Category: Economy

Household Income That’s Subject to Taxes Declines Next Year

Posted on by phoffman@channelchek.com
Image Credit: JD Hancock (Flickr)

These Are the New Federal Tax Brackets and Standard Deductions For 2023

Now for the inflation good news. Thankfully, as it relates to federal income taxes, the IRS makes annual adjustments to certain tax provisions. Simply put, the higher the inflation, the more tax credit benefit, which includes tax credits and taxable wages adjusted downward. So, in addition to receiving much higher COLA increases on Social Security payments and earning an interest rate in excess of 9% on U.S. Savings Bonds, those making an income in 2023 are likely to see more take-home pay.

The IRS Numbers Are In

The IRS announced the 2023 inflation adjustments to the standard deduction and other tax provisions for the 2023 tax year. The adjustments affect 60 provisions in the tax code, and leave a few key provisions unchanged.

Highlights of Changes in Revenue Procedure 2021-38

The tax year 2023 adjustments described below generally apply to tax returns filed in 2024.  A higher level of details about these annual adjustments can be found in IRS Revenue Procedure 2022-38PDF.

The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.

 Marginal Rates: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).

The other rates are:

  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly).

The lowest rate is 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).

 The Alternative Minimum Tax exemption amount for tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300). The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption began to phase out at $1,079,800).

 The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.

 For 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022.

 For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.

 For tax year 2023, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200 from tax year 2022; but not more than $3,950, an increase of $250 from tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for tax year 2022. For family coverage, the out-of-pocket expense limit is $9,650 for tax year 2023, an increase of $600 from tax year 2022.

 For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.

 Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.

 The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2021.

 The maximum credit allowed for adoptions for tax year 2023 is the amount of qualified adoption expenses up to $15,950, up from $14,890 for 2022.

Brand New for 2023

The Inflation Reduction Act extended some energy-related tax breaks and indexed for inflation the energy-efficient commercial buildings deduction beginning with the tax year 2023. For 2023, the applicable dollar value used to determine the maximum allowance of the deduction is $0.54 increased by $0.02 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent (but not above $1.07). The applicable dollar value used to determine the increased deduction amount for certain property is $2.68 increased (but not above $5.36) by $0.11 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent.

Items Unaffected by Inflation Indexing

By statute, these items that were indexed for inflation in the past are currently not adjusted.

The personal exemption for tax year 2023 remains at 0, as it was for 2022, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.

 For 2023, as in 2022, 2021, 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.

 The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).

What Else is Impacted

The maximum contribution amount for a 401(k) or similar workplace retirement plan is governed by yet another formula that uses September inflation data. It is estimated that the contribution limit will increase to $22,500 in 2023 from $20,500 this year and the catch-contribution amount for those age 50 or more will rise from $6,500 to at least $7,500.

The child tax credit under current law is $2,000 per child is not adjusted for inflation. But the additional child tax credit, which is refundable and available even to taxpayers that have no tax liability, is adjusted for inflation. It is expected to increase from $1,500 to $1,600 in 2023.

For those that look forward to capping out payments to Social Security, there is bad news. This has also increased. According to the 2022 Social Security Trustees Report, the wage base tax rate is projected to increase 5.5% from $147,000 to $155,100 in 2023.

Costs are rising, but so are deductions. It’s improbable that the reduced taxes will offset skyrocketing inflation, but at least there is one financial category that is helped by the increases.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023

Small Caps are Bowling Over Large Caps – Here’s Why

Posted on by phoffman@channelchek.com
Image Courtesy of Bowlero (BOWL)

Tailwinds Causing Investors to Love the Small Cap Sector

Investors have been reeling in U.S. small-cap stocks, and many have experienced the market rewarding them. As the U.S. dollar has been unrelentingly strong in 2022, the cost of products in any other currency has increased, this makes sales more difficult for multinational companies. The lower sales, of course, have the impact of weighing on the profits of U.S. companies that derive a large part of their earnings from overseas trade. This puts the smaller stocks at an advantage.

U.S. Dollar Tailwind

Goods valued in dollars, for example, using The WSJ Dollar Index which measures a basket of 16 currencies against the U.S. currency, are now up 16% on the year. This represents the minimum increase of the cost of products sold after the foreign exchange transaction, before inflation.  

This has little impact on small U.S.-based companies that don’t transact as much or at all outside the U.S. borders. This is because companies in the small-cap S&P 600 generate only 20% of their revenue outside the U.S., compared with large-cap S&P 500 stocks that generate 40% of sales internationally, according to FactSet.

This by itself gives small-cap stocks, in the aggregate, an edge over large-cap indexes like the S&P 500. However, small-caps haven’t been unscathed by the overall negative market sentiment this year. But, in recent months, value investors have been putting more upward pressure on the smaller, more U.S.-centric companies than on companies in the Nasdaq 100 or S&P 500. In fact, the small-cap Russell index is the only one of the three indexes showing green over the past three months. It has also been outperforming in shorter periods like one month, 10 days, and 5 days.

Value Tailwind

Wall Street often uses the ratio of a company’s share price to its earnings (P/E ratio) as a gauge for whether a stock appears cheap or overpriced. The small-cap universe, by this measure, is very attractive relative to themselves in recent years and certainly relative to large-cap valuations now.

The S&P 600 is trading at 10.8 times expected earnings over the next 12 months, according to FactSet as of Friday. That is below its 20-year average of 15.5 and well below the S&P 500’s forward price/earnings ratio of 15.3.

The Russell Small-Cap 2000 is up .36% versus the S&P 500, down 3.85%, and Nasdaq 100, down 7.70%. Not shown on the graph below, the S&P 600 small cap index is flat on the period.

Source: Koyfin

According to Royce Investment’s Third Quarter Chartbook, when comparing the stock market segments, four observations stand out. According to their Market Overview, these are:

1) Small-Cap Value, Small-Cap Core, and Small-Cap Growth are the cheapest segments of U.S. equities, 2) These segments are the only ones that are below their 25-year average valuation,

3) While all three value segments (Small-Cap, Mid-Cap, and Large-Cap) have nearly identical 25-year average valuations, their current valuations are vastly different, and

4) Mid-Cap Growth and Large-Cap valuations still have a long way to fall to reach their 25-year average valuations.

The presumption is with the segments all having the same 25-year average valuations and small-cap being below its average, while mid-cap and large-cap has to go down to reach its mean, that not only is small-cheap, but the other segments are still expensive.

Individually, some of the largest companies in the U.S. have shared their individual risks brought on by fluctuations in the currency market. Nike Inc., Fastenal Co., Domino’s Pizza Inc. and some others have pointed to negative foreign-exchange impacts during recent earnings calls. Microsoft warned of these pressures back in June.

Small-Cap Examples

Some standouts, not necessarily in either the S&P 600 or Russell 2000, small-cap indices, but found on Channelchek are, Bowlero (BOWL), with a market cap of 2.4 billion and performance of up 26.6% over the same three-month period shown in the chart above.  For the same period, Comtech Telecommunications (CMTL), with a market cap of 281.5 million, and some international business, is up 12.6%. And RCI Hospitality Holdings (RICK), with a market cap of $705.9 million, has a three-month return of 45.7%. These examples can be found on Channelchek with complete, up-to-date research, alongside many other actionable opportunities.  

Take Away

If yesterday’s trade isn’t working because of factors working against it, perhaps what wasn’t working yesterday is now coming into favor. The tailwind for smaller companies is coming from a few different places; they include having a higher percentage of domestic customers and also the law of reversion to the mean. The continued headwinds for larger companies include being much more likely to have problems that include foreign customer FX, and valuations that are still sitting above the 25-year average.

When researching small-cap stocks, remember that is exactly what no-cost Channelchek was made for.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.royceinvest.com/insights/chartbook/us-small-cap-mrkt-overview/index.html

https://www.wsj.com/podcasts/google-news-update/strong-dollar-boosts-bounceback-of-small-cap-stocks/

Michael Burry Wonders Aloud if Facebook Knows What It Wants to Be

Posted on by phoffman@channelchek.com
Image Credit: Marco Verch (Flickr)  

Is Meta the Wrong Path for Facebook, or is it Just Ahead of its Time?

Not all ideas are good ideas, even when they come from billionaire tech start-up founders like Mark Zuckerberg.

Michael Burry, the legendary investor of “Big Short” fame, has been criticizing the social media giant’s metaverse strategy. Burry joins others in questioning why Zuck would change the Facebook formula and spend billions embracing something that is far from real. Many of Zuckerberg’s critics are other successful billionaires like Elon Musk and Mark Cuban. Other critics are investors that have endured Meta share’s 62.3% ($570 billion) decline since January.  

Burry founded and manages the hedge fund Scion Asset Management. Burry tweeted a message that seems to say Meta management blew it – and suggests they have blown it by historic proportions by taking a deep dive into something that may or may not have legs – the metaverse.

Image: @BurryDeleted (Twitter)

You don’t have to have been alive in the mid-1980s to know what Burry was saying when he posted, “Seems Meta has a New Coke problem.” Any business school textbook lists Coca-Cola’s changing the formula of its best-selling product as the #1 lesson in corporate blunders. It was an expensive change that failed miserably and caused the company to revert back to its original product or risk losing a lot more ground against rivals.

A Sweet Refresher

New Coke was a much sweeter version of the Coca-Cola people had become accustomed to using to wash down their pizza slices, or a burger and fries. It was introduced by Coca-Cola in April 1985 during the cola war Pepsi was waging.

At the time Coca Cola was perhaps one of the most recognized brands in the world. But, Pepsi stole customers after it ran a few Michael Jackson commercials suggesting its sugar water was the “choice of a new generation,” and also backed it up with ads showing blind taste test preferences. Between the taste test science and everyone wanting to be more like Michael Jackson, Coke lost market share. Coke reacted by reformulating its product and did its own blind side-by-side tests that indicated that consumers seemed to prefer the new sweeter taste, similar to Pepsi. The company then decided to market the reformulated recipe – New Coke was born.

Max Headroom was the spokesman for New Coke, Like the Grand Canyon (Flickr)

New Coke was introduced in April 1985, and within weeks they were receiving 5,000 angry calls a day. The number grew from there. Seventy-nine days after their initial announcement, Coca-Cola held a press conference in July 1985 to offer a mea culpa and announce the return of the original Coca-Cola “classic” formula.

Will Zuckerberg Relent?

So far, Facebook, I mean Meta, still wants to identify as a metaverse company, despite there being very few metaverse customers. The company is making sure users have accessories available and just unveiled a new virtual reality headset selling for $1,500 called the Meta Quest Pro. Zuckerberg says lower priced, presumably not “pro,” will follow ($300-$500 zone).

When one has built a business from a college dorm, a garage, or their mother’s basement, and it attains the kind of growth that Facebook, Apple, Amazon, or others have, it’s hard to keep growing at the pace investors and other onlookers have become accustomed to. This leads to a scenario where investors are exposed to a risk best described as the bigger they are, the farther they have to fall.  

And Facebook has fallen, not just in dollar value, but in ranking among its peers. Does this mean Zuckerberg is not right? The game isn’t over, and there aren’t many of us that can say, with honesty, that we are more forward-looking or have more luck than Zuck.

Is Michael Burry Right?

There is a whole universe of stocks beyond metaverse investments. Huge successful companies like Facebook or even Coca-Cola have ample resources to build and grow but lose nimbleness and growth potential, unlike the potential smaller companies enjoy. Huge companies are also more likely to have a “say yes to the boss, and you’ll be rewarded” culture, rather than a small company culture which is more “show the boss you can make them money, and you’ll be rewarded” culture.

Zuckerberg and Meta may very well be moving forward with a mistake that could be enshrined in textbooks years from now. However, like Coke, they may find that if it’s a lemon, they can make lemonade. Coca-Cola emerged from the brief departure from their main product strengthened as consumers discovered what life was like without their favorite soft drink.

Take Away

Michael Burry is worth paying attention to. He thinks differently and has been correct enough to always listen. The metaverse is new; does this mean it won’t grow and become something only a visionary like Mark Zuckerberg can imagine? It has been an expensive and slow start. I suspect Facebook was much less expensive to get off the ground, and adoption also required ancillary products to be useable by the masses.

A lesson investors should remember from this is how difficult it is for large companies to grow from their current offerings and huge corporate base.

Channelchek is a platform created to help investors uncover the next Apple, the next Moderna, or the next Facebook. It’s a resource to dig deeper into these less celebrated fledgling opportunities and to leave investors with enough understanding to decide whether they should take their own action by buying stock and becoming an owner of something with greater than average potential.

Paul Hoffman

Managing Editor, Channelchek  

Sources

https://www.history.com/news/why-coca-cola-new-coke-flopped

https://www.thestreet.com/technology/big-short-burry-says-facebook-and-zuckerberg-are-in-big-trouble

https://www.nytimes.com/2022/10/09/technology/meta-zuckerberg-metaverse.html

The Week Ahead – Housing, Manufacturing, and Fed District Reporting

Posted on by phoffman@channelchek.com

Could This Week’s Economic Data Impact November’s FOMC Meeting?

There are three economic releases investors will focus on this coming week. These will provide information on housing, manufacturing, and how the economy in each Federal Reserve District is doing (Fed’s Beige Book).

Moving out a little further on the calendar, expectations for another 75 basis point rate hike at the November 1-2 FOMC meeting are widely held. The confidence in the Fed move, even though two weeks away, can be attributed to higher-than-expected inflation reports last week and the constant pounding of the drum by Fed policymakers, saying that taming inflation will remain the FOMC’s priority.

What’s on Tap for investors:

Monday 10/17

  • 8:30 AM Empire State Manufacturing Index, will be reported. Expectations are for manufacturing to have shrank -2.5%. The Empire Manufacturing Survey gives a detailed look at how busy New York state’s manufacturing sector has been and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on the markets. Some of the Empire State Survey sub-indexes also provide insight into commodity prices and inflation. The bond market can be sensitive to the inflation ramifications of this report. The stock market pays attention because it is the first clue on the U.S. manufacturing sector, ahead of the Philadelphia Fed’s business outlook survey.
  • 8:45 Noble Capital Markets’ Michael Kupinski, Director of Research, provides indepth report on current state and outlook of the Digital Media segment of the Media and Entertainment sector.

Tuesday 10/18

  • 10:00 AM Housing Market Index will be released. Expectations are for the number to be 44, down from 46 the prior month. The housing market index has consistently been lower than expectations, including September’s 46, which was an 8-year low. N.Y. Fed 5-year inflation expectations for one- and three-year-ahead inflation expectations had posted steep declines in August, from 6.2 percent and 3.2 percent in July to 5.7 percent and 2.8 percent, respectively. Investors will be watching to see if the declining expectations continue. The housing market index is a monthly composite that tracks home builder assessments of present and future sales as well as buyer traffic. The index is a weighted average of separate diffusion indexes: present sales of new homes, sales of new homes expected in the next six months, and traffic of prospective buyers of new homes.

  • 9:45 AM Industrial Production has three components that could impact thoughts on the economic trend. Industrial Production as a whole is expected to have risen 0.1% versus down -0.2% in the prior period. Manufacturing output is expected to have risen by 0.2%, and Capacity Utilization is expected to be unchanged at 80%.

Industrial production and capacity utilization indicate not only trends in the manufacturing sector but also whether resource utilization is strained enough to forebode inflation. Also, industrial production is an important measure of current output for the economy and helps to define turning points in the business cycle (start of recession and start of recovery).

  • Comtech Telecommunications (CMTL) with Noble Capital Markets in NYC in-person roadshow for investors. Interested parties can find out more at this link.

Wednesday 10/19

  • 7:00 AM Mortgage Applications. The composite index is expected to show a decline of -2.0% for the month. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.
  • 8:30 AM Housing Starts and Permits. The consensus for starts is 1.475 million (annualized), and Permits are expected to come in at 1.550 million (annualized). Housing starts to measure the initial construction of single-family and multi-family units on a monthly basis. Data on permits provide indications of future construction. A housing start is registered at the start of the construction of a new building intended primarily as a residential building.
  • 2:00 PM, the Beige Book will be released. This report is produced roughly two weeks before the Federal Open Market Committee meeting. In it, each of the 12 Fed districts compiles anecdotal evidence on economic conditions from their districts. It is widely used in discussions at the FOMC monetary policy meetings where rate decisions are made.
  • EIA Petroleum Status Report. The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products, this has been a big focus for investors because of its implications for prices.

Thursday 10/20

  • 8:30 AM Jobless Claims for the week ending 10/15. Claims are expected to be 235 thousand. Jobless claims allow a weekly look at the strength of the job market. The fewer people filing for unemployment benefits, the more they have jobs, and that sheds light for investors on the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing.
  • 8:30 AM Philadelphia Fed Manufacturing Index. This index has been bouncing back and forth between contraction and expansion. It’s the former that’s expected for October, where the consensus is minus 5.0.
  • 10:00 AM Existing Home Sales. The consensus is for sales to have been 4.695 million (annualized). The previous number was 4.8 million. The pace has declined every month since January.
  • 10:00 AM Leading Indicators. The consensus is for a decline of -0.3%. The index of leading economic indicators is a composite of 10 forward-looking components, including building permits, new factory orders, and unemployment claims. It attempts to predict general economic conditions six months out.
  • Engine Gaming Media (GAME) with Noble Capital Markets in St. Louis in person roadshow for investors. Interested parties can find out more at this link.
  • 10:30 AM EIA Natural Gas Report. This is a weekly report and has gotten much more attention since the war in Ukraine and gas pipeline issues that impact much of Europe. The abundance or lack of energy impacts prices not just for the consumer, but also manufacturers. This report has the ability to move markets as a result.
  • 4:30 PM Fed Balance Sheet. The Fed’s balance sheet is a weekly report presenting a consolidated balance sheet for all 12 Reserve Banks that lists factors supplying reserves into the banking system and factors absorbing reserves from the system. This report will allow investors to see how far along the Federal Reserve has gotten on its quantitative tightening program.

Friday 10/21

  • 1:00 PM Baker Hughes Rig Count. The expectation is for 985 in North America and 769 in the U.S. It’s all about potential supply; the count tracks weekly changes in the number of active operating oil & gas rigs. Rigs that are not active are not counted.

What Else

This week the Biden administration has plans to take new steps to lower gasoline prices. This includes potentially releasing more oil from the Strategic Petroleum Reserve and imposing limits on exports of energy products. The initiative comes a week after the Organization of the Petroleum Exporting Countries (OPEC) and its allies agreed to cut oil production by up to 2 million barrels per day.

Corporate earnings season starts to heat up with widely watched names that can set the market tone. Those to watch out for include: Monday – Bank of America, Charles Schwab, Goldman Sachs, Barclays, Johnson & Johnson, Lockheed Martin, IBM, Netflix, United Airlines, American Airlines, Procter & Gamble, and Tesla. Investors can also expect a key GDP release from China and a vital inflation reading from the U.K.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.investopedia.com/what-to-expect-for-the-markets-next-week-4584772

https://www.econoday.com/

Benefits Increasing With COLA

Posted on by phoffman@channelchek.com
Image Credit:  401(k) 2012 (Flickr)

Soaring Inflation Prompts Biggest Social Security Cost-Of-Living Boost Since 1981 – 6 Questions Answered

Social Security is set to boost the benefits it provides retirees by 8.7%, the biggest cost-of-living adjustment since 1981. It comes as sky-high inflation continues to eat into incomes and savings.

The changes are set to take effect in January 2023 and were announced following the release of the September 2022 consumer price index report, which showed inflation climbing more than expected during the month, by 0.4%.

The automatic adjustment will surely come as a relief to tens of millions of retirees and those who receive supplemental security income who may be struggling to afford basic necessities as inflation has accelerated throughout 2022. But an annual adjustment wasn’t always the case – and other government benefits and programs deal with inflation differently.

John Diamond, who directs the Center for Public Finance at Rice’s Baker Institute, explains the history of the Social Security cost-of-living, or COLA, increase, what other benefits are adjusted for inflation and why the government makes these changes.

1. How fast is the cost of living rising?

The latest data, for September, shows average consumer prices are up 8.2% from a year earlier. The monthly gain of 0.4% was double what economists surveyed by Reuters had expected.

More troubling, so-called core inflation – which excludes volatile food and energy prices – gained even more in September, ticking up by 0.6%. Core inflation is a measure that’s closely watched by the Federal Reserve, as it helps show how pervasive and persistent inflation has become in the economy.

2. How are Social Security benefits adjusted for inflation?

Automatic adjustments to Social Security benefits began in 1975 after President Richard Nixon signed the 1972 Social Security amendments into law.

Before 1975, Congress had to act each year to increase benefits to offset the effects of inflation. But this was an inefficient system, as politics would often be injected into a simple economic decision. Under this system, an increase in benefits could be too small or too large, or could fail to happen at all if one party blocked the change entirely.

Not to mention that with the baby boomers – those born from 1946 to 1964 – entering the labor force it was already clear that Social Security would face long-term funding issues in the future, and so putting the program on autopilot reduced the political risk faced by politicians.

Since then, benefits have climbed automatically by the average increase in consumer prices during the third quarter of a given year from the same period 12 months earlier. This is based on a version of the consumer price index meant to estimate price changes for working people and has been rising slightly faster than the overall pace of inflation.

While helpful, these inflation adjustments are backward-looking and imperfect. For example, 2022 Social Security benefits increased by 5.9% from the previous year, even though inflation throughout this year has been significantly higher – which means the higher benefits weren’t covering the higher cost of living. Thus, the 2023 increase in benefits primarily offsets what was lost over the previous year.

A white hand holds a card reading social security

Millions of retirees and other will soon see a big jump in their Social Security benefits. AP Photo/Jenny Kane

3. Are the benefits taxable?

A growing portion of Social Security benefits are taxed in the same way as ordinary income, except at different threshold with various caps and percentages. Only 8% of benefits were subject to taxation in 1984, but that’s climbed to almost 50% in recent years. That percentage will likely continue to increase as the taxable thresholds are not adjusted for inflation.

For example, if an individual filer’s income, including benefits, is below US$25,000, none of that is taxed. But up to 50% of a person’s benefits may be taxed at incomes of $25,000 to $34,000. After that, up to 85% of their benefits may be taxed.

Such a big increase in Social Security benefits likely means some people who paid no tax will now have to pay some, while others will see larger increases in their tax liability.

4. Why does the government adjust benefits for inflation?

Rapid gains of inflation, like the kind the U.S. and many other countries are currently experiencing, can have significant impacts on the finances of households and businesses.

For example, it might mean seniors cutting back on heating or food. Government policies generally try to account for this to reduce the negative impacts that rising prices can have on those with limited or fixed resources.

In addition, reducing the impacts of price changes creates a more efficient and fair allocation of resources and reduces the arbitrary outcomes that would otherwise occur.

5. What other government programs typically get a COLA?

Other government programs and benefits also increase to account for inflation.

The U.S. Department of Agriculture estimates the cost of its Thrifty Food Plan each June and adjusts Supplemental Nutrition Assistance Program or SNAP benefits – formerly known as food stamps – in October of each year. Beginning in October 2022, food stamp benefits rose by 12.5%, which helps make up for the largest increases in food prices since the 1970s.

In addition, the federal poverty level is adjusted for changes in the consumer price index annually by the Department of Health and Human Services, an adjustment that affects a number of government-provided benefits, such as housing benefits, health insurance and others, including SNAP benefits.

6. Does the tax system also adjust for inflation?

While some aspects of the tax code adjust for inflation, others do not.

For example, income tax bracket thresholds, the size of the standard deduction, alternative minimum tax parameters and estate tax provisions all increase annually for inflation. That means come tax filing season next year, U.S. tax filers will likely see big changes in all these items.

But examples of provisions that are not adjusted for inflation include the maximum value of the child tax credit and the $10,000 cap on the deduction of state and local taxes. In addition, the threshold that determines who is liable for the net investment income tax – the additional 3.8% tax on investment and passive income for taxpayers above a certain income level – doesn’t adjust, which means each year more individuals are subject to it.

 This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of  John W. Diamond, Director of the Center for Public Finance at the Baker Institute, Rice University.

When PPI and CPI are Correlated, and When they are Not

Posted on by phoffman@channelchek.com
Image Credit: Cottonbro (Flickr)

The Connection Between Producer Price (PPI) and Consumer Price (CPI) Inflation

Does a higher PPI mean a higher CPI? A newly released report shows U.S. suppliers raised prices by 0.4% in September from August, when the Producer Price Index report had shown a 0.2% drop. The inflation measure that has impacted the stock market most severely this year is the Consumer Price Index. The two Bureau of Labor Statistics (BLS) releases are related but not directly correlated and are often used to measure different things by economists and those in industry.

The PPI rose 8.5% in September from a year before, down from its 8.7% annual increase in August and 11.3% in June. – BLS

How CPI and PPI are Different

The PPI for personal consumption includes all marketable production sold by U.S.-domiciled businesses for personal consumption. The majority of the products sold by domestic producers come from non-governmental sectors. However, government produces some marketable output that is under the PPI umbrella. In contrast to the PPI’s components, CPI includes goods and services provided by businesses or governments when direct costs to the consumer are levied.

The most heavily weighted item in CPI is rent. It’s weighted at 24% of the index. What the BLS calls owners’ equivalent rent is the implied rent occupants would have to pay if they were renting their homes. This is how the Bureau of Labor Statistics captures the cost of housing for owner-occupied and rented housing. This heavily weighted component is not in PPI – obviously, owners’ equivalent rent is not a domestically produced output.

The PPI for personal consumption and the CPI also differ in their treatment of imports. The CPI includes, within its basket, goods and services purchased by domestic consumers and therefore includes imports. The PPI, in contrast, does not include imports because imports are, by definition, not produced by domestic firms.

How PPI Impacts CPI

The PPI trends often work their way into consumer price movements, but not at a one-to-one basis or even a standard delayed interval. The demand component of consumer’s impact, what the consumers are willing to consume at certain price levels, is at play with what is charged for goods at the retail level. So even if the cost to manufacture goods has risen, passing the cost on is not always possible without hurting sales. At some level of price increases, demand decreases. This is different for each type of product. For instance, food, medical care, and housing may not be impacted as much as recreation, clothing, and other items which are easier to put off or do without.

Companies are trying to manage higher costs without alienating consumers who are weary of price increases. So far in the 2022 U.S. economy, consumer spending has remained strong despite the rate of CPI, but economists worry that we’re approaching a tipping point.

The Fed has raised the benchmark federal funds rate at its last three meetings by 0.75 percentage points, it now sits in the range of 3% and 3.25%. Officials have indicated they are prepared to raise rates over the course of their final two gatherings this year to around 4.25%.

Today, with consumer inflation running at a four-decade high and savings measurements trending lower, consumers are expected to begin to change buying habits. This overall is bad for business and the economy, which is why the Federal Reserve is expected to continue its fight against price increases, despite their lack of popularity with the financial markets.

“Monetary policy will be restrictive for some time to ensure that inflation moves back” Fed Vice Chair Lael Brainard (October 10).

Prices have begun to fall for some goods and services, including commodities, freight shipping, and housing. Those declines have led some Fed watchers to warn that the central bank risks tightening financial conditions too much.

Take Away

Increases in producer prices are passed to consumers when they can be. However, there is only so much a consumer is willing to pay for a purchase they can put off or substitute for something cheaper. This has ramifications for investors.

Companies where demand will wain when prices rise, may find earnings weaken; these could include producers of discretionary goods. Stocks that are shares of consumer staple companies may not feel the brunt of consumer pushback; those that produce more cost-effective brands, including white label providers, may outshine their brand name competitors if consumers increase their substituting for lower priced alternatives. Health care is one area where demand changes little as prices change at the producer or consumer level.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bls.gov/ppi/methodology-reports/comparing-the-producer-price-index-for-personal-consumption-with-the-us-all-items-cpi

https://www.wsj.com/articles/producer-prices-inflation-september-2022-11665541647?mod=hp_lead_pos2

Savings, Spending, and The Fed’s Challenge

Posted on by aweinsoff@channelchek.com
Image Credit: Federal Reserve (Flickr)

Consumer Spending, While Draining Bank Accounts, Could Prolong Fed Tightening

Economics is a social science, and as such, it’s based largely on human behavior, with mathematical models then used to assess decisions and predict outcomes. The U.S. government published consumer savings rates during the first week of October. The results are in line with what economists would expect when the masses’ ability to live the same lifestyle as before is challenged by either high inflation, fewer jobs, or both. There is a delayed effect on consumers’ behavior in the face of higher prices, this is impacting debt levels and savings rates. Also, the upper echelons of earners are not as inclined to cut back, which could make the Fed’s job trickier.

One recognized principle of economics that has proven true throughout history is related to adding stimulus and taking stimulus away and changes in spending. When more money is put in the hands of the citizenry, whether by tax decreases, or direct stimulus checks, that money will be put to work (spent), fairly quickly. Especially by those whose lives would most be impacted, those with stricter budgets. When discretionary income decreases or prices rise, consumers don’t react as quickly. We can think of the reasons why in this way; one is that fixed costs can’t change as quickly if income goes down as they can if the ability to spend increases. The other reason is that we tend to adjust on the downside more slowly while still doing many things that we can not as easily afford to do.

Put another way, we accelerate spending quickly when money is more available than we brake when it becomes less available; in fact, households tend to take their foot off the accelerator, even if it keeps them spending at a pace that puts their household finances in jeopardy.

The Post-Covid Economy is Confounding

At the turn of the year, consumers were thought to have built up about $2.4 trillion of excess savings during the pandemic. Many economists argued the economy would be able to avoid a recession, even as the Fed aggressively raised interest rates. Many of these economists, joined by business owners and investors, are changing their odds of a soft landing; many are still expecting a quick rebound as consumers are believed to have exited the pandemic in strong financial shape.

New data about U.S. consumer savings, however, and a look at consumer finances suggest that they may be overestimating the long-term resilience of consumers.

Last week the FDIC shed some light on savings rates, and the Bureau of Economic Analysis (BEA) provided information on Personal Consumption Expenditures (PCE).

Downward revisions to the savings rate indicated that households had used a much bigger proportion of pandemic savings than seen in previous data, and the starting point is now believed to have been smaller.

According to previous data, through July, households had spent about $270 billion, or 11% of peak excess savings of $2.4 trillion. The updated data show that the peak savings stock was $2.1 trillion. Also, about $630 billion, or 31%, has already been spent.

The  $1.4 trillion that is in savings is still no small amount of money. But, Nancy Lazar, chief global economist at Piper Sandler, told Barron’s that it’s not enough to prevent credit-card borrowing from ballooning and consumer delinquencies from climbing. Credit-card loans are now 6% above their pre-pandemic high. With rates climbing, 60% of revolving debt is extending out and being carried for one year or longer.

“Delinquency risk is rising, especially for low-end consumers who have exhausted their excess savings,” Lazar said.

Lazar told the journal that she calculates the composite 30-day delinquency rate across big financial institutions,  like American Express (AXP), and JPMorgan Chase (JPM), to have risen to 0.82% at the end of August from 0.78% a year earlier. More evidence comes from data from Kroll Bond Rating Agency that showed subprime auto-loan delinquencies are climbing higher, and even prime auto-loan delinquencies are moving up. And Affirm Holdings (ticker: AFRM), which is a buy-now and pay-later company, reported a 290% year-over-year increase in its provision for credit losses.

What Fed Governors Want

Is this “bad news” actually “good news” for stocks and bonds? If consumers have lower means than thought when the Fed began its tightening, this could give hope to those investors that are looking for the Fed to pivot back to an easier policy stance. But economics seldom plays out with just one or two inputs.

Another piece of information economists look at is the Labor Department’s Consumer Expenditure Survey data. Overall, 60% of consumption in the U.S. are from the top 40% of income earners. The lowest quintile, the lowest 20% of earners, those with less discretionary income, make up only 9% of consumption in the U.S.

So the Fed’s predicament has them needing to squelch the relatively high level of consumption of the top 40% that can still pay for the same lifestyle without reducing consumption, and at the same time not overly disrupt those that will feel the impact the most, the lowest 20% of earners in the country.

Take Away

It seems that in the broadest sense, the Fed has impacted consumption in the group that will impact consumption least. Those that would impact the pace of the economy and inflation most are not yet putting their wallets away.   This increases the degree of difficulty the Fed faces when working to bring inflation down to the 2% target.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bea.gov/

https://www.bls.gov/cex/

https://www.kbra.com/sectors/public-finance/issuers

https://www.barrons.com/articles/consumer-savings-fed-problem-51665185301?mod=hp_LEAD_1

The Week Ahead – FOMC Minutes and CPI Late Week

Posted on by phoffman@channelchek.com

Potential for a Change in Sentiment if Suprised by this Week’s FOMC Minutes, Jobs, and Inflation

When the world’s trading partners move interest rates in concert with each other, their actions are much smoother, this is because currency flows, which influence exchange rates, are less inclined to reprice dramatically. The U.S. has been comparatively aggressive in raising rates. This is part of why the Bank of England (BOE) shoring up its bond market, and the Japanese hawkish hesitancy has created disruptions and a historically strong U.S. dollar.

This week begins with Columbus Day; the bond markets are closed, and so are the banks. Stock market participants shouldn’t expect guidance from interest rate moves related to bond trading. The futures market will be active; moves from Interest rate futures from tickers such as ZB=F can be helpful while bonds are silent.  

Monday 10/10

  • 1:30 PM ET Federal Reserve Vice Chair Lael Brainard discusses restoring price stability at the National Association of Business Economics (NABE). Attend via Zoom.
  • Columbus Day, the potential for thin trading and big price swings.

Tuesday 10/11

  • NY Fed 5-year inflation expectations for one- and three-year-ahead inflation expectations had posted steep declines in August, from 6.2 percent and 3.2 percent in July to 5.7 percent and 2.8 percent, respectively. Investors will be watching to see if the declining expectations continue.
  • NFIB Small Business Optimism Index (NFIB), is a monthly survey that asks small businesses if they have plans to increase employment, plans to expand capital spending, increase inventories, expect economic improvement, expect higher retail sales, is now a good time to expand, current job openings, and earnings trends in their business. Health in small businesses can be an indicator of overall economic health and stock market strength. This report is released at 6 am last month, the index was 91.8, and the consensus is 91.5.
  • The Labor Department’s JOLTS has, in recent years, been referred to as the “Quits” report. The report tracks monthly changes in job openings and contains rates of hiring and quitting. The word JOLTS stands for Job Openings and Labor Turnover Survey.

Wednesday 10/12

  • The Producer Price Index (PPI) from the Bureau of Labor Statistics (BLS) is an inflation gauge that measures the average change over time in the prices received by U.S. producers of goods and services. The prices are typically considered input costs for final products and can impact CPI, it may also impact company costs of production and, therefore, profits. The trend has been lower, YOY PPI has been running at 8,7%, the consensus is for 8.4%.
  • The Mortgage Bankers Association (MBA) creates a statistic from several mortgage loan indexes. The Mortgage Applications index measures applications at mortgage lenders. It’s considered a leading indicator and is especially important for single-family home sales and housing construction. Both are considered foundational in a strong economy. L
  • ast week, the Purchase Index was -12.6%.
  • 10 Year Treasury Note Auction is held in the middle of each month and settles on or around the 15th (depending on weekends). The yield is a benchmark for 30-year mortgages and has recently been noted by investment markets because it has been trading at a yield lower than shorter maturities; this inversion of the yield curve has some market players suggesting a recession is expected in the future. Any surprises at the auction will reverberate through the stock market.
  • FOMC minutes (September meeting) – We’d all love to be a fly on the wall at the Fed’s meetings. The minutes detail the issues debated and the consensus among policymakers. This, of course, has ramifications if the contents of the minutes demonstrate an above-average hawkish or dovish change in tone. The Federal Open Market Committee issues minutes of its latest meeting three weeks after the meeting.

Thursday 10/13

  • US Consumer Price Index (CPI) is the inflation indicator most widely broadcast. With inflation being a primary focus, this will be the big number coming out this week. The number represents a basket of goods considered typical for an urban consumer and is taken as the change in the cost of that basket of goods. A percentage is derived from the change. CPI is also reported with food and energy removed as it is considered that other non-economic factors influence these prices. The August report indicated CPI rose 0.6% for the month and 8.3% YOY. Expectations are for a slowing to 0.4% for September and a YOY rate of 8.1%.
  • U.S. Jobless Claims, which represent the prior weeks of employment are expected to have increased to 225,000 from 219,000. From jobless claims, investors can gain a sense of how tight or how loose the job market is. If wage inflation takes hold, interest rates will likely rise, and bond and stock prices will fall.  Remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.

Friday 10/14

  • U.S. retail sales have been lackluster, neither rising nor falling. As we head toward Thanksgiving and Black Friday sales levels, the market will be taking more and more interest in how strong the consumer is. Expectations for September are a rise of 0.2 percent overall, down 0.1 percent when excluding vehicles and up 0.4 when also excluding gasoline. The number is released at 8:30 am.
  • Business inventories are expressed in dollar value held by manufacturers, wholesalers, and retailers. The level of inventories in relation to sales is an important indicator of the near-term direction of production activity. Rising inventories can be an indication of business optimism that sales will be growing in the coming months. However, if unintended inventory accumulation occurs, then production will probably have to slow while those inventories. The consensus is for a 0.9% increase after only increasing 0.6% for August.
  • U.S. Baker Hughes Rig Count tracks weekly changes in the number of active operating oil & gas rigs. Rigs that are not active are not counted. Components in the data are the United States and Canada, with a separate count for the Gulf of Mexico (which is a subset of the U.S. total). A significant increase or decrease could have ramifications on energy costs in North America. The rig count for the prior period in North America was 977, with 762 of those being from the U.S.

What Else

It is a light week for economic releases and Fed governor addresses, but late week could see a dramatic change in market sentiment as the Fed Minutes, CI, and even employment has the potential to impact thinking.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/calendar.htm

http://global-premium.econoday.com/byweek.asp?cust=global-premium

https://www.channelchek.com/news-channel/noble_on_the_road___noble_capital_markets_in_person_roadshow_series

Plusses and Minuses of Abundant Jobs

Posted on by aweinsoff@channelchek.com
Image Credit: pxhere.com

The Employment Report Can be Viewed as Good for Economic Resilience

Does the Fed need to slow its tightening plans? Thankfully no, and darn it, no. On Friday, a report showed the U.S. economy created 263,000 jobs in September; this confirms a strong labor market, albeit one that has begun to slow somewhat. While this is a deceleration in jobs growth from the 315,000 jobs added in August, the report confirms broad-based strength in the labor market, at the average of what economists had been forecasting.

Why this is Positive for Stocks

The Fed has two main mandates, keep inflation in check (price stability), and make sure people have jobs (maximum employment). Friday’s report offers the clearest sign yet that the labor market is still showing considerable strength, although off its peak, as tighter monetary policy and higher labor costs begin to weigh on demand for workers. Although a slight cooling is evident, there is nothing in the report to suggest the Fed will alter its aggressive path of tightening monetary policy.

The cooling of the labor market is desirable when working to tame inflation. But it is likely employment is still promoting price pressures for labor.  The number should confirm that the Fed is inclined to hike rates by a fourth consecutive 0.75% in November.   

Of particular concern, as it relates to inflation, for the Fed is the continued strength in wages and decline for the month in labor-force participation, which remains well below its pre-pandemic level. The lack of workers allows inflationary bargaining power to those in the workforce or seeking work.

 Growth in average hourly earnings, which had slowed in August, remained steady in September, with wages climbing another 0.3%. And the labor-force participation rate erased a bit and was down 0.1 percentage point to 62.3% as fewer U.S. citizens looked for work than the month before. That contributed to the drop in the unemployment rate, which fell from 3.7% in August to 3.5%.

On the Downside

The resolve of this Fed can be stated this way, as long as the labor market remains healthy, they will remain hyper-focused on reining in inflation without concern for people’s 401ks or other distractions. They can afford to kill a few jobs, and bond or stock investors are not on the Fed’s list of primary concerns.

News to Use From Jobs Report?

Jobs were added in a number of industries, with big gains in the healthcare, leisure, and hospitality sectors. These are industries where positions had been lost during the pandemic. The construction industry, which many economists expected would shrink, added 19,000 jobs in September, in line with the average monthly growth so far this year in construction.

On the bad side, the retail sector lost more than 1,000 jobs in September. It remains broadly strong after three months of gains, 1000 across the population is not yet a concern.

The numbers reflect ongoing catch-up in hiring. Employers are still working to fill jobs lost during steps taken related to Covid-19 fears; the increased demand in many areas makes it difficult to find enough workers. The scenario could keep the labor market strong over the coming months, even if the Fed is successful in slowing the broader economy.

Other data not headlined in the labor market report shows signs the labor market remains strong. The number of workers who were employed part-time for economic reasons, meaning they would have preferred full-time work but had seen their hours cut or were unable to find full-time work, declined by 306,000 in September after rising for two straight months. More work, if wanted, is a strong factor that gives the Fed breathing room.

Another very telling group that showed employment expansion is not as robust as the numbers suggest, is the increased hiring of temporary help. Companies tend to release temporary workers; first, this type of work continued to rise. The sector added another 27,000 jobs in September.

Take Away

Employment remained strong through September. While this may indicate the Fed can continue to raise rates at will for stock market participants, it also means businesses have the potential for more output. So, while the headline news may scream rates ‘will go up!’ and ‘markets should beware!’, the better message is businesses continue to hire. This is especially true for leisure and less accurate for retail companies; the economy can be expected to keep plodding along if everyone who wants a job has a job.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bls.gov/news.release/empsit.nr0.htm

Stock Market Launch Never Happened in September

Posted on by aweinsoff@channelchek.com
Image Credit: NASA Kennedy (Flickr)

Looking Back at September and Forward to the Fourth Quarter

September is behind us, and so are the first three quarters of 2022. Yet still, other than the U.S. dollar, there hasn’t been a moonshot in any major market or sector. September 2022 is best characterized by saying a few markets tried to get off the ground, but not unlike the Artemis rocket that was scheduled to go to the moon on September 3rd, the launches were scrubbed and are now on-hold. Maybe they’ll fly in October.

Below we look at the month behind us in stocks, bonds, gold, and crypto. We do this with confidence that they won’t all be grounded forever – and look to find clues as to how the final quarter of the year may treat investors.

Major Market Indicators Tracked Closely

Source: Koyfin

Out of the four closely followed benchmarks, Nasdaq 100, S&P 500, Russell 2000, and Dow 30, there was no runaway index either massively outperforming or underperforming. During the second week in September, the indexes teased that they were ready for take-off after they strung together several consecutive days where they were each up 1%-3%.

Reasons for the bounce that week include that a few of the indexes were approaching a technical floor, through which they’d be considered in a bear market. Stocks rarely break through support levels on their first try. In fact, they often bounce by a large degree.

Adding to the stock market’s climb to as much as up 4% on the month were strong economic numbers, which gave some participants comfort that the economy is still producing jobs and will withstand the Fed’s withdrawing accommodation. Others saw the sign of strong numbers as a sign that the Fed would drive up rates, drag the economy into a recession, and then ease policy by bringing rates back down. This forward-looking reasoning had them bullish.

Eventually, as the month moved along and Jay Powell, the chairman of the Federal Reserve, continued reiterating the central bank’s resolve, stock market investors stopped fighting the Fed – from  September 12th, until month-end, the indexes dropped between 12%-14%

Sectors Within S&P Index

Source: Koyfin

The two standout sectors within the S&P 500 include Health Care which was least negative at down 1.90%, and Biotech, down 4.42%. While this performance doesn’t seem like something to get overly excited about, the dynamics which have taken these two only half as down as the broader index are worth looking into. Both health care and biotech had once been in the stratosphere during the early and mid-pandemic era. As the potential for further benefit waned, these segments fell from their stratospheric highs. Currently, there is potential as large pharmaceutical companies are flush with cash from the pandemic, sit with patents approaching expiration, and biotech, with fresh patents and current R&D on the next generation of medicine, running low on funds. These conditions are ripe for partnerships and acquisitions to accelerate between the two. This may include some individual biotech companies surprising investors with some very good news in the coming months.

On the weak side is technology, which also is still coming down from the pandemic-induced high. The index is down 11.09%. Utilities are also underperforming the broader indexes as higher fuel costs for electric companies and higher interest rates erode the attractiveness of dividends paid on these stocks.

Gold and Bitcoin Performance

Source: Koyfin

Two non-equity assets, each claiming to be a safe haven during any market, political, or economic upheaval, outperformed the broader stock markets during September. Gold maintained its steady as she goes pace with very little volatility, while bitcoin had dramatic days on the up and downside, with each less than 3% lower than where they began the month.

Fixed Income Performance

Source: Koyfin

Interest rates were the topic on everyone’s mind throughout the month. Government bonds are valued 3.48% less than they were at the start of September, with uncharacteristic volatility late in the month as markets first began to fear the worst and then reversed with the BOE announcement that it would resume a less restrictive and possibly easier monetary policy.

High-yield bonds more closely track equities (and even bitcoin) than the interest rate markets. These bonds of less creditworthy issuers spent almost half the month in the positive before underperforming treasuries, which were in the red for all of the month. Tips or inflation-indexed treasuries shed 6.89% for its investors. The securities are sold off a spread to a similar maturity treasury, so they will generally move in the same direction. The Fed holds on its balance sheet a large (as a percentage outstanding) of these securities, this has disrupted the bonds’ use as either a hedge against inflation or a gauge to see where the markets think inflation is heading.

A number of Fed governors spoke during the last week of September. They are united in their message that they are only just beginning to move monetary policy to a place where the economy is in a healthy situation where inflation isn’t eroding the dollar’s purchasing power. None have begun to hint that the policy statement from the November 2nd meeting will look any different than the last.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.washingtonpost.com/technology/2022/09/03/artemis-launch/

www.koyfin

New Data Indicates Inflationary Recession

Posted on by cpatches
Image Credit: Tom Fisk (Pexels)

Inflation Still Surprisingly Strong and Economy Weak

Two important numbers were released on the last day of September. One was based on old news but significant in its finality; it’s the final revision to GDP for the second quarter. The next is viewed as the Fed’s preferred inflation gauge, the PCE deflator. The final GDP number will make it more difficult for public officials or pundits to suggest we can avoid a recession in 2022, and the second did not give any hope that the Fed will have any reason to change course on tightening.

A Recession By Any Other Name

Gross domestic product (GDP) is the indicator that reflects the amount of output produced quarterly in a country. In the U.S., the Bureau of Economic Analysis (BEA) releases two estimates of quarterly GDP, known as the advance and preliminary estimates, in the two months before the release of the final number. So until the final number prints, the number GDP measure is subject to revision.

On September 30, 2022, the Final GDP report for the second quarter was released by the BEA. The report shows that GDP decreased at an annual rate of 0.6 percent in the second quarter of 2022 (table 1). This decline in economic output follows a decline of 1.6% in the first quarter of 2022.

Do two-quarters of a receding economy, based on GDP, indicate the U.S. is in the recessionary part of the business cycle? Most textbooks would agree with that definition. However, there is a Business Cycle Dating Committee within the National Bureau of Economic Research (NBER) that determines and labels where the nation is within the economic cycles; they have not made any declaration.

So far, in 2022, the economy has not experienced any economic growth. If the six months of contraction is eventually deemed an official recession, it will thus far have been a shallow one, characterized by strong employment.

Price Increases Higher than Expected

Inflation is still on many investor’s radar. The Fed is targeting reducing inflation to its 2% target. The inflation measure they use for this target is the PCE Deflator. That measure was released this morning, and it validates the aggressive actions being taken by the Federal Reserve. And suggests the Fed has a lot more work to do.

The personal consumption expenditures price index (PCE), which the Fed targets at 2%, rose 6.2% in August from a year earlier, the Commerce Department reported. Underlying inflation, as measured by a core reading that excludes food and energy prices, rose 4.9% from 4.7% previously.

These numbers are well in excess of the Fed’s target and seemingly trending upward. Expectations are the Fed will provide up to another 150 bp increase (1.50%) over the coming months. This would cause the Fed Funds rate to trade near 5%. There is nothing in today’s release that would likely cause expectations to change.

Stagflation?

High inflation and negative growth have many repeating the word “stagflation”. Stagflation has one more element missing, which is high unemployment. The current economic conditions in the U.S. include high demand for workers, this shortage actually helps feed into the inflation the Fed is trying to tame.

Take Away

The economy contracted slightly in the second quarter of 2022. The decline in production was smaller than measured during the first quarter. Federal Reserve policymakers saw one more reason to keep applying the economic brake pedal by taking money out of the economy, increasing upward rate pressures. The Fed caused rates to rise from 40-year lows faster than any time since the 1980s.

Stock market participants are factored into the Fed’s policy only to the extent that market moves may impact inflation or employment. The markets (stocks, bonds, real estate, gold) are negative on the year. There are some who suggest the Fed will use this as a signal to alter policy, if the Fed bowed to any of the markets listed here, the sign of weakness might actually cause a market collapse in stocks and bonds.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bea.gov/news/2022/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-revised-2nd

https://www.bea.gov/news/2022/personal-income-and-outlays-august-2022-and-annual-update

https://finance.yahoo.com/news/fed-seen-keeping-big-rate-131814754.html

https://www.stlouisfed.org/on-the-economy/2014/may/do-revisions-to-gdp-follow-patterns

https://www.learningmarkets.com/who-decides-when-we-are-in-a-recession

https://www.bls.gov/news.release/empsit.nr0.htm

Will the Fed Yield on Raising Yields?

Posted on by cpatches
Image Credit: QuoteInspector.com (Flickr)

Foundational Changes in Stocks and Bonds

It’s a small world, and as we’ve seen, if something happens with one trading partner, it impacts them all.

Rapid moves and turnarounds in the U.S. Treasury market, considered the bedrock of all other markets, have increased the volatility in equity markets, commodities trading, and, more directly to, currency exchange rates across the globe. The uncertainty has caused investment capital to gravitate to U.S. markets; however, prolonged gyrations, especially in “risk-free” U.S. Treasuries, could put many investors on the sidelines and weaken asset prices globally.

The U.S./U.K. Example

At the end of 2021, the ten-year U.S. Treasury note was yielding 1.5%. Earlier this week a ten-year U.S. Treasury (backed by the same entity that backs the U.S. Currency) rose to yield 4%. That’s a 270% rise in the yield – for bondholders, prices of bonds decline as yields rise. So while the stock market frets over what a Federal Reserve increase in rates may do for equities, bond market investors can usually pull out a calculator and get a fairly precise answer as to how bonds will reprice. If the reaction is radically different, an important foundation is lost. The reaction has been unpredictable.

While the ten-year did hit 4% this week, after lingering around 3.50% the prior week, the yield abruptly dropped after news from across the Atlantic that England’s central bank, the Bank of England (BOE), was taking steps to halt rate increases, effectively implementing quantitative easing. The BOE buying bonds puts pound sterling into their economy and adds to inflation pressures. The immediate reaction was for rates to come down, there, in the U.S., and in other economies that have been tightening. This provided a feeling of relief from equity markets, as it was a sign that the central banks may one by one abandon their plans to fight inflation, choosing instead to fuel it.

The BOE’s move to buy bonds “on whatever scale is necessary” to stabilize its bond market, a move that followed large tax cuts last week by the U.K. government, despite double-digit inflation, many believe indicates a possible problem with a major financial institution or pension fund.

The world’s markets don’t trade in a vacuum. The sudden reversal in the U.K. to stop interest rate hikes and perhaps lower rates brought a positive tone to stocks and bonds in U.S. markets, each having historically challenging years. The conversation in the U.S. is that the Fed may have to pause its own aggressive direction. This would be either because increased rates would further strengthen the dollar, or because the U.S. may have its own underlying time bomb(s), institutions that would fail or bubbles that could burst.

The rallies in the U.S. stock and bond markets gained momentum after the BOE move as the Chicago Mercantile Exchange (CME) data showed reduced expectations of a terminal or neutral Fed Funds rate of 5%, with expectations now for the policy rate to top out around 4.25-4.5%.

Take Away

While the Fed taking its foot off the brake pedal would be a remarkable turnaround after Chairman Powell’s efforts to be clear about his intent to tighten, the reasons for the CME data shift are twofold. First, the Fed won’t be able to keep aggressively raising rates ad simultaneously reducing bond holdings (shrink its balance sheet), because the strong U.S. dollar is disrupting global markets. Secondly, as mentioned before, checking the health of major institutions, housing, and pension funds in the U.S. may be prudent before administering more economic medicine.

Uncertainty has the effect of investors pulling assets out of markets and businesses acting with more caution. Hopefully, clarity, one way or the other, soon presents itself so volatility is reduced and investors can better understand the playing field. 

Paul Hoffman Managing Editor, Channelchek

Sources

https://www.barrons.com/market-data/stocks/cme

https://www.wsj.com/articles/investors-fear-bond-market-turmoil-is-entering-a-new-phase-11664443801?mod=hp_lead_pos3

Understanding Money as the Lubricant for Wealth

Posted on by aweinsoff@channelchek.com
Image Credit: John Guccione (Pexels)

Why Does Money Exist?

Imagine a world without money. With no way to buy stuff, you might need to produce everything you wear, eat or use unless you could figure out how to swap some of the things you made for other items.

Just making a chicken sandwich would require spending months raising hens and growing your own lettuce and tomatoes. You’d need to collect your own seawater to make salt.

You wouldn’t just have to bake the bread for your sandwich. You’d need to grow the wheat, mill it into flour and figure out how to make the dough rise without store-bought yeast or baking powder.

And you might have to build your own oven, perhaps fueled by wood you chopped yourself after felling some trees. If that oven broke, you’d probably need to fix it or build another one yourself.

Even if you share the burden of getting all this done with members of your family, it would be impossible for a single family to internally produce all the goods and provide all the services everyone is used to enjoying.

To maintain anything like today’s standard of living, your family would need to include a farmer, a doctor and a teacher. And that’s just a start.

This article was republished  with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of M. Saif Mehkari, Associate Professor of Economics, University of Richmond.

Specializing and Bartering

Economists like me believe that using money makes it a lot easier for everyone to specialize, focusing their work on a specific activity.

A farmer is better at farming than you are, and a baker is probably better at baking. When they earn money, they can pay others for the things they don’t produce or do.

As economists have known since David Ricardo’s work in the 19th century, there are gains for everyone from exchanging goods and services – even when you end up paying someone who is less skilled than you. By making these exchanges easy to do, money makes it possible to consume more.

People have traded goods and services with one kind of money or another, whether it was trinkets, shells, coins and paper cash, for tens of thousands of years.

People have always obtained things without money too, usually through barter. It involves swapping something, such as a cookie or a massage, for something else – like a pencil or a haircut.

Bartering sounds convenient. It can be fun if you enjoy haggling. But it’s hard to pull off.

Let’s say you’re a carpenter who makes chairs and you want an apple. You would probably find it impossible to buy one because a chair would be so much more valuable than that single piece of fruit. And just imagine what a hassle it would be to haul several of the chairs you’ve made to the shopping mall in the hopes of cutting great deals through barter with the vendors you’d find there.

Paper money is far easier to carry. You might be able sell a chair for, say, $50. You could take that $50 bill to a supermarket, buy two pounds of apples for $5 and keep the $45 in change to spend on other stuff later. Another advantage money has over bartering is that you can use it more easily to store your wealth and spend it later. Stashing six $50 bills takes up less room than storing six unsold chairs.

Nowadays, of course, many people pay for things without cash or coins. Instead, they use credit cards or make online purchases. Others simply wave a smartwatch at a designated device. Others use bitcoins and other cryptocurrencies. But all of these are just different forms of money that don’t require paper.

No matter what form it takes, money ultimately helps make the trading of goods and services go more smoothly for everyone involved.