Inflation Named as Top U.S. Problem by Most Americans Since 1985 About one in five Americans, or 17%, surveyed March 1-18 cited inflation as the nation’s most important problem. That’s up from 10% in February, and compares with 4% who pointed to fuel prices in particular.
(…) Still, the overall share rating inflation as the biggest problem in the U.S. is far below the 52% proportion recorded in the early 1980s. Consumer prices increased as much as 14.8% back then on annual basis, compared to 7.9% in February.
Looking ahead, the poll found Americans are increasingly pessimistic about the economy: 75% said conditions are getting worse, about tied with the most negative it’s been since April 2020.
Investors are also getting worried, at least for the next 5 years:
Business Travel Is Picking Up Again Corporate travel transactions are up significantly over the past nine weeks, with small and medium-size companies driving the acceleration
(…) Delta Air Lines ‘ large corporate contracted travel business, primarily Fortune 500 companies, is about 65% of what it was compared with 2019. Travel for small and medium enterprises is about 5 to 10 percentage points higher, which has been consistent throughout the pandemic, says Steve Sear, Delta’s executive vice president of global sales and distribution. (…)
Big corporate travel-management companies are hovering around 50% of 2019 booking levels, much of which is due to the lack of international travel, says Brandon Strauss, president of CapTrav, a company that captures corporate travel bookings data.
Smaller companies and startups say it has been critical for them to get back on the road to meet with clients and prospective customers. A recent survey conducted by Morning Consult on behalf of the American Hotel & Lodging Association found that 77% of business travelers say that in-person meetings and business travel foster collaboration in a way virtual interactions cannot. (…)
Biden’s Budget Calls for Increase in Defense Spending President Biden released a $5.8 trillion budget that envisions a substantial increase in defense spending, including aid to Ukraine, a sign of the administration’s willingness to devote additional resources to military programs.
(…) The administration is seeking $813 billion for military spending in fiscal year 2023, which begins Oct. 1, a roughly 4% increase from the $782 billion enacted for this fiscal year. Budget figures aren’t adjusted for inflation.
The requested increase is more than double than the 1.6% boost the administration sought for military spending in last year’s budget. (…)
Overall, the proposal seeks $769 billion for non-defense spending and the medical care program at Veterans Affairs in fiscal 2023, compared with the $691 billion Congress enacted for those items in the current year.
The administration forecasts a yearly drop of roughly 50% in the U.S. deficit during fiscal 2022, to $1.4 trillion, as spending on Covid-19 relief programs wanes and a stronger economy generates more tax revenue. (…)
The budget projects debt held by the public would fall to 101.8% of U.S. GDP in fiscal 2023, compared with the White House’s forecast of 102.4% in the current year. Debt is expected to rise in subsequent years to 106.7% of GDP by 2032. (…)
The tax increases most likely to pass Congress soon, including a surtax on top earners, a 15% minimum tax on corporations and higher taxes on U.S. companies’ foreign earnings, would be part of the revived bill. (…)
The budget includes a proposal for a 20% minimum tax rate on income, including unrealized gains in assets, for American households worth more than $100 million. This would apply to the top 0.01% of households, the White House said. That is likely under 20,000 households. (…)
G7 rejects Putin’s demand for rouble payment for Russian gas – Germany
China real estate via @Sino_Market:
- The gross floor area of contracted sales for new homes in 60 Chinese cities has declined by 50% y/y on March 1-24 versus -28% y/y on February 1-24. The GFA transactions in 18 second-tier cities dropped by 39% y/y on March 1-24 versus -38% on February 1-24. #China #realestate
- Chinese property #Yango Group tumbles 10% in Hong Kong after the group failed to pay the principal and interest of some bonds. #Sunac slides 12%, as the group was unable to complete preparations of financial statements for 2021 by the end of March.
THE YIELD CURVE!
John Authers: Not All Yield Curve Inversions Are Fatal
(…) This means a radical difference between the messages of the three-month/10 year and two-year/10-year curves. The former has generally been an even better recession warning, though it delays its signal until closer before the downturn. Historically, there hasn’t been much difference between them. At present, however, they have diverged in spectacular fashion. The following chart, using Bloomberg data and correct as of the close on Friday, was prepared by Win Thin, currency strategist at Brown Brothers Harriman & Co. in New York:
This is a big hint that something genuinely is different this time. Explanations can be found at both ends of the curve.
Expectations for rate hikes in the near future have risen in spectacular fashion. The shift in forecasts has happened with breathtaking pace, and this helps to explain the massive excess of the two-year yield over the three-month. (…)
Bespoke Investment Group offers this chart showing the implicit expectation for the course of the fed funds rate over the next two years, using data from CME Group. It suggests even more tightening than is currently priced by two-year bonds. Nothing as aggressive as this has been seen since Paul Volcker was Fed chair four decades ago:
Even if this is not just a matter of overheated crowd psychology, it’s fair to suggest that the rise in the two-year yield reflects investor confusion in trying to deal with a situation that has no precedent in the working lives of most traders now active. Just as the Fed now admits that it has been behind the curve, so investors have also been slow on the uptake, and may now be over-compensating. That suggests that a curve inversion here should be treated with some caution. (…)
Inversions are generally driven by a decline in long yields as much as a rise in short yields. They have different drivers. As Michael Contopoulos of Richard Bernstein Advisors in New York puts it, two-year yields are driven by policy, while 10-year yields are driven by expectations for growth. Higher yields generally betoken stronger growth ahead. A rising long yield suggests we shouldn’t be too worried about a recession even if the curve is flat or inverted. (…)
None of these [5] prior inversions has followed a rise this great in the 10-year yield. And of course there is a reason why this time is different; massive intervention from the central bank has held the 10-year yield lower than it otherwise would be. To continue with Contopoulos, he suggests that the main yield curve would be nowhere near inverting without the years of QE that preceded it:
Our models show the flatness of the curve could be more a consequence of the Fed’s relentless buying of bonds, and the consequent growth of their balance sheet, rather than because of a looming growth shock. As such, the true fair value of the 2s10s spread could be in the 150bp-200bp range had the Fed never engaged in its multiple rounds of quantitative easing.
The Bernstein model derives 10-year yields from inflation, leading economic indicators, the current fed funds rate and the size of the Fed’s balance sheet relative to gross domestic product — and these deliver a 10-year yield of about 3%. If there had been no QE on these calculations, then the financial world would be a very different place now — and the 10-year yield would be about 3.7%. (…)
This line of thinking suggests (good news) that we needn’t be too worried about the flatness of the curve but that (bad news) the likely start of QT (quantitative tightening) in May is something to fear. The Fed has only just stopped buying longer-dated bonds, which was done in an unabashed attempt to reduce their yields. QT could well steepen the curve, but do it by raising long rates sharply, to levels that might jeopardize credit markets in the U.S. and elsewhere. With the Bank of Japan recommitting to its intervention to keep 10-year yields low on Monday, it also promises to strengthen the dollar yet further, which will have further implications.
It’s not necessarily good news if 10-year yields are about to go up sharply. But at least it should protect us from the dreaded yield curve. (…)
Bill Dudley: The Fed Has Made a U.S. Recession Inevitable Jerome Powell is far too optimistic about the chances of a soft landing.
(…) The Fed’s application of its framework has left it behind the curve in controlling inflation. This, in turn, has made a hard landing virtually inevitable. (…)
So can the Fed correct its mistake and engineer a soft landing? Powell is correct that the central bank tightened monetary policy significantly in 1965, 1984 and 1994 without precipitating a recession. In none of those episodes, though, did the Fed tighten sufficiently to push up the unemployment rate.
- 1964: The federal funds rates rose from 3.4% in October 1964 to 5.8% in November 1966, while the unemployment rate declined from 5.1% to 3.6%.
- 1984: The federal funds rate rose from 9.6% in February to 11.6% in August, while the unemployment rate declined from 7.8% to 7.5%.
- 1993: The federal funds rate rose from 3% in December 1993 to 6% in April 1995, while the unemployment declined from 6.5% to 5.8%.
The Fed’s most benign tightening cycles didn’t increase unemployment
The current situation is very different. Consider the starting points: The unemployment rate is much lower (at 3.8%), and inflation is far above the Fed’s 2% target. To create sufficient economic slack to restrain inflation, the Fed will have to tighten enough to push the unemployment rate higher.
Which leads us to the key point: The Fed has never achieved a soft landing when it has had to push up unemployment significantly. This is memorialized in the Sahm Rule, which holds that a recession is inevitable when the 3-month moving average of the unemployment rate increases by 0.5 percentage point or more. Worse, full-blown recessions have always been accompanied by much larger increases: specifically, over the past 75 years, no less than 2 percentage points.
The Fed needs to adjust how it puts its monetary policy framework into practice. It shouldn’t be completely reactive, waiting passively until inflation exceeds target and the labor market is extremely tight. Such extreme “patience” forces it to slam on the brakes, increasing the likelihood of an early recession. Also, officials need to be more forthright about the road ahead: Getting inflation down will be costly, in terms of jobs and economic growth.
Never heard of Sham Rule before? Here’s the St-Louis Fed:
Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.
You probably also never heard of the “10 point rule” as the NBER explains:
Policymakers should focus on the qualitative data as an indicator of turning points. We find a good measure of when the recession started is when the fear of unemployment series begins to rise sharply. We adopt a “10 point rule”: recession is signaled when the fear of unemployment series rose 10 points above its 2007 low.
“We have nothing to fear than fear itself”!
No worries now as the U. of Michigan’s latest survey shows:
This in spite of poor economic expectations:
- Job Openings Hover Near Record Highs The number of available positions continued to dwarf the number of people looking for work last month, according to private-sector estimates, as the U.S. labor market remains tight.
Employers had 11.2 million job openings on March 18, according to estimates from jobs site Indeed. That is a slight decline from the number the government reported in January but remains a historically high figure. (…)
[Indeed’s] Mr. Bunker said that the tightness in the labor market has already reduced in some sectors of the economy such as leisure and hospitality. He said this can be seen through quits trending down and wage growth cooling. (…)
(…) In Germany, the GfK institute said its consumer sentiment index, based on a survey of around 2,000 people, dropped to -15.5 points heading into April from a revised -8.5 points a month earlier and the lowest since February 2021. (…)
In France, the INSEE official statistics agency said its consumer confidence index fell to 91 points from 97 in February, falling short of economists’ expectations in a Reuters poll for 94 and the worst headline figure since February 2021.
“A fall of that extent is rare,” BNP analysts commented in a note that observed that sharper monthly drops had only previously occurred around the 1993 recession and the 2020 lockdown. (…)
Based on a flash estimate last Wednesday, euro zone sentiment collapsed in March to 18.7 points, the lowest level since the start of the COVID-19 crisis in April and May 2020.
Italy, the euro zone’s third-largest economy, also saw a bigger than expected decline in consumer confidence, the national statistics office said last week.