Jerome Powell to Testify to Congress on Outlook for Rates, Inflation
Federal Reserve Chair Jerome Powell is likely to caution on Capitol Hill that strong economic activity this year could lead U.S. central bank officials to raise interest rates more than they expected to combat high inflation.
Mr. Powell is set to testify for two days, starting Tuesday at 10 a.m. Eastern time before the Senate Banking Committee and continuing Wednesday before a House committee. They will be his last scheduled public remarks on interest-rate policy, and a final chance to shape market expectations, before the Fed’s next meeting, March 21-22. Officials begin their premeeting quiet period on Saturday. (…)
The St-Louis Fed’s GDP Nowcast is at -1.2% for Q1’23 while the Atlanta Fed’s GDPNow is flagging +2.3%. Presumably with the same database!
A casual observation says that Atlanta has been closer to the actual mark (black). Goldman Sachs just increased its Q1 GDP +2.0%. Its domestic final sales forecast is at +2.3%.
The blowout 517,000 jump in January payrolls caught everyone by surprise, coming in 200,000 higher than even the most optimistic forecasts out there. The unemployment was also better than predicted, falling to a 53-year low of 3.4%. The issue was it didn’t tally with any of the business surveys so to try to explain we looked at one-off factors that could have boosted the numbers.
The most obvious case is the 74,000 jump in government workers led by state and local government education workers. This was due to the ending of strike action by University of California Academics. This merely reverses job losses seen in November and December and means February will experience a return to much lower growth.
This does nothing to explain the strength in private payrolls though, which rose 443,000, so we looked at the raw data. The table below charts what has happened in each month for the past seven years (excluding 2020 where the pandemic disrupted the usual seasonal patterns).
Non-seasonally adjusted employment changes by months and year (millions of jobs)
Source: Macrobond, ING
This first thing to say is that the US economy certainly didn’t add 517,000 jobs in January. January is a month where millions of people lose their jobs. This is partly down to the end of the holiday season with people spending less on retail, leisure and hospitality with businesses typically laying off staff at this time. Then there is the weather impacting with winter temperatures and snow limiting the ability of people to work outside – so the likes of construction gets hit along with mining and oil and gas drilling.
According to the National Oceanic and Atmospheric Administration, January 2023 was the sixth warmest on record and was the warmest on record for the most North Easterly states with fewer snow days than the average over the past 20 years. This meant construction, mining and drilling has been less disrupted and people were out and about more, spending money.
Typically, 2.7-3.1mn jobs are shed in January. This year there were only 2.5mn jobs lost in January, so fewer lay-offs, but not massively so. It is therefore likely that labour hoarding in the form of reduced seasonal layoffs post the holiday season was responsible for the strength, but ‘generous’ seasonal adjustment factors appear to have provided an additional boost to generate the seasonally adjusted 517,000 gain.
What about the February jobs report?
So far we have only had the ISM reports with the manufacturing index falling into contraction territory while the service index jumped four points to its highest level since December 2021. Nonetheless, the relationship month to month with payrolls has been poor. On Wednesday we will get the ADP private sector report, which the market expects to rise to 200,000, but remember that the 106,000 outcome for January gave very misleading signals. We will also get the job vacancy data from the JOLTS report for January, which is forecast to drop by more than 400k. This would still leave it pointing to far more job vacancies than there are Americans to fill them.
Given the mixed messaging we have pencilled in a 200,000 jobs gain for February but we have little confidence in that forecast given the seasonal adjustment factors and unusual weather patterns. The consensus remains tight with a range of 100,000-325,000 so there is the risk of another big miss, both to the upside and the downside.
Note that February was also warmer than normal, in the top 10% warmest Februarys on record.
With over 199 million LinkedIn members in the United States, we have unique insight into the real-time dynamics of Americans starting new jobs and moving to new cities. This month’s LinkedIn Workforce Report looks at our latest national data on hiring and migration trends through February 2023.
- Largest hiring declines seen since April 2020: Nationally, across all industries, hiring decreased 6.5% in February compared to January. This is the largest month-over-month decrease we’ve seen since April 2020, though we don’t expect declines of this magnitude to occur on a regular basis going forward. Year-over-year hiring decreased 27.9% – and hiring has now declined for 10 consecutive months. Additionally, our Workforce Confidence Index data from February showed worker confidence in finding and holding a job declined to its lowest level since 2021, consistent with the decline we’re currently seeing in the LinkedIn Hiring Rate.
Hiring in Government Administration, Consumer Services, Education continue to show resilience: Hiring increased month-over-month in 4 of 20 industries – this is a decrease from the 9 industries that saw hiring gains in January. The industries which saw the biggest month-over-month gains were in Real Estate (+3.7%), Education (+2.1%), and Accommodation (+1.3%). The biggest month-over-month declines were in Manufacturing (-10.7%), Technology, Information and Media (-9.6%), and Construction (-9.2%). Since the hiring slowdowns that began last Spring – April 2022 – the industries that have continued to show the most resilience are Government Administration (-10.1%), Consumer Services (-11.5%), Education (-12.8%). Education was the only industry where hiring remains above pre-pandemic levels. And the Technology, Information and Media industry continues to see declines – with hiring in the sector now just 3.8% above its pandemic low in May 2020.
- Hiring across all metros below pre-pandemic levels: Hiring increased month-over-month in 4 of 20 metro areas we track; this is a decline from the seven metros that saw gains in January. While we saw hiring increases month-over-month in select cities, none of the metros had hiring above pre-pandemic levels. (…)
Housing Market Momentum Stalls as Spring Approaches Rising interest rates are again squeezing affordability and driving mortgage applications to their lowest levels in decades.
Chinese Exports Pull Back Again, Hampering Post-Covid Recovery The export engine that propelled China’s recovery through much of the Covid-19 pandemic sputtered to start the year.
Exports from the world’s second largest economy fell 6.8% during the first two months of 2023 from a year earlier, extending a string of year-over-year declines stretching back to October, data from China’s customs bureau showed Tuesday. (…)
The decline in exports for January and February, which China releases together to smooth out irregularities tied to the Lunar New Year holiday, was less than the 9.9% decline in December and better than the 9% pullback expected by economists surveyed by The Wall Street Journal.
The better-than-expected result likely reflects what appears to have been a one-off boost from the lifting of pandemic restrictions, according to economists from Capital Economics, who say that the outlook for exports could deteriorate again, with foreign demand still in the dumps.
Chinese imports, meanwhile, fell by a larger-than-expected 10.2% in the January to February period, worse than December’s 7.5% year-over-year decline and the 5.1% pullback forecast by surveyed economists. That indicates China’s reopening hasn’t translated into increased infrastructure investment, at least for now.
As a result, China’s trade surplus swelled to $116.88 billion, larger than the $78.01 billion surplus in December. (…)
During the first two months of the year, Chinese exports to Southeast Asia rose 9% from a year earlier, according to Chinese customs data, while shipments to the European Union and the U.S.—China’s second and third-largest trading partners—fell 12.2% and 21.8%, respectively. (…)
In South Korea, a bellwether for global trade, exports shrank for a fifth straight month in February, partly because demand from China remained weak. Outbound shipments from South Korea fell 7.5% last month from a year earlier, though the decline wasn’t as bad as January’s 16.6% drop. Exports of semiconductors plunged 42.5% as global demand for electronics continued to falter. (…)
Last week’s PMIs confirm weak demand for goods from most areas but South-East Asia:
- USA: A further drop in new order inflows contributed to the continued overall decline in manufacturing sector health in February. The rate of contraction was little-changed from that seen in January and was strong overall. Foreign demand conditions also weakened further, with new export orders falling for the ninth month running. The pace of decrease quickened from January and was solid overall.
- Eurozone: New orders fell for a tenth successive month as client destocking, inflation and general economic uncertainty weighed on sales performances.
A notable and stronger drag on demand came from international markets, as evidenced by a quicker decline in new export orders during February. - Japan: New sales fell for the eighth month running, and at the fastest pace since July 2020. Firms commented that orders were dampened by weaknesses in domestic and global economic conditions. Export orders also fell at a steeper rate that was the fastest for 31 months, and meant that foreign demand for Japanese manufactured goods had fallen consistently for a year.
- ASEAN: New order inflows rose for the second consecutive month, and at a quickened pace.
- China: Total new business expanded for the first time in seven months, and at the quickest rate since May 2021.
Companies noted an improvement in foreign demand for Chinese manufactured goods, with new export orders rising for the first time since July 2022.
The bigger story from China is the 10.2% drop in imports after -7.5% in December. Domestic demand remains weak.
DIVERSIFY?
I am no Warren Buffett but I also believe that if you have done your research thoroughly and have properly assessed managements and your margins of safety (valuations), portfolio concentration actually decreases risk. He said:
Risk comes from not knowing what you are doing so wide diversification is only required when investors are ignorant.
You only have to do a very few things in your life so long as you don’t do too many things wrong.
In his latest comments to shareholders, he admits that most of his capital allocation decisions have been ‘no better than so-so’, and that his outstanding results were because of a few ‘truly good decisions’. And few terrible ones, thanks to his focus on valuations (margin of safety), I would add.
China’s Xi Jinping Takes Rare Direct Aim at U.S. in Speech Leader blames Washington-led ‘containment, encirclement and suppression’ for challenges at home
Chinese leader Xi Jinping issued an unusually blunt rebuke of U.S. policy on Monday, blaming what he termed a Washington-led campaign to suppress China for recent challenges facing his country.
“Western countries—led by the U.S.—have implemented all-round containment, encirclement and suppression against us, bringing unprecedentedly severe challenges to our country’s development,” Mr. Xi was quoted by state media as saying on Monday. (…)
The accusation of U.S. suppression of China’s development over the past five years comes as Mr. Xi faces charges from investors that China’s economy has been damaged by his policies, including the emphasis on national security. (…)
The English-language version of Mr. Xi’s speech reported by Xinhua didn’t refer to containment or the U.S. Instead, it quoted him telling fellow officials to “have the courage to fight as the country faces profound and complex changes in both the domestic and international landscape.” (…)
The accusations by Mr. Xi against the U.S., delivered to an audience that includes politically connected businesspeople, appeared in part to be an effort by Mr. Xi to shift blame away from his own policymaking, including tough Covid controls that have weakened the economy and pressure on technology companies that cost the industry some of its dynamism. (…)
“In the coming period of time, the risks and challenges that we face will only increase and intensify ever more,” Mr. Xi was quoted as saying by Xinhua.
Chinese officials have long warned the U.S. against what they call Cold War thinking, and Mr. Xi appeared to make a similar point in his November summit with President Biden, according to China’s official summary of the meeting. (…)
- China’s Foreign Minister Says Ties With U.S. Risk Going Off the Rails In blunt briefing, Qin Gang warns Washington against indulging ‘new McCarthyism,’ defends Beijing’s ties with Moscow
(…) “If the United States does not hit the brakes but continues to speed down the wrong path, no amount of guardrails can prevent derailing and there will surely be conflict and confrontation,” said Mr. Qin, who was named foreign minister in late December after serving as China’s ambassador to the U.S. “Who will bear the consequences? Such competition is a reckless gamble.”
It isn’t the first time China has warned the U.S. about the risk of conflict if the countries’ relationship isn’t handled well, although Chinese officials have tended to speak more elliptically about the risk of conflict. (…)
“China and Russia have found a path of major country relations featuring strategic trust and good neighborliness, setting a good example for international relations,” Mr. Qin said. “The more unstable the world becomes, the more imperative it is for China and Russia to steadily advance their relations.” (…)
- India, Wary of China, Expands Trade Ties With the West The nation is gradually pivoting from its nonaligned, protectionist history, though obstacles remain
(…) India wants more protection from China, and freer trade with everyone else. That’s a lot like the U.S., except India starts with high barriers and is lowering them for friends while the U.S. starts with low barriers and is raising them on China. It is a more selective model of free trade than the universal model idealized since the early 1990s. (…)
- Canada’s PM Justin Trudeau ordered a review of allegations China interfered in Canada’s elections, appointing a special investigator. The issue will also be studied by a group of lawmakers cleared to see top-secret intelligence.
KEEP UP WITH THE ACRONYMS
The TINA — “there is no alternative” to stocks — trade is giving way to TARA, TAPAS and even TIARA, according to Goldman Sachs, Deutsche Bank and Insight Investment, respectively. Translations: there are reasonable alternatives, there are plenty of alternatives, and there is a realistic alternative, Axios’ Hope writes.