffs on an additional $300B of Chinese exports of primarily consumer goods effective September 1.
- China “retaliates†by stopping to support the renminbi which briefly eases above the so-called 7.0 threshold. Mnuchin immediately declared China a currency manipulator, just 2 few months after the Treasury officially said it was not.
- Equities sink again and bond prices skyrocket.
- Somebody must have told Trump that September 1 is the start of the most important period for retailers. Since the U.S. economy only holds by the consumer nails, timing for these new tariffs is not optimal, Mr. President.
- “The office of the U.S. Trade Representative on Tuesday said it would instead delay the new tariffs on many major categories of items, including smartphones, laptop computers and toys, until Dec. 15. The USTR said some products would be removed from the tariff lists entirely, based on health, safety, national-security and other factors. The list of excluded items includes some of the biggest-ticket items facing tariffs. Cellphones and laptops alone represent about $80 billion of trade.†(WSJ)
- Only Trump knows why this announcement went untweeted, unlike virtually every other ones, but markets nonetheless took the USTR word for cash and spiked up.
- The same morning, the BLS releases the July CPI data. Just about every measure is up by 0.3% MoM and 2.0%+ YoY. Even the ever deflating Core Goods have appreciated in price by +0.2% in July after +0.4% in June.
So,
- the trade war is not escalating after all. Postponing the next hike to “December 15†probably means December 15, 2020, at the earliest.
- But it’s also not de-escalating and U.S. importers increasingly struggle with the continuing 25% tariffs.
- Inflation is at, even above, the Fed’s target by many measures and there is increasing evidence that tariffs are being passed on.
What will the Fed do now that there is no escalation but there is apparent inflation in the numbers? Let’s watch Mr. Market. He’s pulling all the strings, from Eccles building to the White House.
Meanwhile, the Chinese totally understand what’s going on and let the puppets perform their act while they can.
But financial markets don’t seem to know much more than the puppets where this economy is going:
Here’s what we do know:
- The S&P 500 Index is at 19.8 on the Rule of 20 P/E on today’s pre-opening of 2890, only slightly undervalued.
- The Rule of 20 Fair Value is 2922 based on trailing EPS of $164.25 and inflation of 2.2%.
- Fair Value peaked at 2952 in June and has declined in each of the last 2 months as trailing EPS have stalled while inflation has crept up.
- The Q2 earnings season is almost over so trailing EPS are likely to remain stable for 2-3 months.
- Inflation seems to be creeping up, threatening a third consecutive decline in month-end Fair Value.
Three consecutive monthly declines in the Rule of 20 Fair Value (yellow line) is a rather rare phenomenon. When it has happened, it has generally not been received warmly by equity investors unless inflation quickly receded (e.g.: 01/84, 08/87, 12/89, 02/01, 08/08). Equities do prefer rising earnings and stable or declining inflation.
As of Monday night, we had 453 S&P 500 company reports in, a 73% beat rate, a +5.6% surprise factor and a blended +2.9% earnings growth rate, bettering the +0.3% expected growth rate on July 1. Earnings are hanging in. Q3 estimates are –1.6%, down from +0.8% on July 1 and Q4 estimates are +5.1%, down from +7.2%. Unless Q3 results beat significantly, trailing EPS will decline over the next 3 months.
But there is also the rising inflation risk. This Cleveland Fed table gives the trends:
The sticky-price consumer price index (CPI)—a weighted basket of items that change price relatively slowly—rose 3.4% annualized in July, following a 3.0% increase in June. On a year-over-year basis, the series is up 2.5%. The core sticky-price index rose 3.4% annualized in July, and its 12-month percent change was 2.5%.
The flexible cut of the CPI—a weighted basket of items that change price relatively frequently—jumped 6.4% annualized in July, and is up 0.3% YoY.
The Atlanta Fed also has a wage growth tracker. Breaking out?
China’s Growth Struggles Mount China reported a raft of weak economic data, adding to evidence that the world’s second-largest economy is slowing further as it remains locked in a trade war with the U.S.
(…) Industrial production rose at its slowest pace since the beginning of 2009, increasing 4.8% in July from a year earlier compared with a 6.3% rise in June, the National Bureau of Statistics said Wednesday. (…) Retail sales—a gauge of consumption—rose 7.6% in the period, down from a 9.8% increase in June, as car dealers finished unloading inventories ahead of new emissions standards. (…)
Urban unemployment shot up to 5.3% in July, matching a record high in February, data from the statistics bureau showed. (…) China International Capital Corp. said in a research report in July that the nation’s industrial sector has lost five million jobs in the past year, attributing 1.8 million to 1.9 million jobs losses to the trade war with the U.S. (…)
There are a lot more stats in this Reuters’ piece. Some charts from Bloomberg via Zerohedge:
U.S. to Back More Condo Loans Aimed at First-Time Buyers The Trump administration is vastly expanding the scope of condominium purchases eligible for lower-down-payment loans.
(…) The FHA now insures a million home loans made by banks and other private lenders, the vast majority of which are for single-family homes. With the new rules, the agency estimates it could insure as many as 60,000 additional condo loans each year, on top of the 16,000 condo loans it backed in 2018. (…)
“FHA is already a higher risk program,†Mr. Stevens said. “Layer that on top of a higher-risk product called the condominium and you definitely have to prepare yourself for the fact that in the next correction you’re going to take more losses at FHA than anywhere else.â€
Mr. Stevens said condos are a dicier proposition because units in a building can be turned into rentals, which tend to be less-well-maintained. A single foreclosure in a condo building can affect other units as windows aren’t washed, balconies aren’t painted and maintenance dues aren’t paid. (…)
1 thought on “THE DAILY EDGE: 14 AUGUST 2019: The Puppets Show”
The Fed has done a bad job with data interpretations for decades, but it doesn’t help to have a maniac president playing with market manipulation, adding to chaos and compounding problems. The hole that has been dug by the admin and Fed is just about at crisis level. The VIX @ 21.79 and 10 yr @ 1.588% suggests that at a major crash is basically guaranteed. Stupid comments by Mr. 3-D chess player will obviously accelerate the fire and help push the markets down by thousands of points.
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