FOMC notes and updated indicators (2022 09 21)

FOMC NOTES*

  • Fed’s third straight 75 basis-point-hike drove “a much more hawkish dot plot that showed 125 more basis points of hikes this year” (so a potential fourth 75-basis-point increase in November) and a terminal rate of 4.6%
  • Policymakers substantially revised other economic projections and now see growth at just 0.2% this year, down from the 1.7% forecast in June. They now see the unemployment rate rising to 4.4% next year and inflation not falling to 2% until 2025
  • Chair Powell, “my main message has not changed at all since Jackson Hole” (recall: “historical record cautions strongly against prematurely loosening policy”) and “our job is to deliver price stability…central bankers see that as a precursor for health in the rest of the economy”
  • Powell said growth will need to be below trend for a while, and labor markets will need to soften, but he refrained from being too forceful on the subject of economic pain. Delays in restoring price stability could bring “more pain”

OTHER INDICATORS:

  • The Bloomberg Dollar Spot Index climbed to a record high
  • The yield on 10-year Treasuries advanced 12 basis points to 3.65%
  • US Leading Economic Index (LEI) fell 0.3% in Aug., vs. est. -0.1% (six-month annualized LEI narrowed to -5.3%)
  • US asking rents rose in August by the slowest pace in a year, a sign the hot rental market could finally be cooling, according to real estate brokerage Redfin. The national median asking rent rose 11% year-over-year to a record high of $2,039
  • Mortgage rates in US advance to 6.29% – the highest since October 2008

* source for many of these notes Stifel Economics

Consumer credit and spending momentum

Today’s Federal Reserve Consumer Credit Report (G.19) reported the following for July:

Consumer credit increased at a seasonally adjusted annual rate of 6.2 percent. Revolving credit increased at an annual rate of 11.6 percent, while nonrevolving credit increased at an annual rate of 4.4 percent. 

This reflects a month-over-month decrease in revolving credit from 16.8 billion to 11.6. See the full G.19 report here.

Directionally this is consistent with the most recent Visa Spending Momentum Index (SMI) which reported the following (Aug. 11):

Visa’s U.S. Spending Momentum Index (SMI) declined to 95.0 in July (seasonally adjusted), a 4.5-point deterioration from June. The SMI has now recorded a month-over-month (MoM) decline in five out of seven months in 2022 and the trend is clear: Most consumers are spending less via payment methods. All major components of the SMI declined in July—the indexes for discretionary and non-discretionary spending are both firmly below 100—indicating that spending activity is becoming concentrated among a smaller share of consumers.

The bottom or is this time it’s different?

A number of market analysts observe that historically, an index can retrace a very significant amount (up to two-thirds; cf. Colby) while still in a primary trend. Some interpret the Dow Theory as supporting this:

…signals that occur on one index must match or correspond with the signals on the other. If one index, such as the Dow Jones Industrial Average, is confirming a new primary uptrend, but another index remains in a primary downward trend, traders should not assume that a new trend has begun (Investopedia).

BofA Global believes this to be the case for a very specific reason: household majority position of the overall market that has not sold, yet:

U.S. households now own roughly 52% of the stock market. And a look at three major market plunges since 2000 (see chart) shows that equities only bottomed a few quarters after significant selling activity from households occurred.

BofA’s research investment team said a common refrain from July investor meetings was: “Everybody’s already bearish, might as well buy.” But they still favor cash, credit, and equities, in that order. Or at least until households, the “decision-maker,” decides to make a move and sell.

Gated article but full post access here.

July CPI – hot, cold, or goldilocks for the Fed?

For years the monthly CPI report has been rather routine, with decades of low inflation and the challenge, from the perspective of the Fed, to target slightly higher, target inflation rates – something that sounds almost absurd in our present time. As always, there is a challenge on the part of the Federal Reserve to not overreact in one direction or another. The conundrum is more than two years of highly stimulative activity that followed more than a decade of stimulative activity. The discussion of how behind the Central Bank may be is an entirely different discussion. For now, it is a question of how much, how fast, and a very interesting question on the part of the markets regarding interpretation. Below is an excerpt from the Chief Economist at Stifel who presents a balanced and thoughtful assessment:

July CPI is expected to rise 0.2% and 8.7% over the past 12 months, according to Bloomberg data. Although, some including the Cleveland Fed anticipate a slightly higher read at 8.8%. In either case, this would be a welcome reprieve from a 9.1% near-term peak in June, although from a monetary policy perspective, may prove underwhelming. Committee members, after all, have been clear several months of a marked reduction in prices is needed before the Fed can comfortably say inflation is trending back under control. Therefore, one month’s minimal decline does not make a trend and should not have a material impact on the Committee’s latest hawkish rhetoric, or plans to move forward with a potential third-round 75bp hike in September.

…Investors, meanwhile, are still unconvinced of the Fed’s resolve to fight inflation no matter the costs with the 10-year restrained relative to a federal funds rate of 2.50% and a likely rise to 3.50% by year-end. As a result, expectations continue to ping pong between a 50bp or 75bp rise next month. A cooler-than-expected inflation report will likely tip the scale in the direction of a smaller move, while a hotter-than-expected report will all but solidify forecasts for 75bps.

Graphic source/credit: Stifel

Employment Cost Index (ECI) from the BLS for JUNE 2022 – wages continue to inch higher

ECI for June 2022 (released today) demonstrates continued wage pressure, which is good and bad at the same time, especially in an inflationary environment:

Compensation costs for civilian workers increased 1.3 percent, seasonally adjusted, for the 3-month period ending in June 2022, the U.S. Bureau of Labor Statistics reported today. Wages and salaries increased 1.4 percent and benefit costs increased 1.2 percent from March 2022.

Compensation costs for civilian workers increased 5.1 percent for the 12-month period ending in June 2022 and increased 2.9 percent in June 2021. Wages and salaries increased 5.3 percent for the 12-month period ending in June 2022 and increased 3.2 percent for the 12-month period ending in June 2021. Benefit costs increased 4.8 percent over the year and increased 2.2 percent for the 12-month period ending in June 2021. (See chart 2 and tables A, 4, 8, and 12.)

WHY THIS MATTERS: inflation. Especially in a service economy (but everything else as well), this is a major “M & O” cost for companies and even local governments. If this cools as hiring slows down, great, but if not the Fed will have to continue to act. Below is a breakdown by employment type and one notable thing: local governments. Local governments (in California especially) typically follow CPI as a guide for collective bargaining adjustments. This year, soaring CPI has provided more leverage than there has been in decades for upward adjustments to wages. These adjustments are not reflected in the table below and my guess is they’re delayed.

The full report can be viewed here, FRED interactive chart here, and the trend below.

Pending Home Sales Fell 8.6% in June – Year-over-year, transactions DOWN 20.0%

Excerpt from the June pending home sales report from NAR:

Homes were 80% more expensive in June 2022 than in June 2019

    • Homes were 80% more expensive in June 2022 than in June 2019
    • Pending home sales declined 8.6% from May as escalating mortgage rates and housing prices impacted potential buyers.
    • Pending sales retreated in all four major regions, with the West experiencing the largest monthly decline.
    • Compared to the previous year, contract signings dropped by double digits in each region as pending sales in the West were down by nearly a third.

“The Pending Home Sales Index (PHSI), a forward-looking indicator of home sales based on contract signings, dipped 8.6% to 91.0 in June. Year-over-year, transactions shrank 20.0%. An index of 100 is equal to the level of contract activity in 2001.”

See full report here.

Where capital flows are moving to hedge against inflation

It has been so long for most of us and never for many to consider the impacts of inflation as a driver of investment decisions – but then again, the last two years of the pandemic have accelerated radical and essential changes to business and society (to use an old-fashioned summary phrase). 

There are traditional ways we have thought about inflation but many of these are tinctured with models we either grew up with, formally studied or both. The general thought is to divert money into tangible assets or as Elon Musk has advised, “physical things like a home or stock in companies you think make good products.” Warren Buffett in the same article advises investments in revenues generating assets such as great companies that produce products or deliver services and provides jobs. 

The Financial Times notes a distinctive shift:

Investors are buying more US farmland in search of a hedge against inflation as commodity shortfalls caused by Russia’s invasion of Ukraine drive world food prices to record highs.

Land values in the Midwest grain belt have gained 25-30 percent in the past year while auctions draw intense bidding for available ground.

FT notes that larger investors, funds, and institutions are not new to this asset class, but the volume of increase is what’s notable, which is driving inflation in the farmland itself, which in some cases has, “outstripped farmland’s earnings potential” which is thought to be offset by the overall value. 

Another post on Investopedia, 9 Asset Classes for Protection Against Inflation covers a blend of asset categories that may function as a hedge, including some that may address the impact of devalued currency. 

CPI: Consumer Purchasing Power (U.S. Dollars)

Healthy body and mind: America’s oldest competitive snowboarder

Absolutely inspiring – after practicing law for decades, in Life 2.0, “it’s time to do something else.” This something else involves healthy body and mind, and interaction with people. 

From the Los Angeles Times:

Dick Schulze, 76, didn’t take up snowboarding until his early 50s. Since then, he has competed in amateur and professional events around the world, including the 2006 Olympic qualifiers, in which he competed against Shaun White.

…Up he goes, toward the blue sky, scaling the bank of snow before a hop and quick pivot sends him sailing back down again. Down he glides, across the slope like a knife smoothing butter on toast, before pinwheeling through a series of small turns…Dick Schulze…at age 76 defies both age and gravity. He is the country’s oldest competitive snowboarder, a relative late bloomer who didn’t take up the sport until his 50s and plans, despite a titanium knee and a fall that crumpled his helmet and blacked him out, to keep going until he hits at least 100.

Because the combination of speed and agility — the sensation of skimming through a giant bowl of whipped cream, of hurtling forward like the brakes have gone out, of moving with the fluid ease of quicksilver — thrills him in ways he can’t describe. Unlike when he navigates a field of moguls…or flies down a black diamond run…Schulze struggles to explain his passion and obsession. “There’s something very sensual about the way a snowboard moves,” he finally said after grasping for the words. “That’s about the only answer I can really give.”

This month in Ford’s history: its greatest market failure

From Benzinga:

This Day In Market History: The Debut Of The Edsel, Ford’s Biggest Flop…in 1957, Ford Motor Company unveiled the Edsel.

The Edsel is infamous as Ford’s costliest mistake in history. Experts estimate the Edsel cost Ford roughly $350 million ($2.3 billion in 2016 dollars) in losses, or roughly $3,200 per vehicle sold.

The Edsel had such a negative impact on Ford’s finances that the company’s net income per share dropped from $5.40 in 1957 to just $2.12 in 1958. Ford also cut its dividend from $2.40 to $2.00 to mitigate the Edsel’s impact on its balance sheet. Ford’s share price itself dropped from above $60 to below $40.

Experts cite a U.S. economic recession, the Edsel’s unappealing name, poor marketing, unreliability, unappealing design and other of potential explanations for the car’s poor performance in the market. Whatever the reason, Ford discontinued the Edsel in 1959, just two years after its launch.

Source: The Henry Ford

It is difficult to imagine this kind of event in the age of NFTs and red hot IPOs (that in some cases we may not be entirely sure what it is the company will produce, if anything). a Washington Post article concluded, “the idea for the Edsel came from Ford executives who were thinking about market niches when they should have been thinking about cars.” But the story is still cautionary from the standpoint of hype, and consumer sociology as the Edsel ultimately failed:

because consumers did not buy it…in reality, however, Ford terminated the Edsel largely because shortly before Ford introduced the car a change in leadership brought a change in corporate strategy that made the Edsel irrelevant to Ford Motor Company’s (FMCs) long-range plans (Dicke, 2010).

The same author in an interesting assessment of what went wrong strategically concludes:

The Edsel was also a reassuring failure in the sense that it in no way challenged the basic soundness of the American economy. As the Wall Street Journal pointed out in its editorial/obituary, consumers could reject any product for any reason or for no reason. After the 1958 model year people rejected the Edsel because they did not like the brand not because it had any serious mechanical deficiencies. Consumers could afford to reject a US$ 250 million investment by an automaker for trivial reasons because they had faith that the auto industry could absorb the loss and come up with something more in tune with their tastes (Dicke, 2010).

See the full paper on Wiley here

Vintage Edsel Car – Library of Congress


Alameda County revises COVID-19 death toll down by 25%

According to the County of Alameda:

Using the older definition of COVID-19 deaths, a resident who had COVID-19 but died due to another cause, like a car accident, this person would be included in the total number of reported COVID-19 deaths for Alameda County. Under the updated definition of COVID-19 deaths, this person would not be included in the total because COVID-19 was not a contributing factor in the death.

With much discussion on public trust, it is possible to suspend judgement but still ask about the timing of this decision and announcement? The County states, “aligning with the State’s definition will require Alameda County to report as COVID-19 deaths only those people who died as a direct result of COVID-19.” Why wasn’t this a discussion during the highest period of impact during the pandemic? See the full press release here.

Supply chain bottleneck: corporate panic buying

We are a full-orbed panic buy culture, and current behavior would indicate this will be the post-pandem norm as noted the other day:

But now it is bleeding over into corporate panic buying due to supply chain restraints. From Yahoo Finance, The World Economy Is Suddenly Running Low on Everything:

A year ago, as the pandemic ravaged country after country and economies shuddered, consumers were the ones panic-buying. Today, on the rebound, it’s companies furiously trying to stock up.

Mattress producers to car manufacturers to aluminum foil makers are buying more material than they need to survive the breakneck speed at which demand for goods is recovering and assuage that primal fear of running out. The frenzy is pushing supply chains to the brink of seizing up. Shortages, transportation bottlenecks and price spikes are nearing the highest levels in recent memory, raising concern that a supercharged global economy will stoke inflation.

Copper, iron ore and steel. Corn, coffee, wheat and soybeans. Lumber, semiconductors, plastic and cardboard for packaging. The world is seemingly low on all of it. “You name it, and we have a shortage on it,” Tom Linebarger, chairman and chief executive of engine and generator manufacturer Cummins Inc., said on a call this month. Clients are “trying to get everything they can because they see high demand,” Jennifer Rumsey, the Columbus, Indiana-based company’s president, said. “They think it’s going to extend into next year.”

The difference between the big crunch of 2021 and past supply disruptions is the sheer magnitude of it, and the fact that there is — as far as anyone can tell — no clear end in sight.

An end in sight is yet to be determined but these constraints are certainly related to some of the short-term inflation that is currently being somewhat over-reported but still exists, “essentially what people are telling us to expect is that it’s going to be hard to get supply up to a place where it matches demand.”