'Hyperinflation is coming. I guarantee it'
I don't share my neighbor's worry. But this week reminds it's never a 1-way market.
These are not my words, but those of my day-trading neighbor, whom I see often as we walk our respective pups. Retired, very intelligent, but not a veteran of my business, he’s got strong convictions, which he is most happy to share! Forward inflation expectations have jumped to their highest level since January, and Treasury Inflation-Protected Securities have been on a run since March. June and July combined produced the largest increase in global inflation since 2005, UBS says. But a quarter of that was the consumer energy price rebound, which has now retraced about 40% of its March-May plunge. There also was also a sharp increase in core inflation, though again, off a very low floor after Covid lockdowns evaporated demand. In other words, the Swiss global investment bank isn’t sniffing the beginning of an inflation surge, just a recovery off deep lows related to one-off factors that are about to reverse. For example, core PCE in the U.S. stood at 1.3% year-over-year (y/y) in July while core inflation in the eurozone fell to an all-time low, with the headline rate declining 0.2% y/y, its first negative print since May 2016. A key aim of the Fed’s policy shift is to allow inflation to run above its 2% target to make up for a long-running deficit—headline PCE inflation has run above 2% for only 14 out of 102 months since the target was introduced in February 2012. Hyperinflation? That seems to be a worry for a day far, far away.
Volatility arrived on schedule in September, a historically volatile month, particularly in an election year. Just as matter of fact, fiscal stimulus in almost every country has been incomparably bigger than anyone thought possible in March. Gavekal Research notes that investors appear to have decided to believe in Keynesian policies with 100% certainty, and even if they are wrong about this, the evidence to shake this conviction will not be visible for at least another year. Gavekal posits the Covid debacle could mark the start of a successful new era of expansionary demand management comparable to the Keynesian “golden age” of the 1950s and early 1960s. Bullish. Fed Chair Powell’s speech last week arguably affirmed this view of a once-in-a-generation economic regime change, confirming a belief many investors have held—that policy rates will not increase for at least the next two years, regardless of the size of budget deficits, movements in the dollar, declines in unemployment or changing inflation forecasts. Even when inflation does eventually start to accelerate, the 2% rate long viewed as the Fed’s overriding objective has been downgraded to just another statistic. Going forward, the central bank no longer can pretend its conduct can be reduced to simple inflation targeting. Instead, it also will take into account powerful arguments for balancing inflation pressures against unemployment, capacity utilization, economic growth, financial stability and other variables before choosing to act in a way that may weaken activity, damage investor confidence or raise government borrowing costs. This change has several investment implications, all of them bullish.
September is always a tricky month (“the worst”) and, as Evercore ISI notes, we entered it overbought, uncorrected, riding a wave of momentum, going into an election while sending our kids back to school in a pandemic, the sum of which is a recipe for volatility. Indeed, the market was 60% off its lows, with Tech’s adjusted S&P 500 sector weighting peaking at 44% (!) on Tuesday. Thursday’s rout brought about the worst breadth reading since June, and more consolidation is likely. But Renaissance Macro isn’t hearing alarm bells signaling an imminent deep sell-off, only possibly a renewed rotation toward value cyclicals and away from Tech amid increasing signs of solid recovery (more below) and a Fed on ultra-easy street. The backdrop for risk-taking remains strong and intact. It is highly unlikely a major market turning point commenced in thin summer trading going into Labor Day weekend. While it has waffled of late after hitting a record high, gold remains in a strong uptrend. The ratio of its total return to the S&P just broke through its 7-year moving average, a break that historically has been highly favorable for the precious metal. Now, my neighbor knows how this will all end, with the dollar collapsing (sounds like my Mister), suggesting we buy hard assets—real estate, art, gold. You know, because of the hyperinflation. Perhaps he should consider a second dog?
- Nothing is more important than jobs Despite grumbling about a private payroll miss (more below), today’s 1.4 million increase in total August nonfarm jobs surprised and contained a lot of underlying positives. The unemployment rate fell to a much lower-than-expected 8.4% as household employment surged 3.8 million, with employment of millennials up a strong 2.4%. The participation rate rose again; average hours worked jumped and are on track to climb 26% quarter-over-quarter in Q3; higher hourly earnings topped forecasts and are up 4.4% y/y; and perhaps most notably, people out of work for 5-14 weeks fell by 2.8 million. Elsewhere, weekly jobless claims fell well below 1 million and Challenger job-cut announcements plunged by more than half in August.
- Manufacturing ‘V’ The ISM gauge jumped to 56 in August, well above expectations and led by a 16-year high in new orders. July factory orders also rose solidly a second straight month. Global PMI data also was consistent with continued recovery, with all regions—developed markets, emerging markets (EM), EM Asia, Central and Eastern Europe along with the Middle East and Africa, and Latin America—posting expanding activity.
- Don’t fight the Feds Since the start of this year, the combined balance sheets of the Fed, European Central Bank (ECB) and the Bank of Japan have jumped $6.3 trillion to a record $20.9 trillion, led by the Fed (up $2.9 trillion to $7 trillion), with the ECB a close second (up $2.4 trillion to $7.6 trillion).
- Nothing is more important than jobs August’s gains included 238,000 temporary Census workers as private payrolls fell well short of expectations. ADP’s separate count was worse, coming in at less than half the consensus for a gain of 1 million. The third straight month of moderating job gains has left nonfarm jobs 11.5 million below their pre-pandemic level. The reason jobless claims fell 1 million was because the Labor Department altered seasonal factors. Had it stuck with what it’s been using, claims would have been above 1 million again. Also, despite their decline, job cuts for August were still the highest for the month since 2002.
- Not out of the woods State & local government finances continue to deteriorate sharply, meaning they must either borrow more in a market with uncertain demand (particularly for lower-quality debt) or cut expenditures, primarily labor costs. Because state & local government employment accounts for more than 13% of payroll employment, this represents a potential labor-market headwind heading into fall.
- Services soften ISM’s final read on August slipped and, while still solidly expansionary, was led by a 3-month low in new orders and a pullback in business activity, both suggesting softening demand. Markit’s separate read was more bullish, moving into expansion territory for the first time since January.
Why isn’t the media talking about this? That’s what TIS Group asks, citing revised Centers for Disease Control statistics that say Covid-19 is only directly responsible for 6% of the reported Covid deaths in the U.S., or around 10-11,000 people. The rest of deaths reflect Covid as a contributing factor to existing illnesses, particularly among the elderly. From its perspective, this suggests the Covid story is pretty much over and that lockdowns and other measures that hurt the economy aren’t necessary.
Don’t bet on it Looking at the betting sites vs. the polls, Washington Analysis finds that polls proved more accurate in calling the 2016 presidential election and Brexit. In both cases, the predicted poll numbers were within the margin of error of actual vote percentages, and the RealClearPolitics average was very close to the final national numbers in the 2016 presidential race.
Shopping in my slippers! Per a report in Women's Wear Daily, Amazon may launch a new luxury platform this month with a dozen brands from the U.S. and Europe (though, reportedly, only one brand will participate initially). The site will let brands operate their own place to sell on Amazon.com, with control over product placement, pricing and promotions, while Amazon's fulfillment/logistics/returns network would handle the back end.