Tag: Economy

The Week Ahead – Inflation Data Worries and Election Outcome

Posted on by phoffman@channelchek.com

Federal Reserve President Speeches With Elections and CPI to Shape the Week’s Trading

Yes, the stock markets are open on Veterans Day (Friday). But bond trading, which the stock market has been more keenly focused on this year, will be taking the day off along with other U.S. government services. Equity traders can get a sense of interest rate sentiment on Friday by turning to the Chicago Board of Options and viewing tickers ZF=F (5 yr. USTN), ZN=F (10 yr. USTN), ZB=F (30 yr. USTB).

All markets are open on Election Day, and the outcome, as measured by House seats and Senate seats distributed among the major political parties, has the potential to be market-moving.

It’s a quiet week for economic numbers, except for Thursday, when the CPI report is released. This has the potential of changing those calling for a 50 bp hike at the next meeting to up their expectations or those still forecasting 75bp to lower their call. Certainly, the Fed governors will be watching this and all measures of inflation up to the December 14-15 meeting. There are a number of Fed governors speaking this week; this could alter the tone; however, the next meeting is far out into the future.

Election Day.

Monday 11/7

  • 3:00 PM ET the amount of consumer installment credit for September, including credit cards, auto loan, and student loans outstanding, indicate current consumer spending and borrowing patterns. The markets tend to ignore this number as we are already in November and this report measures September
  • 3:40  PM ET, the Federal Reserve Bank Presidents Mester (Cleveland) and Collins (Boston), will be speaking. Both are considered fairly hawkish.
  • 6:00 PM ET, the Federal Reserve Bank President Harkey (Philadelphia) will be speaking.

Tuesday 11/8

  • Election Day.
  • Meet the Management; Noble Capital Markets hosts Management of Entravision Communications (EVC) in West Palm Beach, FL. This is a no-cost-to-attend, in-person breakfast meeting with investors. If interested, click here.
  • Meet the Management, Noble Capital Markets hosts Management of Entravision Communications (EVC) in Boca Raton, FL. This is a no-cost-to-attend, in-person lunch meeting with investors. If interested, click here.

Wednesday 11/9

  • It can be expected that the newswires will be filled with Election Day outcomes and market-moving conjecture.
  • 7:00 AM ET Mortgage Applications. 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.
  • 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.
  • 10:30 AM ET, EIA Petroleum Status Report.
  • 11:00 AM ET, Federal Reserve President Barkin  (Philadelphia) speaks.
  • Meet the Management; Noble Capital Markets hosts Management of Entravision Communications (EVC) in Winter Park, FL. This is a no-cost-to-attend, in-person breakfast meeting with investors. If interested, click here.
  • Meet the Management; Noble Capital Markets hosts Management of Entravision Communications (EVC) in Orlando, FL. This is a no-cost-to-attend, in-person lunch meeting with investors. If interested, click here.

Thursday 11/10

  • 8:30 AM ET, U.S. 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 September report indicated CPI rose 0.4% for the month and 8.2% YOY. Expectations are for an increase to 0.7% for October and a YOY rate of 8.0%.
  • 8:30 AM ET U.S. Jobless Claims which represent the prior week’s employment are expected to have increased to 221,000 from 217,000. 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.
  • 10:30 AM ET, EIA Natural Gas Status Report.

Friday 11/11

  • Veterans Day, the stock market is one, the futures markets are open, and the bond market and other U.S. government-related offices are closed.
  • 10 AM ET Consumer Sentiment, November (preliminary). This barometer, reported by the University of Michigan,  questions households each month on their assessment of current conditions and expectations of future conditions. This “preliminary” release is for the month of November and is expected to have fallen to 59.6 versus 59.9 last month.

What Else

It is a light week for economic releases and Fed governor addresses, but the election outcome and CPI have the potential to whip markets around.

We’re entering the holiday shopping season when there will be a number of measures that investors focus on that will give a hint as to how strong the consumer is in the current economy.

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

https://www.econoday.com

The New Effort to Re-Anchor the US Dollar to US Gold Stock

Posted on by phoffman@channelchek.com
US Sailors, Coastal Riverine Group, Restoring Command Anchor with Gold Paint, Credit: US Pacific Fleet (Flickr)

Can the Dollar Once Again Be Anchored by Gold? One Congressman Believes It Can

On October 7, 2022, US congressman Alex Mooney (a Republican from West Virginia) introduced a bill (the Gold Standard Restoration Act, H.R. 9157) that stipulates that the US dollar must be backed by physical gold owned by the US Treasury. The initiative clearly indicates that the increasingly inflationary US dollar is triggering efforts to get better money.

It should be noted that there have already been many legislative changes to make precious metals more attractive as a means of payment in recent years: in many US states, the value-added and capital gains taxes on gold and silver, but also on platinum and palladium, have been abolished. Mr. Mooney’s proposal is divided into three sections.

The first section of the bill establishes the need for a return to a gold-backed US dollar. For example, it is said that the US dollar—or more precisely, the bill refers to “Federal Reserve Notes”—that is, banknotes issued by the US Federal Reserve (Fed)—has lost its purchasing power on a massive scale in the past: Since 2000, it has dropped by 30 percent, and since 1913 by 97 percent. The bill also argues that with an inflation target of 2 percent, the Fed will not preserve the purchasing power of the US dollar but will have it halved after just thirty-five years. Moreover, the bill points out that it is in the interest of US citizens and firms to have a “stable US dollar.” The bill highlights that the inflationary US dollar has been eroding the industrial base of the US economy, enriching the owners of financial assets, while endangering workers’ jobs, wages, and savings.

The second section of the bill describes in more detail the technical process for re-anchoring the US dollar to the US official gold stock. It states that (1) the US secretary of the Treasury must define the US dollar banknotes using a fixed fine gold weight thirty days after the law goes into effect, based on the closing price of the gold on that day. The Fed must (2) ensure that the US banknotes are redeemable for physical gold at the designated rate at the Fed. (3) If the banks of the Fed system fail to comply with peoples’ exchange requests, the exchange must be made by the US Treasury, and in return, the Treasury takes the Fed’s bank assets as collateral.

The third section specifies how a “fair” gold price in US dollar can develop in an orderly manner within thirty days after the bill has taken effect. To this end, (1) the US Treasury and the Fed must publish all of their gold holdings, disclosing all purchases, sales, swaps, leases, and all other gold transactions that have taken place since the “temporary” suspension of the redeemability of the US dollar into gold on August 15, 1971, under the Bretton Woods Agreement of 1944. In addition, (2) the US Treasury and the Fed must publicly disclose all gold redemptions and transfers in the 10 years preceding the “temporary” suspension of the US dollar’s gold redemption obligation on August 15, 1971.

What to Make of This?

The bill’s core is the idea of re-anchoring the US dollar to physical gold based on a fair gold price freely determined in the market. (By the way, this is an idea put forward by the economist Ludwig von Mises (1881–1973) in the early 1950s.) In this context, the bill refers to US banknotes. However, banknotes only comprise a (fractional) part of the total US dollar money supply. But since US bank deposits can be redeemed (at least in principle) in US banknotes, not only US dollar cash (coins and notes) could be exchanged for gold, but also the money supply M1 or M2 as fixed and savings deposits could be exchanged for sight deposits, and sight deposits, in turn, could be withdrawn in cash by customers, and the banknotes could then be exchanged for gold at the Fed.

As of August 2022, the stock of US cash (“currency in circulation”) amounted to $2,276.3 billion. Assuming that the official physical gold holdings of the US Treasury amount to 261.5 million troy ounces, and the market expected US cash to be backed by the official US gold stock, a gold price of about $8,700 per troy ounce would result. This would correspond to a 418 percent increase compared to the current gold price of $1,680. If, however, the market were to expect the entire US money supply M2 to be covered by the official US gold stock, then the price of gold would move toward $83,000 per troy ounce—an increase of 4.840 percent compared to the current gold price. Needless to say, such an appreciation of gold has far-reaching consequences.

All goods prices in US dollars can be expected to rise (perhaps to the extent that the price of gold has risen). After all, the purchasing power of the owners of gold has increased significantly. Therefore, they can be expected to use their increased purchasing power to buy other goods (such as consumer goods, but also stocks, houses, etc.). If this happens, the prices of these goods in US dollar terms will be pushed up—and thus, the initial purchasing power gain that the gold dollar holders have enjoyed by being tied to the increased gold price will melt away again. Moreover, if US banks were willing to accept additional gold from the public in exchange for issuing new US dollar, reanchoring the US dollar in gold would increase the upward price effect.

A re-anchoring of the US dollar in the US official gold stock will result in a far-reaching redistribution of income and wealth. In fact, it would be fatal for the outstanding US dollar debt: US dollar goods prices would rise, caused by a rise in the US dollar gold price at which the US dollar is redeemable for physical gold, thereby eroding the US dollar’s purchasing power. In the foreign exchange markets, the US dollar would probably appreciate drastically against those currencies that are not backed by gold and against currencies which are backed by gold, not as fine compared to the fineness of the gold backing of the US dollar. The purchasing power of the US dollar abroad would increase sharply, while the US export economy would suffer. US goods would become correspondingly expensive abroad, while foreign companies gain high price competitiveness in the US market.

Once the US dollar is re-anchored in gold, today’s chronic inflation will end; monetary policy–induced boom-and-bust cycles will come to an end; the world will become more peaceful because financing a war in a gold-backed monetary system will be very expensive, and the general public will most likely not want to bear its costs. However, there is still room for improvement. A “Gold Standard Restoration Act” will deserve unconditional support if and when it paves the way toward a truly “free market for money.” A free market in money means that you and I have the freedom to choose the kind of money we believe serves our purposes best; and that people are free to offer their fellow human beings a good that they voluntarily choose to use as money.

In a truly free market, people will choose the good they want to use as money. Most importantly, in a truly free market in money, the state (as we know it today) loses its influence on money and money production altogether. In fact, the state (and the special interest groups that exploit the state) no longer determine which kind of gold (coins and bars, cast or minted) can be used as money; the state is no longer active in the minting business and cannot monopolize it anymore; there is no longer a state-controlled central bank to intervene in the credit and money markets and influence market interest rates. That said, let us hope that the Gold Standard Restoration Act proposed by Mr. Mooney will pave the way to reforming the US dollar currency system—and that it will eventually move us toward a truly free market in money.

About the Author

Dr. Thorsten Polleit is the Chief Economist of Degussa and an Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.

November’s FOMC Meeting – Will December Be the Same?

Posted on by phoffman@channelchek.com

Image Credit: Federal Reserve (Flickr)

The FOMC Votes to Raise Rates for Sixth Time (2022)

The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from a target of 3.00%-3.25% to the new level of 3.75% – 4.00% at the conclusion of its November 2022 meeting. The monetary policy shift in bank lending rates was as expected by economists and the markets. The recent focus has been more on what the next move in December might look like. There were no clues given in the statement following the meeting. Many, including some members of Congress that recently wrote a letter to Chair Powell, have urged the Fed to be more dovish, while others suggest the central bank is still behind and hasn’t moved aggressively enough. A third contingent believes there may be more work to be done, but there should first be a pause to see what the impact has been of five aggressive moves.

The statement accompanying the policy shift also included a discussion on U.S. economic growth continuing to remain positive. There was little changed. Language from that statement can be found below:

Fed Release November 2, 2022

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Take-Away

Higher interest rates can weigh on stocks as companies that rely on borrowing may find their cost of capital has increased. The risk of inflation also weighs on the markets. Additionally, investors find that alternative investments that pay a known yield may, at some point, be preferred to equities. For these reasons, higher interest rates are of concern to the stock market investor. However, an unhealthy, highly inflationary economy also comes at a cost to the economy, businesses, and households.

The next FOMC meeting is also a two-day meeting that takes place December 14-15. If the updates to GDP, the pace of employment, and overall economic activity is little changed, the Federal Reserve is expected to move again, perhaps not in as big of a step.

Paul Hoffman

Managing Editor, Channelchek

Sources

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

https://www.warren.senate.gov/imo/media/doc/2022.10.31%20Letter%20to%20Fed%20re%20Monetary%20Policy.pdf

https://www.warren.senate.gov/imo/media/doc/2022.10.31%20Letter%20to%20Fed%20re%20Monetary%20Policy.pdf

Here is what the FOMC is Looking At

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

The Many Factors that Come Into a Fed Rate Decision are Mind Boggling

What do the FOMC members look at as they’re changing interest rates and whipping up new policy stances?

The Federal Open Market Committee, or FOMC, meets eight times a year. There are 12 members; seven are board members of the Federal Reserve System, and five are Reserve Bank presidents, including the president of the Federal Reserve Bank of New York, who serves as president of the committee. The group, as a whole, is arguably among the most powerful entities in the world. What is it that this group, that impacts all of us, focus on? And what specifically will they weigh into their decision at the current meeting?

Labor markets and prices are top on the Fed’s list and specifically part of their mandate. Also feeding into the mandate are contributing factors like housing, growth trends, and risks to monetary policy.

Prices (Inflation Rates)

Inflation remains elevated. In September, the Consumer Price Index (CPI) picked up to 0.4%. Energy prices declined in each month of the third quarter, dropping a cumulative 11.3% since June. The Fed will have to discern if this is sustainable or a function of oil reserve releases that will need replacing. Food prices continued high, although at a slower 0.8% increase during September.  

Core CPI inflation (which strips out energy and food) started the third quarter at a somewhat slow pace—increasing just 0.3% in July. The trend went against the Fed as it rose by 0.6% in both August and September. Price growth for services was the largest contributor to an increase in core CPI in the third quarter.

One of the two mandates of the Federal Reserve is to keep inflation at bay. Chairman Powell has said they are targeting a 2% annual inflation level. While nothing that has been reported in price increases since the last meeting has approached that low of a target, the Fed also has to consider their tightening moves do not work to lower demand (especially in food and energy) rapidly.

The Federal Reserve’s preferred measure of inflation is the PCE price index; this is the measure they use with their 2% target. The PCE price index typically shows lower price growth than CPI because it uses a different methodology in its calculation, but the drivers of both measures remain similar. Over the year ending September, the headline PCE price index rose 6.2 percent, while the core PCE price index was up 5.1 percent.

Jobs (Employment and Wages)

Labor markets are still tight. The economy has added an additional 3.8 million jobs this year through September. This includes 1.1 million during the most recent quarter. During the third quarter, the U.S. economy exceeded pre-pandemic employment levels. The unemployment rate hasn’t budged much, and as of September, the rate held at a comfortable 3.5 percent rate.

The broadest measure of unemployment—the U-6 rate is a measure of labor underutilization that includes underemployment and discouraged workers, in addition to the unemployed. The U-6 rate has also remained behaved all year. It stood at 6.7 percent in September, the lowest rate in the history of the series (starting in January 1994).

When the Fed pushes on a lever for one of its mandates, in this case it is tightening to reign in inflation, it has to watch the impact on its other mandate, in this case, the job market. So far, there is nothing that has occurred on the employment side that should tell the Fed they have gone too far too fast.

.In fact, the labor numbers may suggest they should discuss whether they have moved nearly fast enough. Competition for employees continued as the economy added an additional 3.8 million through September 2022 (1.1 million during the third quarter). Notably, during the third quarter, the economy surpassed pre-pandemic employment levels as of August 2022.

Image: FOMC participants meet in Washington, D.C., for a two-day meeting on September 20-21, 2022, Federal Reserve (Flickr).

Housing Markets

Housing demand decreased in the third quarter as affordability (lending rates + prices), with economic uncertainty weighed on homebuyers. During September, 90% of all home sales were of existing homes. This pace declined 1.5 percent over the month (down 23.8 percent on a twelve-month basis). New single-family home sales dropped a large 10.9% in September; this was the seventh monthly decline.

Homes available for sale have now risen from all-time lows; this includes new and existing.

Over the past few years, home prices have increased dramatically; this was fueled by Fed policy. Prices still remain above longer-term trendlines. The Case-Shiller national house price index measures sales prices of existing homes; this was up 13% over the year ending August 2022. For reference, for the 12 months ended August 2021, prices rose 20%. The prior year they had only increased 5.8%.

Housing plays a huge role in economic health. The Fed is well aware of all the housing-related inputs to the 2008 financial crisis and the part easy money plays in market crashes. Orchestrating an orderly slowdown to the boom in housing is certainly critical to the Fed’s success.

Other Risks to Economy

Eight times a year, information related to each of the 12 Federal Reserve districts is gathered and bound in a publication known as theBeige Book. This summary of economic activity throughout the U.S. is provided approximately two weeks before each FOMC meeting, so members have a chance to evaluate economic activity over the diverse businesses the U.S. engages in.

U.S. Inflation can arise from conditions outside of the control of the U.S. For example Russia’s invasion of Ukraine has added upward pressure to inflation this year. This impact may have to be determined and netted out of calculations and policy as the Fed can’t fight this inflation pressure with monetary policy.  An example would be the Fed can’t alter global food shortages brought on by war.

Dollar strength or weakness comes from many things. One of the most impactful is the difference in interest rates net of inflation between countries and their native currency. If the Fed raises rates when a competing currency has not, there is a chance there will be more demand for the alternative currency, which would weaken the dollar. Further complicating this for the Federal Resreve is a lower dollar is inflationary as it causes import prices to rise, a stronger dollar can reduce domestic economic activity as exports fall. The U.S. dollar has been rising and is now at its strongest in 20 years.

Commodity Prices were elevated in the first half of this year, mostly by energy.  Although there was some relief from gas prices over the summer, energy is expected to rise into the colder months. They may rise further as the U.S. Strategic Petroleum Reserves are used less to control prices, this may be curtailed.  The White House’s two goals of sharply reducing Russian revenue and avoiding further disruptions to global energy supplies while at the same time reducing oil use and production within the U.S. are a tanglement the Fed needs to consider. These can be very impactful to costs and economic activity, yet The Fed has no direct levers to impact these economic inputs.  

World economies play a part in our own economic pace. If the Fed were to tighen aggressively while the global business is slowing, the impact of the tightening might be more pronounced than if the world economies are booming. Demand for goods and services impacts prices; the U.S. doesn’t live in a vacuum, and demand for our production and our demand for foreign production all must weigh on the Feds outlook for global economic health.

According to the IMF’s latest World Economic Outlook, global growth is expected to slow to 3.2 percent in 2022 and just 2.7 percent in 2023.  At the same time, central banks around the world are tightening monetary policy to fight high global rates of inflation.  In addition, there has been financial instability in some major world economies. These rising risks to the global growth outlook may feed back into the U.S. outlook by weakening international demand for U.S. goods and service exports. On the positive economic side, China is considering easing its Zero-COVID policy, which could eventually ease the supply chain impact to inflation. 

Take Away

The original question was, “What do the FOMC members look at as they’re changing interest rates and whipping up new policy stances?” The answer is they have to look at everything. The recent mix of “everything” shows growth and employment in the U.S. have sustained at an even keel. Will previous rate hikes to calm inflation eventually take their toll? This is probably the big question the FOMC will be evaluating. Other domestic issues, including housing and the financial markets, are certainly to be weighed as well – a  market crash of any magnitude could quickly slow economic activity.

The Fed has little control over what goes on overseas but must be aware of and hedge its policy to allow for.

All told, the Federal Reserve has a very difficult job. The report of the new monetary policy stance should hit the wire at 2 pm ET today (November 2).

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bls.gov/opub/ted/2021/consumer-prices-increase-6-2-percent-for-the-year-ended-october-2021.htm

www.bea.gov

Was the Recession Transitory?

Posted on by phoffman@channelchek.com
Image Credit: Andrea Piacquado (Pexels)

Can We Wave Goodbye to Recession Talk Now that Q3 GDP is Positive?

Gross Domestic Product (GDP), the “advance estimate,” has shown we were not in a recession during the third quarter; instead, the economy expanded. This is a dramatic turn-around from the final data for the previous first two quarters of 2022, which show the U.S. economy contracted during each. Since the Spring, in the stock market, bad economic news has been met with buying, and good news has been met with selling. This GDP report has the power to change that back to more normal investor behavior.

The third quarter production report shows the economy expanded at an annual rate of 2.6%  despite nearly 325 basis points of Fed tightening from a base close to zero earlier this year. This report should be great news for the stock market as it shows that a large part of the economy is growing even while stimulus and easy money is being removed. In addition to the headline news related to overnight bank lending rates, each Thursday after the market closes, the Fed releases information on how large its balance sheet is. This balance sheet holdings report can be viewed as how much money they have at work in the system, effectively acting as stimulus. They have been pulling money out at a pace that many expected would also doom growth. It has not, this too should be taken as a positive sign for stock market investors.

This positive GDP report also helps veterans of the market that did not like playing word games by referring to two-quarters of economic recession (lower case “r”) as something other than a Recession (upper case “R”). This definition had in the past always been automatic, without needing the National Bureau of Economic Research (NBER) to decide when to put a light-shaded bar on our economic timeline charts. We expected that they had the same definition.

GDP Plus Recessions in Gray

Image: Gross Domestic Product Product since 1947-Apris 2022. Gray bars indicate declared recessions.

In 2022 market watchers were all expected to say, “I don’t know what a recession is, I’m not an NBER economist.” This is because, for some reason,, the National Bureau of Economic Research decided not to use the standard metric and definition, it decided instead to be less scientific. The bureau, for the first time declared there is “no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.” In other words, every set of economic conditions is different, and there is no specific threshold that must be met before a recession is declared. We no longer have to even talk about a recession until maybe next year.

Will they declare this quarter an Expansion (upper case “E”)? We’ll see.

Why this GDP Report is Important

Economic growth of nations is measured as the cost of all goods and services sold and provided from domestic-based resources. After all, wealth comes from output, not increases in currency in circulation. GDP measures this output. As you might imagine, an entire economy’s worth of output is a lot of number crunching by the Bureau of Economic Analysis (BEA). So they do two preliminary numbers before the final. This allows them a couple of months to harvest all the needed data. The final GDP report for this quarter is unlikely to show 2.6% growth as it will have been revised twice, but it is likely to approximate this first look.  

Source: Investopedia

Take Away

Good news (economic strength) has been viewed harshly by the market this year as it has been looked at with an eye toward the Fed needing to be more aggressive. Bad news has been embraced and actually caused market rallies.

The most recent GDP report has the power to change this. Despite the historically aggressive Federal Reserve tightening, the economy has grown. Perhaps fears of a deeper recession will pass, and stocks will regain their historic trend of always reaching new highs.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.forbes.com/sites/qai/2022/09/22/when-will-this-officially-be-called-a-recession/?sh=357b1a558a0b

https://fred.stlouisfed.org/series/GDP

https://www.investopedia.com/terms/g/gdp.asp#:~:text=GDP%20can%20be%20determined%20via,approach%2C%20and%20the%20income%20approach.

New Home Size as a Leading Indicator for Recession

Posted on by phoffman@channelchek.com
Image Credit: Tannert11 (Flickr)

Housing Is Getting Less Affordable. Governments Are Making It Worse

The average square footage in new single-family houses has been declining since 2015. House sizes tend to fall just during recessionary periods. It happened from 2008 to 2009, from 2001 to 2002, and from 1990 to 1991.

But even with strong economic-growth numbers well into 2019, it looks like demand for houses of historically large size may have finally peaked even before the 2020 recession and our current economic malaise.  (Square footage in new multifamily construction has also increased.)

According to Census Bureau data, the average size of new houses in 2021 was 2,480 square feet. That’s down 7 percent from the 2015 peak of 2,687.

2015’s average, by the way, was an all-time high and represented decades of near-relentless growth in house sizes in the United States since the Second World War. Indeed, in the 48 years from 1973 to 2015, the average size of new houses increased by 62 percent from 1,660 to 2,687 square feet. At the same time, the quality of housing also increased substantially in everything from insulation, to roofing materials, to windows, and to the size and availability of garages.

Meanwhile, the size of American households during this period decreased 16 percent from 3.01 to 2.51 people.

Yet, even with that 7 percent decline in house size since 2015, the average new home in America as of 2021 was still well over 50 percent larger than they were in the 1960s. Home size isn’t exactly falling off a cliff. US homes, on a square-foot-per-person basis, remain quite large by historical standards. Since 1973, square footage per person in new houses has nearly doubled, rising from 503 square feet per person in 1973 to 988 square feet person in 2021. By this measure, new house size actually increased from 2020 to 2021.

This continued drive upward in new home size can be attributed in part to the persistence of easy money over the past decade. Even as homes continued to stay big—and thus stay comparatively expensive—it was not difficult to find buyers for them. Continually falling mortgage rates to historical lows below even 3 percent in many cases meant buyers could simply borrow more money to buy big houses.

But we may have finally hit the wall on home size. In recent months we’re finally starting to see evidence of falling home sales and falling home prices. It’s only now, with mortgage rates surging, inflation soaring, and real wages falling—and thus home price affordability falling—that there are now good reasons for builders to think “wow, maybe we need to build some smaller, less costly homes.”  There are many reasons to think that they won’t, and that for-purchase homes will simply become less affordable. But it’s not the fault of the builders.

This wouldn’t be a problem in a mostly-free market in which builders could easily adjust their products to meet the market where it’s at. In a flexible and generally free market, builders would flock to build homes at a price level at which a large segment of the population could afford to buy those houses.  But that’s not the sort of economy we live in. Rather, real estate and housing development are highly regulated industries at both the federal level and at the local level. Thanks to this, it is becoming more and more difficult for builders to build smaller houses at a time when millions of potential first-time home buyers would gladly snatch them up.

How Government Policy Led to a Codification of Larger, More Expensive Houses

In recent decades, local governments have continued to ratchet up mandates as to how many units can be built per acre, and what size those new houses can be. As The Washington Post reported in 2019, various government regulations and fees, such as “impact fees,” which are the same regardless of the size of the unit, “incentivize developers to build big.” The Post continues, “if zoning allows no more than two units per acre, the incentive will be to build the biggest, most expensive units possible.”

Moreover, community groups opposed to anything that sounds like “density” or “upzoning” will use the power of local governments to crush developer attempts to build more affordable housing. However, as The Post notes, at least one developer has found “where his firm has been able to encourage cities to allow smaller buildings the demand has been strong. For those building small, demand doesn’t seem to be an issue.”

Similarly, in an article last month at The New York Times, Emily Badger notes the central role of government regulations in keeping houses big and ultimately increasingly unaffordable. She writes how in recent decades,

“Land grew more expensive. But communities didn’t respond by allowing housing on smaller pieces of it. They broadly did the opposite, ratcheting up rules that ensured builders couldn’t construct smaller, more affordable homes. They required pricier materials and minimum home sizes. They wanted architectural flourishes, not flat facades. …”

It is true that in many places empty land has increased in price, but in areas where the regulatory burden is relatively low—such as Houston—builders have nonetheless responded with more building of housing such as townhouses.

In many places, however, regulations continue to push up the prices of homes.

Badger notes that in Portland, Oregon, for example, “Permits add $40,000-$50,000. Removing a fir tree 36 inches in diameter costs another $16,000 in fees.” A lack of small “starter homes” is not due to an unwillingness on the part of builders. Governments have simply made smaller home unprofitable.

“You’ve basically regulated me out of anything remotely on the affordable side,” said Justin Wood, the owner of Fish Construction NW.

In Savannah, Ga., Jerry Konter began building three-bed, two-bath, 1,350-square-foot homes in 1977 for $36,500. But he moved upmarket as costs and design mandates pushed him there.

“It’s not that I don’t want to build entry-level homes,” said Mr. Konter, the chairman of the National Association of Home Builders. “It’s that I can’t produce one that I can make a profit on and sell to that potential purchaser.”

Those familiar with how local governments zone land and set building standards will not be surprised by this. Local governments, pressured by local homeowners, will intervene to keep lot sizes large, and to pass ordinances that keep out housing that might be seen by voters as “too dense” or “too cheap-looking.”

Yet, as much as existing homeowners and city planners would love to see nothing but upper middle-class housing with three-car garages along every street, the fact is that not everyone can afford this sort of housing. But that doesn’t mean people in the middle can only afford a shack in a shanty town either — so long as governments will allow more basic housing to be built.

But there are few signs of many local governments relenting on their exclusionary housing policies, and the result has been an ossified housing policy designed to reinforce existing housing, while denying new types of housing that is perhaps more suitable to smaller households and a more stagnant economic environment.

Eventually, though, something has to give. Either governments persist indefinitely with restrictions on “undesirable” housing — which means housing costs skyrocket — or local governments finally start to allow builders to build housing more appropriate to the needs of the middle class.

If current trends continue, we may finally see real pressure to get local governments to allow more building of more affordable single-family homes, or duplexes, or townhouses. If interest rates continue to march upward, this need will become only more urgent. Moreover, as homebuilding materials continue to become more expensive thanks to 40-year highs in inflation—thanks to the Federal Reserve—there will be even more need to find ways to cut regulatory costs in other areas.

For now, the results have been spotty. But where developers are allowed to actually build for a middle-class clientele, it looks like there’s plenty of demand.

About the Author

Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Ryan has a bachelor’s degree in economics and a master’s degree in public policy and international relations from the University of Colorado. He is the author of Breaking Away: The Case for Secession, Radical Decentralization, and Smaller Polities (forthcoming) and Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. He was a housing economist for the State of Colorado. 

Can We Expect a Stock Market Rally After the FOMC Meeting on November 2nd?

Posted on by phoffman@channelchek.com
Image Credit: AlphaTradeZone (Pexels)

Will the November Fed rate announcement cause a stock market rally?

The next time the Federal Reserve is expected to adjust the target range of the Fed Funds overnight lending rate is Wednesday, November 2nd. Few have doubt at this point that this will again be a 0.75% increase. That level is already baked into equities. Stock market strength and direction shouldn’t veer much from the rate move but could dramatically turn as a result of the Fed’s forward guidance. If Chairman Powell & Co. suggests a slower benchmark lending rate increase, it would be a very welcome sign for investors.

Focus on the Post Meeting Announcement

There are already signs the Fed may slow the pace of Fed Funds increases. There are also indications it may alter its quantitative tightening (QT) in a way that could quicken a yield curve steepening. In other words, the speed of QT may increase. To date, the real rate of return on bonds, of most all maturities, is viewed as unnatural as they are below zero (Yield – Inflation = Real Rate). While an increase in QT may do more to raise rates and reduce the money supply, the effect is stealthier; it doesn’t provide a panicky headline for investors to react to abruptly. 

Some Fed governors have already shown signs that they believe the best course from here is to slow the ratcheting up of the funds level and perhaps even stop raising Fed Funds rates early next year. A hiatus would allow them time to see if the moves have had an impact and give members a chance to see if further moves are prudent. The Fed always runs the risk of overreacting and going too far when tightening; this “oversteering” by previous Feds has occurred a high percentage of the time as they contend with a lag between monetary policy shifts and economic reaction.  

Where We Are, Where We’re Going

In the most aggressive pace since early 1980, so far in 2022, the Fed raised its benchmark federal-funds rate by 0.75 points at each of its past three meetings. The most recent move was in late September. This left the overnight interest rate at a range between 3% and 3.25%.

The stock market wants the Fed to slow down. It rallied in July and August on expectations that the Fed might slow the pace of increase. Slowing, at least at the time, would have conflicted with the central bank’s inflation target because easy financial conditions stimulate spending, economic growth, and related inflation pressures. This rally in stocks may have prompted Powell to redraft a very public speech to economists in late August. He spoke about nothing else for eight minutes at Jackson Hole except for his resolve to win the fight against higher prices.

But sentiment related to how forceful the FOMC now needs to be may be shifting. Fed Vice Chairwoman Lael Brainard, joined by other officials, have recently hinted they are uneasy with raising rates by 0.75 points beyond next month’s meeting. In a speech on Oct. 10th, Brainard laid out a case for pausing rate rises, noting how they impact the economy over time.

Others that are concerned about the danger of raising rates too high include Chicago Fed President Charles Evans. Evans told reporters on Oct. 10th that he was worried about assumptions that the Fed could just cut rates if it decided they were too high. He felt a need to share his thought that promptly lowering rates is always easier in theory than in practice. The Chicago Fed President said he would prefer to find a rate level that restricted economic growth enough to lower inflation and hold it there even if the Fed faced “a few not-so-great reports” on inflation. “I worry that if the way you judge it is, ‘Oh, another bad inflation report—it must be that we need more [rate hikes],’… that puts us at somewhat greater risk of responding overly aggressive,” Evans said.

Kansas City Fed President Esther George also had something to say on this topic last week. She said she favored moving “steadier and slower” on rate increases. “A series of very super-sized rate increases might cause you to oversteer and not be able to see those turning points,” according to the Kansas City Fed President.

Others like Fed governor Waller don’t view steady 0.75% increases as a done deal but instead something to be reviewed, “We will have a very thoughtful discussion about the pace of tightening at our next meeting,” Waller said in a speech earlier this month.

The caution surrounding oversteering isn’t unanimous; at least one Fed official wants to see proof that inflation is falling before easing up on the economic brake pedal. “Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year,” said Philadelphia Fed President Patrick Harker.

The ultimate result is likely to come down to what Mr. Powell decides as he seeks to fashion a consensus. In the past, votes, while not always unanimous, tend to defer to the Chairperson at the time.

Take-Away

If, after the next FOMC meeting, the Fed is entertaining a lower 0.50% rate rise in December (not 0.75%), they will prepare the markets (bond, stock, and foreign exchange) for the decision in the moments and weeks following their Nov. 1-2 meeting. If this occurs, it could cause stocks to perform well just before election day and perhaps make up some lost ground in the year’s final two months.  

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/speech/waller20221006a.htm

https://www.wsj.com/articles/fed-set-to-raise-rates-by-0-75-point-and-debate-size-of-future-hikes-11666356757?mod=hp_lead_pos1

https://www.federalreserve.gov/aboutthefed/federal-reserve-system-philadelphia.htm

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/

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

What To Watch Out For October 3rd – October 7th, 2022

Posted on by aweinsoff@channelchek.com

Monitoring the Week Ahead – Week Ending October 8th

Today is the first trading week of the new quarter and the first in October. It’s the start of what many hope will be a market turnaround and a strong positive close to the year.

Taking the new month and new quarter one day at a time, below are events scheduled this week that could prove important to our Channelchek subscribers. US data and events will be heavy most days this week, opening with the ISM Manufacturing Survey Monday and ending with monthly Employment on Friday. A variety of Fed Governors will be talking on a number of critical subjects, those talks most likely to move markets are listed.

All times are Eastern Time.

Monday 10/3

  • Noble Capital Markets in Chicago, interview E.W. Scripps (attend live)
  • 9 am Raphael Bostick, Federal Reserve Bank of Atlanta, President/CEO, Discusses technology and Disruption. Follow
  • US Construction Spending 10 am –  This reports the dollar value of new construction activity on residential, non-residential, and public projects. Construction spending fell 0.4 percent in July, marking the sixth straight lower-than-expected result. August’s consensus is a 0.1 percent decline.
  • ISM Manufacturing Index 10 am –  The survey gathers information from managers about the general direction (tracked in volumes) of production, new orders, order backlogs, inventories, employment, supplier deliveries, exports, and imports. It was 52.8 in each of the last two reports, this shows the ISM manufacturing index has stabilized at a level of modest growth. September’s consensus is 52.4.
  • TD Ameritrade’s Investor Movement Index 12:30 – The Investor Movement Index, (IMX), is a behavior-based index created by TD Ameritrade designed to shed insight into Main Street sentiment. The IMX strives to measure what investors are actually doing and how they are positioned in the markets. The index is a snapshot, but when compared to previous periods may be helpful to uncover trends or changes in focus.

Tuesday 10/4

  • Noble Capital Markets in Chicago, interview E.W. Scripps in Milwaukee (attend live)
  • Factory orders are a leading indicator. It is the dollar amount of new orders for both durable and nondurable goods. Factory orders are seen gaining 0.2 percent in August, which would follow a 1.0 percent decline in July. Durable goods orders, which have already been released and are one of two major components of this report, fell 0.2 percent in the month.
  • 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 on hiring and quitting. The word JOLTS stands for Job Openings and Labor Turnover Survey.

Wednesday 10/4

  • OPEC meeting. OPEC meetings and the announcements post meeting with changes to production quotas, raising or lowering the global supply of crude oil can have a dramatic impact on energy prices, which currently have been feeding into inflation and business costs. The Organization of Petroleum Exporting Countries and associate members meet monthly.
  • U.S. MBA Mortgage Applications at 7 am. This is a gauge of both the demand for housing and economic momentum. Families and individuals are usually feeling comfortable and confident in their own financial position to buy a house. The changes in housing provide data that has a significant multiplier effect acting on the economy as other purchases follow. The indicated change in economic activity impacts many industries and investment markets.
  • U.S. International Trade in Goods and Services at 8:30. Trade numbers are available by export, import, and trade balance for six principal end-use commodity categories. The numbers will be for August and are expected to show a deficit of $68.0 billion for total goods and services trade which would compare with a $70.6 billion deficit in July. Advance data on the goods side of August’s report showed a nearly $3 billion narrowing in the deficit.
  • The U.S. PMI Composite (Final) or Purchasing Managers Index released at 9:45 am is based on a monthly survey collected from over 400 U.S. companies. The companies provide a leading indicator of what is occurring in the private sector economy.  At 49.2, the first indicator for September showed improvement from August’s 43.7. No change at 49.2 is the expectation for the final.
  • The U.S. Energy Information Administration (EIA) Petroleum report 10:30 am. This report 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. The report is comprehensive and viewed by people in the industry at all levels.

Thursday 10/6

  • The Challenger Job-Cut Report at 7:30 am provides insight into where layoffs are occurring. There is industry and state-level detail, which makes it more insightful than a weekly jobless claims reports.
  • The Jobless Claims report is released each Thursday at 8:30. Jobless claims for the October 1 week are expected to come in at 203,000 versus 193,000 in the prior week, which was much lower than expected.
  • The U.S. Energy Information Administration (EIA) Natural Gas report 10:30 am. This report provides weekly information on natural gas inventories in the U.S., whether produced here or abroad. With winter approaching in the northern hemisphere, unresolved natural gas distribution issues in Europe have heightened the attention paid to this report.

Friday 10/7

  • U.S. Employment situation at 8:30 am is possibly the most closely followed of all economic indicators. It establishes the official unemployment rate. the employment situation is a set of monthly labor market indicators based on two separate reports: the establishment survey, which tracks 650,000 worksites and offers the nonfarm payroll and average hourly earnings headlines, and the household survey, which interviews 60,000 households. August was the fifth straight month, and in seven of the last eight, payroll growth exceeded expectations. One widely followed estimate is that nonfarm payrolls rose 250,000 in September.
  • U.S. Wholesale Inventories at 10 am. Wholesale trade measures the dollar value of sales made and inventories held by merchant wholesalers. It is a component of business sales and inventories
  • Federal Reserve Governor Lisa Cook, 1 pm address at Peterson Institute for International Economics. Watch
  • U.S. Consumer Credit, released at 3 pm is expected to show an increase to $25.0 billion in August versus a $23.8 billion increase in July.

What Else

The U.S. markets have been taking good news as bad and bad news as good when it relates to the economy. The reasons are fear that if the economy shows too much strength, the Fed will continue its aggressive fight to tame it, possibly overshooting.

A quarterly report Metal & Mining Q3 was released Monday by Noble Capital Markets. Check back with Channelchek this week for other quarter-end industry reports, including energy expected on Tuesday.

When investing and trading, always be aware of your surroundings and what may be lurking in the next influential speech, event, or report. Wishing you all a profitable week.

Paul Hoffman

Managing Editor, Channelchek

Sources

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

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

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

https://www.marketwatch.com/economy-politics/calendar