Inflation not a conversation starter at my dinner table
Lots to be thankful for amid the divisiveness.
As Americans gather to give thanks for friends, family, good health (and higher stock prices), the conversation at many tables inevitably turns to inflation and shortages. Some bemoan the high cost of gas and meat, others the inability to find a reliable painter, or shortened hours at favorite restaurants, or ghost-like downtowns. “Where did all the people go?” At my table, this is guaranteed not to be the discussion. My fervent hope is that we can make it through the day without mentioning the “T” word—if you don’t know what I mean, count yourself lucky. Assuming President Biden’s climate and social spending bill passes after Manchin and Sinema take their hacks, we’ve likely seen all we’re going to get out of his economic agenda. Looming midterms make it unlikely Democrats will try reconciliation again next year. With the sausage-making over the “soft” infrastructure package turning off many, Dems can’t afford to further expose intra-party rifts. Polls already suggest a narrow if not impossible path for them to hold their majorities in Congress. Even as the White House and members of Congress hit the road to tout the bipartisan “hard” infrastructure package and individual components of the “soft” package that poll well with voters, surveys show independents aren’t sold. All they see is more spending adding to inflation that’s already squeezing their pocketbooks.
Powell should be reconfirmed easily in what may be the last show of bipartisanship for the foreseeable future. In announcing his decision, Biden said Powell’s top priority would be mitigating climate risks, followed by inflation. Inflation is killing Biden’s approval rating and clearly is on the administration’s mind. Biden on Tuesday announced the U.S. along with other countries would be releasing the strategic oil reserves to try and tamp down oil prices. It’s peanuts in the scheme of things. Only oil producers can really affect prices, and OPEC is holding firm while U.S. output has fallen 13% since 2019. Annualized stock returns under past Fed chairs show Powell’s 15.1% ranks second, just shy of Paul Volcker’s 15.6%. A strong finish to the year could put him over the top. But a Monday morning rally on word he was being renominated quickly reversed as bond yields jumped and tech and other rate-sensitive sectors sold off. Inflation worries, which got a jolt this morning from jobless claims (more below), aren’t going away. Fundstrat’s Tom Lee thinks lackluster breadth, widening bullish sentiment and other technical factors point to choppiness in the weeks ahead and thinks stocks potentially could give up half their gains since early October. He still sees another leg up that will take the S&P 500 to 4,800. (That’s the Federated Hermes forecast, too.) Hey, Santa is not even due for four weeks!
Despite Covid cases rising most everywhere and new lockdowns in parts of Europe, the situation is vastly different than a year ago. Neary 73% of U.S. adults are double-vaccinated. More than 17% already have been infected. That puts the country at or near the 90% herd immunity threshold, depending on how many previously infected also got shots. Deaths and hospitalizations are down dramatically, particularly for people under 65 and for the vaccinated, where breakthrough cases have tended be mild if not asymptomatic. After Q3’s poor GDP report, the word “stagflation”—a combination of high inflation and economic stagnation that evokes one of history’s worst stock-market periods (1966-82)—was popping up all over. It’s a misleading depiction of current conditions. The economy is humming (more below) and stock multiples remain undervalued relative to the level of interest rates and credit spreads. One Credit Suisse analyst says a period of high inflation and commodity prices, robust demand, low interest rates and tight spreads is about as good as it gets for investors. (I want to hang around this person on Thanksgiving.) Bank of America’s bearish Michael Hartnett doesn’t share the optimism. He thinks 2022 will experience a “rates shock” and sharply slower profit growth. (I’m putting him at the children’s table.) Maybe we should use name tags at our table in case no one wants to sit next to me. Truly, I will be the last one to sit down—OBV, next to the one nobody wants to talk to. They better not bring up the T word!
- The economy is booming Weekly jobless claims plunged below 200K to their lowest level since 1969 and well below the weekly average in 2019, when the jobless rate hit 3.5%. If this morning’s second estimate of Q3 GDP was a very sluggish 2.1%, it belies a broad range of newer data pointing to Q4 reacceleration, including October’s surge consumer spending and another rise in incomes. The Atlanta Fed says GDP in the current quarter is tracking at an 8.2% annualized pace, which if it holds would represent the biggest quarterly increase since Q3 2020’s record 34% spike.
- Manufacturing is one reason why Markit’s first take on November manufacturing rose a touch more than expected to almost 60, and this morning’s durable goods report showed business investment rose an eighth straight month in October. The European Union and the U.K. also posted better-than-expected PMI readings.
- Housing is another Amid strong demand for single-family homes, existing home sales unexpectedly rose in October to a 6.34 million annual rate, a 9-month high, and are on pace for their best year in 15 years, the National Association of Realtors said. Sales of homes costing more than $1 million are up more than 100% vs. pre-pandemic levels, and cash-out refis are running at a rate close to 1% of GDP. New home sales also rose in October for the third time in four months.
- The labor market is tight Evercore ISI views the shocking drop in jobless claims as a game changer that’s certain to put more upward pressure on wages and inflation. Core PCE inflation, the Fed’s preferred gauge, already is running at multi-decade highs, with this morning’s report for October putting it at 4.1% year-over-year, a 31-year high.
- Watch what consumers do, not what they say Despite today’s robust spending report, the University of Michigan’s final take on November consumer sentiment remained mired at 10-year lows. Inflation worries were a major reason why, as expectations for inflation one-year out rose to 4.9%, its highest levels since the summer of 2008.
- “Temporary” hardly ever is Republicans were unable to remove Obamacare despite repeated threats to do so, and Dems are betting the same will hold for entitlements in their “soft” infrastructure bill. According to Penn’s Wharton School of Business Budget Model, the House bill would increase spending by $2.1 trillion over the 10-year budget window, but that includes early sunsets on several entitlements. If the provisions are made permanent, it estimates the spending at $4.6 trillion over 10 years.
Biden’s clever move Market odds favored Powell but it was thought Biden also might nominate Fed Gov. Lael Brainard to head bank supervision. Banks may be breathing a sigh of relief as the longtime advocate of tougher banking regulations instead was nominated for vice chair, a post that grants her more stature on macro policy debates and issues such as “inclusive” employment. Plus, Biden is expected to nominate three more doves.
Get your head around the metaverse yet? Bank of America shares that 1 million emojis will have been sent globally by the time you have finished reading this sentence; Ariana Grande drew a record 78 million to her virtual concert in Fortnite, more than the entire population of the U.K.; and quantum computers can solve problems that would take a traditional computer 1 billion years.
I am not going to drink swill, I tell you that The American Farm Bureau, which has been doing its survey on the cost of Thanksgiving dinner since 1986, says the average homecooked turkey feast for 10 is expected to be $53.31 this year, a 14% increase from 2020. On the positive side, stuffing is estimated to be about 52 cents cheaper as compared to last year. Who doesn’t love stuffing?