Last year's transitory is this year's pivot
And it doesn't look like the Fed is planning one anytime soon.
This week I surrounded myself with hundreds of bankers and several Uber drivers. It’s Bankers Conference season, with my first stop in Naples for the New York bankers, followed by the Nashville bankers and to finish the week, Alabama bankers. Jovial groups all—to include the Uber drivers! On my way to Naples, my driver treated me to spa music. Then in Music City, my driver loves Al Green music as much as I do. He took requests and serenaded me—don’t worry boss, I gave him just the standard tip. My driver in Birmingham is a retired science teacher (his class dissected frogs [OK] and cats [!]) and football coach (some of his students went onto the NFL). Displaying his gift of gab, he’s driven band members of some famous country singers, and met people from 90 countries. He’s driven many a young person who works hard and has a plan. “You hear all the negative things, but Southern hospitality is real. Uber driving is the easiest thing I’ve ever done.” As with my Naple’s driver, all is chill but for the traffic. As with my Nashville driver, he missed a turn by talking to me too much. Speaking of talking, Chair Powell’s insistence that inflation was transitory ended abruptly last year. And the market’s quest for “pivot talk” this year was put to bed at Wednesday’s press conference. Rather, he hit the market with a higher-for-longer message. But TrendMacro wonders if this interpretation misses what arguably was the only real and significant change—the FOMC’s acknowledgment in its statement that rate hikes hit with a lag. Finally, the “lag” acknowledgment. And uttered about 10 times. Pivot hint? Nope.
Indeed, Chair Powell admitted the Fed’s aggressiveness (the fastest and largest rate hikes in 40 years) has diminished odds of a soft landing. Wage pressures remain elevated—non-supervisory workers in the lowest wage sector, leisure & hospitality, are seeing year-over-year (y/y) increases of 7.9%. American Airlines pilots this week rejected a contract offering a 20% wage increase over two years. It’s not just here. In Germany, where October consumer prices shot up 11.6% even with Europe on the edge of recession, some unions are seeking pay hikes up to 8%. Not all workers are getting big raises. But with labor markets stretched, it’s going to take time to bring wage costs down to a 3.5% pace that’s consistent with 2% inflation. To get there in the U.S., Applied Global Macro Research thinks it may take multiple years of unemployment above 5% or a shorter period with an even higher jobless rate. A mild recession may not be enough. A labor market that “continues to be out of balance” is the biggest impediment to bringing down inflation, Powell said, crushing hopes for an early pause (and traders positioned for one). Although today’s strong jobs report (see below) shows a labor market still tight as a drum, there was something for everyone still in it. Strap yourself in for next week’s CPI report.
The consumer is a conundrum for the Fed. Buoyed by the strong job growth and balance sheets swelled with Covid stimulus and savings, Americans continue to spend, feeding demand at the same time the Fed is trying to cool it. According to Wards, total vehicle sales rose a fourth straight month in October at a 14.9 million annualized rate, the best month since January. If that pace holds, autos could lift Q4 GDP by 1.5 percentage points on its own. This comes on top of the strong build-in for Q4, with real consumption running at 3.7% annualized pace over August-September. Headwinds are building, however. This week, Lyft, Twitter, Stripe, Opendoor, Chime, Udaan and Amazon joined Alphabet, Apple, Microsoft and Uber in announcing widespread Big Tech layoffs and hiring freezes, and surveys show retailers pulling back on holiday hiring. At the same time, after reaching an unprecedented 9-9.5 years’ worth of consumption at the height of the pandemic-era asset bubble, household net worth has been plummeting on the steep sell-off in equity and bond prices and the recent (and accelerating) decline in home prices. Citigroup estimates the year-to-date falloff at $8.6 trillion! All this suggests the resilient consumer could weaken into the new year. Did you hear that, Jerome? Nope. Last year’s transitory is this year’s pivot.
- Something for everyone Though slower than September’s pace, October nonfarm jobs rose a more-than-expected 261K and the prior two months were revised up modestly. Yet y/y hourly earnings moderated, and the household survey reflected softness as residential employment shrank by 328K, the participation rate ticked down and the jobless rate rose two-tenths to 3.7%. All inflation friendly. Elsewhere, ADP’s private payroll survey increased above consensus, as did September job openings.
- Some price pressures are easing At -5.7%, the decline in Apartment List’s rent survey was the largest in its brief 5-year history and a far cry from the 18.1% highs a year ago. Elsewhere, used-car prices fell sharply, supplier delivery times contracted for the first since pandemic’s start, and new vehicle prices, import prices, freight costs and prices paid (more below) moderated.
- Pockets of value emerging Valuations among emerging-market countries outside of China are trading at cheap multiples, and their return on equity is at the highest level in decades. Many are benefitting from the run-up in energy and commodity prices due to the war, and to broad central bank tightening a year before the Fed, helping ease the sting of a strong dollar in many EM countries.
- Bad news is good news ISM manufacturing fell in October, with cost pressures diminishing amid fading demand. Notably, delivery times fell to a March 2009 low, new orders for goods continued to contract and prices fell to their lowest level since May 2020. The S&P (Markit) manufacturing PMI also was consistent with a stalled factory sector. Globally, new orders are only expanding in a quarter of manufacturing PMIs, matching crisis lows in ’98 (Long-Term Capital Management), ’01 (tech wreck), ’08 (global financial crisis) and ’20 (Covid pandemic).
- Bad news is good news The final S&P services PMI for October was revised slightly higher but still entrenched in contraction territory, with steepening deterioration in business activity conditions across the sector. New business from abroad declined at the second-fastest rate since May 2020 and employment growth stalled, ending 27 months of expansion. The ISM services gauge also declined but stayed expansionary, equating to its slowest pace of growth since its May ’20 contraction.
- This should weigh on Q4 GDP The overall U.S. trade deficit reversed course in September, widening by $7.6 billion. This suggests Q3’s outsized contribution to GDP growth from trade is unlikely to carry into Q4 as a strong dollar and slowing/contracting overseas economies knee-cap export opportunities.
I’ve got my popcorn ready for Tuesday night! It’s looking increasingly likely that Republicans will retake the House and Senate. Polls show Biden to be as unpopular as any president heading into the first midterm election, while approval for Congress, overall satisfaction and views of economic conditions are at or below all-time pre-midterm lows as far back as Gallup has collected the data.
Tarnished gold So much for gold as an inflation hedge. October marked the first time the precious metal has fallen seven straight months since 1982, matching 1869 for the longest losing streak in the 300 years for which there is data. It’s closing in on resistance at the 38.2% retracement level off 2018’s high, below which the downward trend could accelerate.
Best Covid story ever So says TrendMacro, which notes that when a big Covid breakout hit Shanghai Disneyland, instead of locking everybody out, they locked everybody in. Rides and venues continued to operate for those trapped inside.