Slow down the 'V!'
A slower recovery could make for a longer one, too.
What are people worried about? Jobs? (Why? Job openings are at a record high, more below.) A slowdown in inoculations? (Some estimates suggest more than 70% of U.S. adults are now immune through vaccinations or previous exposure.) Inflation and a Fed that’s behind the eight ball? This week’s reports on consumer and producer prices (more below) did shake markets and reinforce a messy political environment. Unprecedented stimulus, supply chain imbalances and prospects for a record tight U.S. labor market are creating high uncertainty about the inflation outlook. Republicans argue Biden’s fiscal overreach isn’t helping. (With five months left in the fiscal year, the nation’s budget deficit already stands at a record $1.9 trillion.) The GOP’s favored to win back the House in the midterms, which could freeze fiscal plans in place and lead to market-friendly gridlock. But the political environment is messy. Infighting such as this week’s ouster of former House Republican Conference Chair Cheney could help the Dems stay in power. If that happens, BCA Research thinks President Biden’s $1.5 trillion American Families Plan is likely. It already puts 80% odds of passage of his $2.3 trillion infrastructure bill, which would end seven decades of declining corporate tax rates if Biden funds it the way he wants. Higher corporate rates would hit big growth and tech companies the hardest, Empirical Research says, with large-cap earnings falling as much as 9% next year.
The situation is messy all over as Covid’s fallout makes it difficult to analyze data. April’s big jobs miss ran contrary to other employment dynamics that remain upbeat. (Excuse me, job openings are at a record high!) The jump in consumer prices belies a trendline rate that’s only back to its modest pre-pandemic level. In fact, a range of high-frequency indicators are proving unreliable and volatile due to stimulus, Covid infections and/or vaccination surges around the world, supply-side shocks and even base effects (the rolling off of negative year-ago prints when the global economy shut down). A common factor in the contradictions is the reality that restarting the economy after a pandemic is bumpier and less predictable than Fed or private economists could model. The question is whether the imbalances prove transitory or persistent. The behavior of the fixed-income market may be instructive. Long rates rose modestly this week but stayed below March highs and well below comparable 2019 levels. Rates on the short end haven’t budged. This uncharted territory comes as financial conditions are easier than ever. Messy! Maybe the “V” slows. So what? Demand isn’t the issue; supply is, and maybe it takes longer to work itself out. That just means the recovery—and low rates—last longer, too.
We really rocked the boat last year. One of my favorite Wall Street sources suggests it’s best to analyze 2019 versus 2022 expectations. If you don’t trust forecasts, then the pre-pandemic trend, perhaps. The 52-week high data is as good as anything Strategas Research has seen in 30 years. This has bullish implications for the next 12 months, though can be climactic in the short term. With the S&P 500 up 10% (12% before this week’s sell-off) in just over four months, the easy money arguably has been made. Until there’s clarity, the market’s likely to be volatile, with the mere mention of “taper’’ by the Fed (maybe at one of this summer’s meetings or at Jackson Hole in August) potentially presenting a nice buying opportunity. Fundamentals look strong, with S&P net margins at new highs and the estimated S&P operating margin for the next 12 months continuing to climb. Q1’s amazingly strong earnings-per-share trends (the 21% beat was the biggest in history) and a robust Fed survey of senior bank loan officers prompted Citigroup to raise both its earnings outlook and S&P target, moves in line with other Wall Street houses. When might this goldilocks environment end? I’m watching the dollar. At some point, the piper has to get paid. But that’s a worry for later. For now, great walking weather arrived in Pittsburgh this week. My student-of-the-market retired neighbor advised me to “sell everything.” This morning over coffee, the Mister lamented “I have a bad feeling about the market.” In the last two days, I have received texts from friends/family suggesting I bet on a market fall. I’ve heard experts/non-experts calling for a summer market crash. And, Joe Manchin is the most powerful person in the country—did you know that? Maybe you did. Can we just chill?
- Excuse me, job openings are at a record high That’s according to the government’s monthly Jobs Openings and Labor Turnover Survey, which showed most industries posting increases and total job openings reaching 8.12 million in March. In the latest NFIB small business survey, “jobs hard to fill’’ hit record levels. And April’s Employment Trends Index, a leading employment indicator, rose strongly.
- Housing has a long way to go Despite early spring bumps, Applied Global Macro Research expects single-family building permits to climb 25% over the next 12 months as builders rush to try and fill a shortage that has home prices climbing to records. Plans to buy a home over the next six months are at a record high, and with rates remaining low, housing is still broadly affordable for the median-income family.
- Europe joining global recovery The German ZEW survey jumped in May, with its economic expectations’ component soaring to its highest level in more than two decades. The improvements mirror changes in other euro area figures, with the latest European sector PMI data indicating output growth in 18 out of 20 sectors, the highest total since August 2018.
- Inflation’s here! Its anticipated runup arrived on cue in April, with core consumer and producer prices coming in well above elevated expectations. Base effects were key factors but didn’t fully explain the increases. Still, alternative measures suggest underlying consumer price pressures remained subdued, with the Atlanta Fed’s sticky CPI and core sticky CPI, which exclude the most volatile CPI components, up 2.4% and 2.3% year-over-year (y/y), respectively.
- Slowing down the ‘V’ After March’s stimulus-fed surge, April retail sales were flat and, ex-autos and gasoline, actually fell almost 1% versus expectations for a nearly 1% increase. The y/y sales rate remained robust, in part because year-ago numbers were so awful. The overall story suggests sales may follow a more moderate path than indicated by March's jump as the economy continues to reopen—a view arguably reinforced by this morning's disappointing read on early Michigan consumer sentiment for May.
- Slowing down the ‘V’ Industrial production also moderated in April, with the biggest slowdown occurring in manufacturing, which rose at a quarter of consensus expectations. The slowing did come against an upwardly revised and robust March, indicating manufacturing’s basic health remains strong. As with retail sales, y/y activity soared but again, against a period when everything shut down.
China shrinking? Inconsistencies in its 2020 data that said it’s still growing indicate China’s population likely peaked in the last year. New births plunged 18% y/y in 2020, a result of its former 1-child policy, a low fertility rate and declining marriage rate. Worried about future workers, Liaoning Province along the Northeast coast is seeking to allow couples to have as many babies as they want versus the current 2-child policy.
Hmm After jobless North Carolina workers lost access to all federal unemployment benefit extensions in July 2013, the next three months saw substantial declines in the number of unemployed and the unemployment rate, and corresponding increases in employment and the share of population that is employed. At least 11 states are now considering or have moved to end the pandemic’s emergency jobless benefits, which Bank of America estimates currently allow anyone who earned $32,000 before the pandemic to get more from a combination of state and federal unemployment benefits.
Home sweet home The pandemic caused many younger millennials (ages 28-32) to move back in with Mom and Dad, setting back their trend of independence from their parents and their desire for home ownership by about five years, Bank of America estimates.