Daily Economic Update: September 6, 2023

Continued dollar strength especially against Asian currencies (JPY and CNY)  and rising oil prices are front and center today as equities and bonds are little changed to start the day.  The 2Y UST is trading ~4.95% while 10Y is ~4.25% ahead of today's ISM Services and Fed Beige book.  Fed Governor Waller yesterday didn't rule out more hikes and didn't seem to favor cuts.  German factor ordered missed estimates badly falling 11.7% in another sign of stagflationary fears for EU.

XTOD: You know what breaks the S&P 500?  People selling off their Vanguard funds from their retirement accounts and paying the penalty because they no longer work and milk now cost $357.73. 

Few understand this.

XTOD: A Delta flight from Atlanta to Barcelona was forced to return to Atlanta to address, "diarrhea all the way through the airplane."

XTOD: There's an epic Battle for Narrative right now.  Each side is vying to get a landmark share placing out successfully:

- On one side, OPEC wants to pump the Saudi Aramco placing through the Inflation narrative

- On the other side, Wall Street wants to pump the ARM IPO through the AI AI AI AI narrative 

The only certainty is that a new class of bagholders will be created

XTOD: Long list of people who keep on telling me how smart they are to be long duration and what an idiot I am for being short it. It's almost as if they don't have a quote provider and they are living in their own little fantasy land where supply gets mysteriously bought by Daddy.

XTOD: Join us on the blog as we mark one year since Liz Truss began her short-lived tenure as PM, one that got us all talking about submerging markets and...lettuce. 

Daily Economic Update: September 5, 2023

The first full week of September starts with yields higher, the 2Y up ~4bps to 4.92% and the 10Y up ~5bps to 4.23% . GS research was out with a report where they cut their next 12- month recession probability assessment down to 15% from 20% and appeared to disagree with the notion that monetary policy will have impacts from 'long and variable lags' (maybe they've been reading John Cochrane's blog?).  In their report they also are confident the Fed is likely done hiking and call for very gradual rate cuts starting in 2Q2024.  Ahead of the weekend G20 meeting, the Financial Stability Board has a letter out this morning highlighting the risk of rising debt service cost such as real estate and leverage in the non-bank financial sector. Of course crypto risk and climate risk are in the letter as well.

On the day ahead we have Factory Order data, the highlight of the week is likely to be ISM services report and Fed Beige Book on Wednesday.  Hopefully the U.S. service sector data is better than China's where their services PMI hit an 8-month low.  Also in APAC the Royal Bank of Australia kept their policy stance on hold with the cash rate at 4.1%.  The dollar hitting a 43-week high against the AUD.

There has been a lot of talk about the resumption of student loan repayments (interest resumed accruing on Sep. 1), but some data is showing that some borrowers might have been making monthly payments as it became evident that payments would resume, so perhaps some of the impact could have been pulled forward.

On the week ahead the calendar looks like:
Today (Tue): Factory Orders
Wed: Fed Collins speaks, S&P PMI's and ISM Services data, Bank of Canada Rate Decision (10am) Fed Beige Book (2pm), Fed Logan speaking at 3pm
Thur: Jobless claims, Productivity and Cost, Fed Williams speaking 330pm, Bowman speaking 455pm..Goolsbee, Harker and Bostic also speaking during day
Fri: Wholesale Inventories, Consumer Credit

XTOD: When the market closes up on a Friday, it is a statement of traders' confidence. When it does it on a lot of Fridays, it becomes a more emphatic statement. Years ago, I studied this and found 6 weeks was a good lookback period. DJIA is up 7 of the last 8 Fridays.

XTOD: more than 73,000 festival attendees and campers are trapped with no access in or out of the Burning Man festival that takes place in Black Rock City, Nevada. This situation has arisen after a heavy overnight rainstorm transformed the once dry, dusty desert into an undrivable mud pit, causing disastrous conditions. Festival-goers have been asked to shelter in place and conserve food and water due to the poor conditions. Travelers were informed that burning man festival is closed, and anyone heading to the festival will be turned away, as a national emergency has been declared at the festival.

XTOD: Did a deep dive into the most interesting Jackson Hole paper and came away thinking that the optimal solution to Treasury market "dysfunction" is just yield curve control

XTOD: I agree with @jasonfurman  that real rates are most worrisome factor in fiscal outlook. As noted in a prior column, real rates have gone from well below real growth pre-pandemic to roughly equal now, removing an important stabilizing factor for the debt. 

XTOD: The question is which real assets?  Commodities never do well in a recession..Real estate gets taxed when governments implement wealth tax ..Gold price is manipulated via paper gold market..What else is out there?

XTOD: S&P: Despite a relatively innocuous July the global corporate default tally has hit 91, more than double the amount at this point last year and well above the 10-year average. 

XTOD: This is an interesting chart showing that Google trends for the word "strike" recently surged to record levels.  This spike implies a growing pressure among workers to secure improved compensation deals with their employers.  Labor strikes are becoming a regular occurrence in society, reminiscent of their prevalence in the 1970s.  These are unmistakable signs of an inflationary setting, where the rising cost of living is placing significant pressure on wages to rise.

XTOD: Modern day corporate America is essentially indentured servitude. They pay you enough monthly so you take out tons of liabilities that are enough to make you ‘comfortable’ - but not free from the payments of those liabilities.   Most Americans at the end of the month (or beginning) when they pay said liabilities put in their ATM card and have essentially little (or) no money left. The net relationship is essentially swapping your time to accumulate liabilities (swap time for net nothing) and said ‘luxuries’ - ie: I might be able to drive my two door sports car - but your employer can rug pull you at any moment interfering with that ability to continue paying your lenders to live a lifestyle you can’t actually afford.  Unfortunately I think 90+% of Americans are living a lifestyle they can’t actually afford (guilty of it myself, as well)....This line has never been more true, especially among younger gens: We’re “buying things [we] don’t need to impress people [we] don’t like”. 

Daily Economic Update: September 1, 2023

 

It's a Jobs Friday, one of those days that SIFMA doesn't have an early bond market close but everyone that's anyone has already fueled up their choppers with pilots on standby to head to the Hamptons (see around 3 minute mark).  Market estimates are for +170K on the headline, but the whisper number seems lower as bank research desk are citing the impact of Hollywood strikes and the bankruptcy of Yellow trucking.  Stock futures higher and 10Y is up ~1.5bp to 4.11% and 2Y flat around 4.85% both over 20bps off recent highs.  Oil has been sneaking higher despite China woes.

After JOLTS showed some signs of labor market softening this will be the last major labor market indicator ahead of the September 20 FOMC announcement.  

Been reading John Cochrane's 3 part 'dissertation' asking just what do we (we economists) really know about how interest rates affect inflation.  "As you may recall, the standard story says that the Fed raises interest rates; inflation (and expected inflation) don't immediately jump up, so real interest rates rise; with some lag, higher real interest rates push down employment and output (IS); with some more lag, the softer economy leads to lower prices and wages (Phillips curve). So higher interest rates lower future inflation, albeit with "long and variable lags." ".. Modern (anything post 1972) theory really does not support this idea. The standard new-Keynesian model does not produce anything like the standard story."  He concludes with this: "for my lay readers, here is as far as I know where we are. If you, like the Fed, hold to standard beliefs that higher interest rates lower future output and inflation with long and variable lags, know there is no simple economic theory behind that belief, and certainly the standard story is not how economic models of the last four decades work."

XTOD: Madame Ringarde will go down in history as worst CB governor of all times if she presides over a pause in Sep when EZ CPI is above 5% and services CPI at 5.5%. Whatever the growth, whatever the lag, whatever the what.

XTOD: Mitch McConnell CLEARED by NFL concussion protocols

XTOD: Nebraska police pull over man with a Watusi bull riding in the passenger’s seat https://northeast.newschannelnebraska.com/story/49572004/norfolk-police-pull-over-man-and-bull-riding-shotgun

XTOD: “A recession is inevitable so own bonds” is the same as saying “the economy goes up over time, own stocks”.

XTOD: IMF sees interest rates remaining high for 'quite some time,' top official says http://reut.rs/3sCTKFx

XTOD: There are other costs (than inflation) of mis-calibrated monetary policy. 

30 YR mortgage rates were pushed  below 3% as the Fed bought MBS, partly guided by low r* estimates. Now the rates>> 7%.  

➡️large cohort of US homeowners who are locked in, unable/unwilling to move.  This cohort will likely be locked in for a long time. Persistent negative effects on labor mobility.   This new paper finds large lock-in effects on the probability of moving.

XTOD: B of A: “10-year Treasury on course for 3rd consecutive loss (-0.3% in ‘23, -17.0% in ’22, -3.9% in ’21) .. has never occurred in 250-year history of US republic ..” [Hartnett]

XTOD: Most interesting macro takeaway from meetings with CEOs this week…

“At least we can fill job openings now, but at every talent level we have hired for over past 2 years, we are SOOO overpaying for the work output we are actually getting.”  

Every CEO in violent agreement w/this.

XTOD: There is a metric shit ton of private equity firms holding onto worthless assets, not marking them to market and taking fees based on the fairytale values they make up.  Hundreds of billions in complete vaporware

XTOD: "The freedom to do what you want, when you want, with whom you want, for as long as yo want, is true freedom."

Daily Economic Update: August 31, 2023

Last day of August starts with Euro Area inflation coming in above expectations at 5.3% this morning while Chinese manufacturing was better than expected.  Domestically (kind of), Bostic speaking at an event in South Africa said: "I feel policy is appropriately restrictive," "We should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain."  He added: "that does not mean I am for easing policy any time soon,  Yesterday ADP payrolls missed expectations as did GDP with yields continuing to ease from the highs of August 21st.  Ahead of PCE and jobless claims this morning yields are down a little over a bp with the 2Y at 4.87% and 10Y at 4.10%.   On the upcoming PCE data, Nick Timiraos X/Tweet: "Based on inputs from the July CPI and PPI, forecasters anticipate the July core PCE price index will rise by 0.2% or 0.3% from June.  That would bring the 12-month rate to 4.3% in July from 4.1% in June. The increase partly reflects base effects, as July 2022 printed at +0.08%"

XTOD: Morgan Stanley predicts a TSwift/Barbie/Beyonce hangover in consumer spending data in the fourth quarter. (+ it's only slightly smaller than their estimate of the drag coming from the expiration of the student loan moratorium, which they put at 0.8pp)

XTOD: Pyongyang said it had successfully test-fired two ballistic missiles designed to make “scorched-earth strikes” at South Korean command centers and operational airfields

XTOD: Preemptive congrats to the cartels on seizing political power over all of Mexico in a little over 20 years time.

XTOD: First poll in Argentina that shows Milei winning outright in the first round..What is more shocking, in a global-historic sense, than an Internet movement lifting up an anarcho-capitalist candidate in Argentina (population ~46M) basically out of nowhere? You go back 2 years ago and people would have laughed at you for suggesting this was possible...He's also incredibly weird right up to his hair, like dog clones named after libertarian philosophers weird, has flirted with some extremely radical views and is a thorough ideologue for a fringe political tradition.

XTOD: to industrial policy enthusiasts: "I think that what we are seeing right now in China illustrates the real limits of that kind of government planning for the economy." 

XTOD: The problem is that the crackdown on residential property has resulted in a sharp fall in housing sales. And I don’t think those sales are ever coming back. That’s a problem because residential housing investment mostly accrues to households through those sales. So if housing sales have fallen, but the household’s gross savings rate has not, then household net financial balances must be increasing. Higher household net savings must be absorbed by the corporate or government sector, or else the current account surplus will widen as it lends the savings to foreigners. But it’s not clear to me that any sector can really absorb these savings...Property developers really must deleverage. That’s been partly offset by the government’s pivot to manufacturing in 2020, but there’s unlikely to be enough corporate investment & credit demand to absorb higher HH net savings.  And the rest of the world probably can’t either. China’s trade surplus as a share of its GDP may be lower than in 2008, but it’s now a larger share of global GDP. So, assuming policymakers don’t want to reflate the housing market like they did in 2016, the only solution is to restore HH confidence to bring down the savings rate. But nothing the government has announced seems likely work If not, the household net financial surplus will continue to get stuck in the financial system and won’t be intermediated into new demand. Which will lead to lower incomes and eventually lower savings, sort of like what happened in Japan after 1990. Which is the great irony. China's policymakers launched the crackdown on property to reign in a housing bubble they feared could lead to a Japan-like balance sheet recession. But in doing so, they may have sowed the seeds for a different kind of economic collapse

Daily Economic Update: August 30, 2023

The 2Y is yielding around 4.91% to start the day, while the 10Y is yielding around 4.15%.  Yesterday the 2Y yield fell by (checks charts) the most since (gasp) May (obviously historic), following JOLTS, which El Erian summarized in a X/Tweet as: "The job market isn't so strong that employees feel emboldened to quit loudly and find another job, but it isn't so weak that companies can carelessly cut their staff count, counting on easy hiring when profits improve."  The JOLTS data, declining consumer confidence and a strong 7Y auction has emboldened bets of the Fed pause in September.  Across the pond this morning, German and Spanish inflation data looked to come in above expectations.
We'll see how ADP and GDP looks today and still have PCE and Jobs on the come. 
Hurricane Idalia is yet another reminder that climate risk are real.

XTOD: You a year ago: OMG the Phillips Curve is going to destroy us!! 😲 You now: Hahaha idiot macroeconomists, you actually believed in the Philips Curve, LOL macro is so fake 😂😂😅

XTOD: Sure why not crowd on 

XTOD: You’ve probably read studies finding <5% of stocks make up the entire historical excess return of stocks over T-bills. The market is cap weight, so those successful companies have a large impact. Active managers tend to equal-weight, and that makes it tough to beat the market.

XTOD: “There are 60,000 economists in the US, many of them employed full-time trying to forecast recessions and interest rates and if they could do it successfully twice in a row, they’d all be millionaires by now. As far as I know most of them are still gainfully employed which ought to tell us something”   --- Peter Lynch

XTOD: While a weaker RMB does make Chinese manufacturing more competitive in export markets, the PBoC doesn't want a weaker RMB for at least two reasons. First, stronger exports come at the expense of weaker domestic consumption, as a depreciating RMB effectively shifts income from households (who are net importers) to manufacturers (who are net exporters), and by now almost everyone agrees that China must urgently boost domestic consumption.  Second, expectations of RMB weakness can become self-fulfilling and lead to destabilizing capital flight if these expectations cause wealthy Chinese to start selling RMB for dollars. We saw how badly this can go seven years ago.

XTOD: GOP presidential candidate Vivek Ramswamy said in an interview he’d accept the terms of a cease-and-desist letter he received for a campaign trail performance of Eminem’s hit song “Lose Yourself.”

XTOD (not investing advice, by who new Jeff Bezos had some real estate investing platform?): Thanks to Jeff Bezos, you can now make money from real estate for just $100

XTOD: Thursday 31st August 2023 is a Super Blue Moon.  Last Super Blue Moon was on 31st Jan 2018.  Subsequently, $NDX dropped by 10% in a week.  Incidentally, $NDX was up roughly +40% over a year, almost similar to now 🥹  #Gothilocks does work in mysterious ways🥹

Daily Economic Update: August 29, 2023

U.S. yields start the day with yields relatively unchanged following the double auctions yesterday which seemed relatively clean.  The 2Y is trading 5.01% and the 10Y ~4.20% (off the highs of about a week ago of around 4.35%) . I guess we're all going to be buying electric cars from Vietnam...and I thought VinFast might be tied to vehicles made for Vin Diesel in Fast and Furious.  China remains in focus, wake me up when they do something big in terms of stimulus.  The Jackson Hole papers referenced yesterday continue to garner some discussion, especially the Eichengreen paper on the era of high government debt.  I haven't listened to the podcast yet but Odd Lots has covered the paper.

 Today's JOLTS data will be the first labor market indicator that will be scrutinized this week and I'm sure there will be some post somewhere about the Beveridge Curve.

XTOD: Here is the J-Hole paper that concluded the world is f**cked (which was of course obvious to anyone who is not a career economist since 2009)

XTOD: I wonder why there is no session at Jackson Hole on "Lessons from the fastest economic recovery ever" or on "How to restore full employment faster after a recession"

XTOD: U.S. consumers in recent weeks have seen gasoline prices tick up to their highest levels so far this year, leaving many with an unwelcome sense of déjà vu

XTOD: https://threadreaderapp.com/thread/1696262024626651461.html Share this if you think it's interesting. 

XTOD: The "urban doom loop" has caught on as a possible threat to cities nationwide -- especially in midsize cities that may be more vulnerable to an economic spiral  My look at what's behind the risk, and what it could look like from Minneapolis to Memphis:  Much of the focus has gone to hubs like New York and San Francisco. But many economists and analysts are more concerned about smaller cities with less ability to offset the economic blow if companies nix large leases or sale prices of downtown buildings crater.  Still, the loop isn't a given. Many cities are leaning on state and local stimulus aid. A large share of the outstanding business and mortgage loans aren't due for a few more years. And wonky tax rules are key to assessing whether individual cities could be in trouble. But a look at midsize cities could show early signs of distress. These places have some of the highest rates of office delinquency (where loan payments on buildings are behind schedule) and the lowest rates of office occupancy.

XTOD: "They issued an urgent call for a revised playbook to better understand and respond to a rapidly changing landscape that threatened to stoke more frequent supply shocks, higher prices and heightened volatility across financial markets." An important article on #JacksonHole by the  @FT 's  @colbyLsmith   Good to see the growing recognition among policymaking influencers that we have gone from a world of insufficient aggregate demand to one in which the supply side needs to be better understood and responded to.

XTOD: Michael Kantrowitz - bearish stocks
Michael Hartnett - bearish stocks
Michael Wilson - bearish stocks
Michael Kramer - bearish stocks 
Michael Gayed - bearish stocks 
Michael Burry - bearish stocks
What do they all have in common?  Anyone?

XTOD: "Everything in life is volatility times time. As volatility increases, time compresses. But what we care about is the validity of the fixed point. If we lose it, everything in the past becomes meaningless." — Myron Scholes

Daily Economic Update: August 28, 2023

The final days of August are upon us with a week that ends with a Jobs/ Payrolls Friday report. Before we get there 2Y is up over 4bps to 5.10% and the 10Y is flat, trading at 4.24%.  It will be a busy data week and labor disputes remain something to watch with UAW, actors and writers, etc. 
With J-Hole behind us, while Powell gets all the hype, there were other speakers.  To start here's a quick recap of Lagarde at J-Hole: (1) there may be some fundamental changes in economic relationships, so understanding policy transmission can be more difficult in today's changing world (2) three major changes are changes to labor markets, with remote work and AI, the green energy transition and geopolitics (3) these shifts may lead to more supply side disruptions in the economy as well as increasing investment needs which may lead to relative price changes amongst sectors  (4) confronting this changing world monetary policy will need to continue to ensure price stability while being flexible.

I can't say I read all of the J-Hole papers (not good beach reading), but at a high level here's what I saw upon a cursory review (not all inclusive and take this summary with a grain of salt): (1) a paper by Ma and Zimmerman positing that monetary policy may impact innovation (tight monetary policy may impact innovation negatively with higher cost to future growth) and therefore may not be long run neutral (2) a paper by Duffie on deficits and how structurally dealer balance sheets may not be able to accommodate the increase in the size of the Treasury market (3) a handout by Jones that seems to ponder if we're running out of ideas and therefore poised for lower growth - will AI come up with ideas for us? (4) a handout by Richardson on the job market for nurses and teachers where demand outstrips supply (5) a paper by Eichengreen on how high debt and deficits are here to stay and could lead to financial repression and some difficult "medicine"

It's a busy week that starts with a double auction day today with both the 2Y and 5Y being auctioned at 1pm. 
Tue: JOLTS, home prices, 7Y note
Wed: ADP, GDP (2nd read), pending home sales
Thur: PCE, Income and Spending, Jobless claims
Fri: Jobs Day! ISM Manufacturing

XTOD: Everybody knows the inflation target is ACTUALLY 3.14159265359

XTOD: Yesterday, I trolled Larry Summers, as I thought his graph was more misleading than helpful. But I fully agree with the major points of his WAPO column today: Inflation is still too high, unemployment very low, and deficits too large.

XTOD:  Mark Cuban said that after investing nearly $20 million in 85 startups on “Shark Tank,” he’s taken a net loss across all of those deals combined. 

XTOD:  I cannot believe Bob Barker lived as close to 100 as possible without going over.

XTOD: For the sake of argument, can we consider an alternative to the current narrative on rates, literally the semantics: the explicitly pessimistic "raise them until something breaks" or the ominous sounding "higher for longer"?   How about "properly pricing risk," "correcting mistaken capital allocation", or even the pedantic but true "getting all those formulas in the finance books to actually work?"  Yes, the inversion of the curve/high near-term rates is real/has negative implications for businesses & consumers, has created issues for bank balance sheets (1.5% paper now at 4%), & managing inflation is a challenge for all.  But the 10 year at 4% is a whole lot healthier & "normal" for financial decision making than 1.5%. By a lot. It will lead to less speculation & to less misallocation of capital. So, here's 😃 😀 😃 for rates closer to where they ought to be after too many years of distortionary rate levels expressed in comforting but misleading phrases.

XTOD: I’m bullish on organizations that help people live their ordinary lives well over the next few decades: who to call when someone dies, teaching adults how to cook, curating the best of music and literature, how to manage content and take paid time off. All these things and more.

Powell at J-Hole: must there still be pain as "we are navigating by the stars under cloudy skies"?

J-Star, unlike the other "stars" (r-star, u-star, etc.) is a fully observable variable that describes how Jay Powell is the star of J-Hole and what he says carries more weight than any other variables.  When J-Star is inserted into your equation all other coefficients go to zero and therefore have no impact.  WWPD, "What Will Powell Do?" is important for markets.  I'm being facetious of course. 

Expectations play a prominent role in  today's economic models and Fed policy (this wasn't always the case, see here). If you followed Powell's speech one thing he didn't mention was cutting interest rates.  Highlights of the speech focused on uncertainty around the post-pandemic labor market dynamics and how labor market tightness feedbacks into wages and inflation.

In today's speech Powell didn't use the word "pain" but he did say:

"Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions." and "We expect this labor market rebalancing to continue. Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response."

So I guess the Phillip's curve is alive and well, while it remains a topic of debate. 

Markets didn't seem to react much too strongly to Powell's speech and market expectations are for 2024 rate cuts.

One other thing Powell mentioned again was that 2% remains the Fed's inflation goal, despite some debates and calls for changes to the target. 

The current Atlanta Fed GDP estimates are 5.9% and Powell acknowledged that growth has continued to come in above estimates this year.  It's hard to fathom 2% inflation with real growth at 5.9%, but perhaps it's possible.

We'll get more data on employment and inflation between today and the meeting that could change market expectations.  The next FOMC meeting is September 20th along with updated dot plot, for now Powell's journey to get inflation back to targe will have to ramble on:

"..the autumn moon lights my way

For now I smell the rain, and with it pain, and it's headed my way

..but I know one thing I've got to do
Ramble on, the time is now" - Ramble On, Led Zeppelin