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>>> Rocky Treasury-Market Trading Rattles Wall Street
Mounting illiquidity raises concerns over a key market’s functioning should a crisis erupt
The Wall Street Journal
By Matt Grossman and Sam Goldfarb
Oct. 30, 2022
https://www.wsj.com/articles/rocky-treasury-market-trading-rattles-wall-street-11667086782
Rising friction in the trading of U.S. government debt has investors worried about the health of a $24 trillion market that is critical to the functioning of the broader financial system.
The ranks of traders ready to buy and sell Treasurys are shrinking. Individual trades are moving prices more. Treasury securities with similar characteristics are trading at larger-than-normal price differences. Major players, including the big banks and asset managers that have long been significant buyers, are in retreat.
Investors expect to be able to buy and sell Treasurys quickly at the listed price, no matter what else is happening. Difficulty doing so reflects a lack of what traders call liquidity, and it can scramble the most basic signals that help the economy run: How much home buyers should expect to pay for a loan, what kinds of investments businesses should make, and what kinds of stocks likely will perform the best in a given period.
Climbing Treasury yields have recently sent mortgage rates above 7% for the first time in two decades, slashed stock valuations and slowed corporate borrowing. While there hasn’t been a serious breakdown in Treasury trading so far, the possibility is far from unthinkable given the tumult this year. Many traders and portfolio managers warn that such a development would tear through other markets, potentially requiring intervention from the Federal Reserve to prevent a full-blown financial crisis.
Andrew Kreicher, a director at Wells Fargo, said liquidity in Treasurys has been about the worst he has seen over a sustained period recently.
“There are so many systems in other asset classes that use Treasurys as a building block,” he said. “If you have rot in the foundation, the whole house is at risk.”
Investors rely on easy Treasury sales to obtain quick cash for debt payments, margin calls and a variety of other pressing short-term needs. When that process hits hiccups, financial trouble can spiral, said Jim Caron, a fixed-income portfolio manager at Morgan Stanley Investment Management.
“If the Treasury market isn’t working, nothing is working,” he said.
While many agree trading Treasurys remains smoother than during the worst moments of 2020’s pandemic-fueled market breakdown, the current unease has built gradually over months without a single precipitating event, said Deirdre Dunn, co-head of global rates at Citi.
Some traders believe the Fed’s rapid interest-rate increases are the main cause. Treasurys—especially shorter-term notes—closely reflect expectations for the Fed’s overnight rates, so quick changes can cause choppy moves. This week, the Fed is expected to raise rates by 0.75 percentage point for the fourth straight meeting.
Other traders lay some blame on rules enacted after the global financial crisis that make it more expensive for banks to keep Treasurys on their balance sheet.
Big banks function as Treasury-market dealers, helping match buyers and sellers. When they step back, trading stalls, said Ariel da Silva, director of fixed income at Wealth Enhancement Group, a wealth-management firm. Given the current regulatory regime, “It doesn’t behoove them to take on the inventory,” he said.
Measuring the ease of trading isn’t straightforward. Some approaches gauge the differences between the prices buyers and sellers are demanding. Others look at how much deal flow the market can absorb at the current price, or, similarly, how much a single large trade swings prices for everyone else.
“We’re seeing plenty of concerns about liquidity, but it’s coming at the same time that we’re seeing real concerns about volatility, and it’s very difficult to untangle those things,” said Steven Abrahams, a senior managing director at Amherst Pierpont Securities. During the Fed’s smaller, more predictable rate increases between 2004 and 2006, trading stayed more fluid, he said.
One problem is a growing difference between yields on the newest Treasurys in the market and older vintages that are still traded among investors. Theoretically, a five-year note sold this year should trade at the same yield as a five-year-old 10-year note, because both come due in 2027. But fresh Treasurys are trading at a growing premium to older notes, a sign the older securities have become harder to find buyers for.
To address that issue, Treasury Department officials have considered buying back outstanding bonds, funding the purchases with auctions of more fresh debt. Earlier in October, the Treasury surveyed dealers for feedback on the plan, a version of which the government enacted to sustain the market during the budget surpluses of the early 2000s. Treasury Secretary Janet Yellen said the department is still studying it.
For now, doing business in Treasury markets takes more finesse than a year ago, traders say. Some report working harder than usual to shield their intentions from the broader market, lest their bids or offers send jumpy prices moving against them.
Trading conditions aren’t nearly as difficult as they were in March 2020, when dealers demanded extraordinarily large discounts to buy Treasurys from investors, said Michael Lorizio, a senior fixed-income trader at Manulife Investment Management. But he has sometimes found it necessary to make larger trades “in a more quiet way” than in the past, communicating his intentions to dealers carefully rather than “just blast it out there without any sort of qualifications.”
Upheaval in U.K. bond trading this autumn showed one scenario investors hope the U.S. can avoid. In September, a new debt-heavy British budget plan ignited such a sharp bond-price decline that U.K. pension plans had to sell bonds to cover esoteric bets on a strategy called liability-driven investment. Yields soared, forcing the Bank of England to step in as a buyer even though it had been reducing its bondholdings before the furor began.
In the U.S., the Fed’s own effort to trim its holdings of Treasurys—part of the central bank’s anti-inflation efforts—is yet another factor some traders blame for falling liquidity. The program, known as quantitative tightening, amounts to “a mechanical withdrawal of liquidity” that reduces banks’ ability to absorb government debt, said Alex Lennard, investment director at Ruffer, a British investment fund.
Still, the Treasury market continues to process massive trading volumes without disruption. Last month, an average $570.5 billion of Treasurys changed hands daily, similar to levels in recent Septembers, according to data from Sifma, a financial-industry trade group. Daily U.S. stock trading last month, by comparison, was $510.5 billion.
Trading Treasurys remains far more frictionless than trading corporate bonds or other debt securities.
“Internally, when I complain about liquidity, our corporates guys are quick to tell me to stop whining,” said Mr. Lorizio.
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>>> Higher Interest Rates Fuel Losses at the Federal Reserve
The central bank is now paying out more in interest expenses than it earns in interest income
The Wall Street Journal
By Nick Timiraos
Oct. 31, 2022
https://www.wsj.com/articles/higher-interest-rates-fuel-losses-at-the-federal-reserve-11667208602
The Federal Reserve’s aggressive interest-rate rises to fight inflation are leading the central bank to do something it has never consistently done before: lose money.
The central bank’s operating losses have increased in recent weeks because the interest it is paying banks and money-market funds to keep money at the Fed now exceeds the income it earns on some $8.3 trillion in Treasury and mortgage-backed securities it accumulated during bond-buying stimulus programs over the past 14 years.
The losses don’t interfere with the Fed’s ability to conduct monetary policy, and they follow years in which the central bank earned profits of around $100 billion, which it sent to the U.S. Treasury. Those remittances reduced federal deficits, and as they end, the federal government could face marginally higher borrowing needs.
If the Fed runs sustained losses, it won’t have to turn to Congress, hat in hand. Instead, it will simply create an IOU on its balance sheet called a deferred asset. When the Fed runs a surplus again in future years, it would first pay off the IOU before sending surpluses to the Treasury.
The arrangement is akin to an institution facing a 100% tax rate and offsetting current losses with future income, said Seth Carpenter, chief global economist at Morgan Stanley.
The losses stem from some obscure monetary plumbing. The Fed’s $8.7 trillion asset portfolio is full of mostly interest-bearing assets—Treasury and mortgage securities—with an average yield of 2.3%. On the other side of the ledger—the liability side of the Fed’s balance sheet—are bank deposits held at the Fed known as reserves and overnight loans called reverse-repurchase agreements.
Before the 2008 financial crisis, the Fed kept its portfolio relatively small, at less than $1 trillion. Its main liability was the amount of currency in circulation. The Fed shifted reserves up and down in incremental amounts if it wanted to lower or raise short-term interest rates.
After the crisis, the Fed cut interest rates to zero and purchased large quantities of bonds to provide additional economic stimulus. Those purchases flooded the banking system with reserves. To maintain control over interest rates with a larger balance sheet, the Fed revamped the way it manages rates. The new system, which was already in use by many other central banks, controlled short-term rates by paying interest on bank reserves.
For the past decade, relatively low short-term interest rates meant the Fed earned more on its securities than it paid out as interest on reserves or other overnight loans. After covering its expenses, the Fed last year handed back about $107 billion to the government.
“We’ve returned close to $1 trillion to the Treasury over the last 10 years. We did not keep that revenue in the Fed,” St. Louis Fed President James Bullard told reporters last month. “Now, with the rising rates, the situation is changing.”
In September, when the Fed raised its benchmark rate to a range between 3% and 3.25%, it began earning less on its assets than it pays out on liabilities. The central bank is expected to raise rates by 0.75 point after its two-day meeting ends Wednesday.
“The losses can grow over time if they keep raising short-term interest rates, which it seems like they will, because the mismatch between interest income and interest expense will rise,” said Mr. Carpenter, a former senior Fed economist.
Economists at Barclays expect the Fed’s net interest losses to reach $60 billion next year and $15 billion in 2024 before it posts a surplus again in 2025. The Fed might not erase its deferred asset until 2026, when it would resume handing earnings to the Treasury.
Fed officials were briefed on operating losses at their Sept. 20-21 meeting, according to minutes of the meeting released earlier this month. Fed staffers at the meeting said the size of the deferred asset “would increase over time” and that net income would turn positive “likely in a few years.”
“At this point, they just have to live with it,” said Mr. Carpenter.
Economists expect the Federal Reserve’s net interest losses to reach $60 billion next year.
Like most central banks, the Fed doesn’t mark its assets to market but instead recognizes losses on its securities holdings only if it sells assets. The Fed is currently shrinking its asset portfolio passively, allowing up to $95 billion in securities to mature every month.
Even though the net interest losses have no impact on the Fed’s day-to-day operations, they could cause political headaches down the road, in part because they are large and novel, said strategists at Barclays in a recent report. Moreover, the distribution of Fed reserves and overnight loans in its reverse-repurchase facility could result in $325 billion in payments to large financial institutions in the next two years, they said.
An operating loss “doesn’t impede the monetary policy that we’re doing, but I do think it poses a communications problem,” said Cleveland Fed President Loretta Mester earlier this month.
Rep. French Hill (R., Ark.) has introduced legislation that would prevent the Fed from funding the operations of the Consumer Financial Protection Bureau during periods where the central bank runs an operating loss. When Congress created the CFPB through the 2010 Dodd-Frank financial overhaul law, it funded the new agency with money transferred from the Fed rather than with congressional appropriations.
Mr. Hill said his legislation is designed to make more transparent the Fed’s accounting and operating income, including the use of a deferred asset for operating losses. “It is their accounting arrangement, but it is not an arrangement anyone else in the economy gets to enjoy except for them,” said Mr. Hill.
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>>> Cash-Rich Consumers Could Mean Higher Interest Rates for Longer
Buoyed by pandemic-fueled savings, consumers and businesses are proving less sensitive to tighter credit—complicating the Fed’s job
U.S. households have an extra $1.7 trillion in savings, according to estimates by the Federal Reserve.
The Wall Street Journal
By Nick Timiraos
Oct. 30, 2022
https://www.wsj.com/articles/cash-rich-consumers-could-mean-higher-interest-rates-for-longer-11667075614
Washington’s response to the pandemic left household and business finances in unusually strong shape, with higher savings buffers and lower interest expenses. It could also make the Federal Reserve’s job of taming high inflation more difficult.
The U.S. central bank is trying to slow down economic growth to prevent inflation from becoming entrenched. To that end, it has increased rates aggressively this year and is likely to raise them another 0.75 percentage point at a two-day policy meeting that concludes Wednesday. That would bring the benchmark federal-funds rate to a range of 3.75% to 4%.
Some officials have argued for slowing the pace of rate rises after this week’s meeting. But the debate over the speed of increases could obscure a more important one around how high rates ultimately rise. In economic projections released at the Fed’s last meeting in mid-September, most officials anticipated their policy rate would reach at least 4.6% by early next year.
But some economists think it will have to go higher than 4.6%, citing in particular reduced sensitivity of spending to higher interest rates.
“The big question will be, given the resilience the economy has had to interest-rate increases so far, whether that will actually be sufficient,” said former Boston Fed President Eric Rosengren. “The risks are they’re going to have to do a bit more than they’re suggesting.”
The Fed combats inflation by slowing the economy through tighter financial conditions—such as higher borrowing costs and lower stock prices—which curb spending, further reducing employment, income and spending. This normally has its greatest effect on sectors of the economy most sensitive to the cost and availability of credit.
In 2020, however, the government’s wartime-like response to the pandemic—generous fiscal stimulus that showered cash on households and reduced borrowing costs—interrupted the usual recessionary dynamics of rising joblessness that amplifies declines in income and spending. It means private-sector balance sheets are in a historically strong position.
Household, nonfinancial corporate and small-business sectors ran a surplus of total income over total spending equal to 1.1% of gross domestic product in the quarter of April to June, according to economists at Goldman Sachs Group Inc. Using a three-year average, the measure is healthier than on the eve of any U.S. recession since the 1950s.
U.S. households still have around $1.7 trillion in savings they accumulated through mid-2021 above and beyond what they would have saved if income and spending had grown in line with the prepandemic economy, according to estimates by Fed economists. Around $350 billion in excess savings as of June were held by the lower half of the income distribution, or around $5,500 per household on average.
Businesses were also able to lock in lower borrowing costs as interest rates plumbed new lows in 2020 and 2021. Just 3% of junk bonds, or those issued by companies without investment-grade ratings, mature over the next year, and only 8% come due before 2025, according to Goldman Sachs.
State and local governments are also flush with cash, leaving them in a far better position than after the recession of 2007 to 2009.
While the housing market—among the most interest-rate sensitive parts of the economy—is entering a deep downturn, the rest of the economy is so far holding together. Consumer credit-card balances are rising. Earnings reports from companies including United Airlines Holdings Inc., Bank of America Corp., Nestlé SA, Coca-Cola Co. and Netflix Inc. also point to strong consumer demand and pricing increases.
“This is not the earnings season the [Fed] wanted to see,” said Samuel Rines, managing director at Corbu LLC, a market intelligence firm in Houston. “For now, the consumer is too strong for comfort.”
The Commerce Department reported Friday that consumer spending adjusted for inflation rose 0.3% in September from August, a pickup from prior months.
The upshot is that cooling the U.S. economy might require even higher interest rates. The household savings buffer “suggests to me we may have to keep at this for a while,” said Federal Reserve Bank of Kansas City President Esther George in a webinar earlier this month.
Ms. George is among a handful of Fed officials who have argued in favor of slowing down the pace of interest-rate increases. But she also said the central bank’s ultimate rate destination might be higher than anticipated and that the Fed might have to stay at that higher rate longer.
The tight labor market also figures into this calculus. It not only leads to higher wages that might bump up prices, but also could continue to power consumer spending even as households run down savings.
Worker pay and benefits continued to rise at a rapid clip in the third quarter, according to a Labor Department measure released Friday that is closely monitored by the Fed. The employment-cost index, a measure of what employers pay for wages and benefits, showed that wages and benefits for private-sector workers excluding incentive-paid occupations rose 5.6% from a year earlier.
Jason Furman, a Harvard economist who served as a top adviser to former President Obama, thinks it will be harder for the Fed to slow down the economy. He said he sees the fed-funds rate ultimately reaching 5.25% next year, with a significant risk for topping out at an even higher level.
Steven Blitz, chief U.S. economist at research firm TS Lombard, thinks the central bank’s policy rate will rise to 5.5%. “A recession is coming in 2023, but there is more work for the Fed to do to create one,” he said.
The silver lining might be that stronger private-sector balance sheets cushion the extent of any slump in the U.S. The danger is that higher interest rates or a stronger dollar make trouble in corners of a global financial system that had come to expect low interest rates to persist.
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>>> The Reporter Who Knows What Jerome Powell Is Thinking Or, at least, that is Nick Timiraos’s reputation on Wall Street and in Washington.
Intelligencer
Oct 13, 2022
By Jen Wieczner
https://nymag.com/intelligencer/2022/10/the-reporter-who-knows-what-jerome-powell-is-thinking.html
“Fed whisperer” Nick Timiraos.
When financial reporters enter the headquarters of the Board of Governors of the Federal Reserve System at the intersection of 20th and C Streets in Washington, D.C., they first remove their shoes. As they proceed through a sequence of two metal detectors, they must leave their phones and any other “smart” devices behind; even a 1980s Casio watch, with its built-in calculator, has been considered too smart, owing to the fact that “there’s a chip in there,” one reporter was told.
They continue into what’s known as the “lockup,” a secure black box of a room where their special, designated computers — without Wi-Fi or Bluetooth capabilities and which they had previously mailed to an address for inspection — are waiting for them. “The Fed is the most ironclad institution in D.C.; it’s absolutely insane,” says one reporter on the Fed beat. “No other agency requires that — not even the Pentagon.”
It is a ritual undertaken eight times a year when the 12-member Federal Open Market Committee meets to decide and announce any changes to the nation’s core interest rate — in essence, the price of borrowing money anywhere in the economy. At 1:30 p.m. on September 21, half an hour before the latest announcement, the reporters get the news first: This time, the Fed has elected to raise interest rates by three-quarters of a point, a large move by historical standards and the third supersize increase in a row. Reporters receive a copy of the central bank’s statement explaining the decision and go to work writing their stories in Microsoft Word. Then, at 2 p.m., like clockwork, the internet switch flips on again and reporters file their articles before shuffling into the briefing room to grill Fed chair Jerome Powell, whose thinking about the proper level for interest rates — with inflation hovering at a decades-high 8.5 percent — is without exaggeration one of the biggest factors affecting the world’s economy. Even at the level of individual Americans, the practical effects of Powell’s decisions loom large — everything from the value of your 401(k) to your mortgage rate (or rent) to your chances of ending up jobless are directly related to the Fed’s actions.
But with all those elaborate security protocols to keep the outside world in suspense about its plans, there is one journalist inside the windowless room who has developed a reputation for knowing what the Fed is going to do before everyone else does. On Wall Street and in Washington, Nick Timiraos, chief economics correspondent for The Wall Street Journal, is playfully referred to as the “Fed whisperer” or even “Chairman Timiraos” for his recent prescience about the central bank’s next move. The Fed regularly reshuffles its press-conference seating chart, but Timiraos is always placed front row and center, face-to-face with Powell. “The general air inside the press room is definitely that Nick is the big character in the press corps,” says another journalist who has covered the Fed. “It’s almost like he broke the seal.”
During the pandemic, the Fed — the inspiration for the “money printer go brrr” meme — effectively propped up financial markets and the economy as a whole by gobbling up trillions in bonds. Now, faced with the repercussions of that easy-money policy — namely, soaring inflation — Powell and company are mired in a damned-if-you-do, damned-if-you-don’t conundrum, in which the best way to avoid a devastating price spiral is to cause a (hopefully minor) recession. That has made the Fed and its hell-bent commitment to hiking rates a popular target of criticism. Voices from across Wall Street to Elizabeth Warren to the United Nations have railed against Powell’s aggressive rate-hiking strategy, generally arguing that it harms working-class Americans and does unnecessary damage to the economy. (The U.N. maintains that it is hurting poorer countries.) All of which means that Timiraos’s beat is more high-profile than ever — as is his reputation for being ahead of the curve.
The extra attention on Timiraos started a little more than a year ago, when he correctly reported (nearly two months in advance) that the Fed would begin winding down its pandemic stimulus in November. But the buzz began in earnest on the eve of the Fed’s mid-June meeting. Timiraos wrote an article suggesting the Fed was “Likely to Consider 0.75-Percentage-Point Rate Rise” when the consensus bet among investors around the world was for just a half-point hike. At the time, the Fed had been in a blackout period, in which its officials do not speak with reporters, for over a week. But Timiraos was right: The Fed subsequently hiked rates three-quarters of a point. “I independently confirmed that it was essentially a leak to him,” says the journalist who covered the Fed. “And that wouldn’t go to anybody else.” Since then, Timiraos has accurately called each of the Fed’s next moves, writing in July that the Fed was “preparing to lift” rates — at a moment many observers were expecting a pause — and, in September, that it was “on a path to raise” them once again by three-quarters of a point, swaying Wall Street odds-makers in that direction. On September 21, of course, three quarters of a point was exactly what Powell delivered.
Timiraos, who has worked at WSJ since graduating from Georgetown and covered the Fed for the past five years, has become a kind of economic indicator in his own right — his stories and Twitter feed are a must-read for Fed watchers the world over. “Right now, hundreds of interns and first-year analysts have one job on Wall Street, constantly refreshing a @NickTimiraos search on WSJ.com looking for an update,” Jim Bianco, a well-known macroeconomic analyst and president of Bianco Research, tweeted during the quiet period ahead of the Fed’s September meeting. “@NickTimiraos better have his phone charged, as he should be getting a ‘Blue Horseshoe likes (75 or 100)’ call any moment now.” (It’s a reference from the movie Wall Street — the nickname is code for Gordon Gekko.) Bianco sees it as everyone just doing their jobs though. “It’s not Timiraos but the seat he occupies,” explains Bianco, referring to WSJ’s towering stature in U.S. financial media. “And in fairness to the Fed, it’s a way to get information out that everybody has equal access to. No one, from a retail investor to a powerful investment banker, has any more advantage when an unexpected leak pops up in The Wall Street Journal.” (Officially, leaks at the Fed are considered rare and scandalous; in 2017, a leak of confidential information to a financial analyst led to the resignation of a prominent Fed official as well as a criminal investigation.)
The 38-year-old Fed whisperer is clean-shaven with freckled cheeks flushed from the summer sun below a ruffle of brown hair; John Krasinski would be a lock to play Timiraos in a movie. He was up-front before our meeting that he could not discuss his sources while acknowledging, “And I know that’s a lot of the focus people might have.” When we get coffee the afternoon before September’s Fed announcement, he refuses to even discuss the lockup logistics: “We’re not supposed to talk about how the sausage gets made.”
In March, Timiraos published a book, Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic — and Prevented Economic Disaster, that focuses on Powell’s unprecedented response to the pandemic. Timiraos remembers the night of March 18, 2020, when the Fed put out an emergency lending program after he’d already gone to bed. “And I got a phone call saying, ‘Check your email,’” he recalls, declining to say whom it was from. (Warren Buffett hailed the book at Berkshire Hathaway’s annual meeting as “a marvelous account.”) The volume includes extensive detail of Powell’s personal and family history, though Timiraos declined to acknowledge Powell’s participation in his reporting: “I don’t really want to get into what people say to me,” he says.
Regardless of whether Timiraos has backstage access, his track record is so perfect that the most highly respected investors take his reporting as gospel. “He, at times, becomes the chosen messenger for the Fed when the FOMC wants to get word out to the markets,” says Kathy Bostjancic, chief U.S. economist at Oxford Economics. Adds Mohamed El-Erian, former CEO of bond giant PIMCO and widely considered something of a market oracle himself, “His signaling of what the Fed is thinking and likely to do has proven to be extremely insightful.”
Both Timiraos and his editor, Nell Henderson, were reluctant to embrace the spotlight this article threatened to shine on him. “Nick is an oracle today, but he’s been preceded by other oracles both at the Journal and elsewhere,” says Henderson.
Indeed, Timiraos comes from a tradition of Fed whisperers — or at least suspected ones. Alan Greenspan once devoted a significant portion of a 1993 FOMC meeting to discussing the source of leaks to WSJ’s then-Fed reporter David Wessel, according to the official minutes. “I used to joke that the most important thing to know about Alan Greenspan was that most of his girlfriends were reporters,” says Wessel, now a senior fellow at the Brookings Institution. He once gave his colleague on WSJ’s Fed beat, Greg Ip, a silver tray as a gag gift — a reference to the common assumption that Ip’s scoops were delivered that way. Wessel paints a picture of what takes place behind the scenes as Fed officials ahead of blackout periods take meetings with reporters, who in turn read between the lines. “If you’re good at covering the thing, you kind of know how they think, and you have some sense of where they’re going, you can have your hypothesis either confirmed or denied,” he says. “I think what people sometimes mistake is they think the only way you know what the Fed is going to do is if someone tells you. And maybe that happens sometimes. I’m not saying it doesn’t.”
At times, it can be an awkward situation for an accomplished journalist to be seen merely as conduit for leaks; less flattering depictions describe Timiraos as a “Fed mouthpiece.” As we sit outside La Colombe around the corner from his office on Connecticut Avenue, Timiraos mostly keeps his arms folded across his chest. But when I read a couple of analysts’ tweets about him, he gets a sheepish half-grin on his face. (“Do they say that?” he asks when I reference the “oracle.”) “I cannot control what people are going to say,” he says. “If people think that they’re getting good analysis, then that’s great.” Over and over he repeats, “I want to let the work speak for itself.”
On Fed meeting days, Timiraos says, his routine is actually quite pedestrian. He drops his 5-year-old twins off at school before heading to WSJ’s nondescript Washington bureau, then Ubers or takes the bus to the Martin Building, where the Fed currently holds its press conferences. “I don’t find it boring at all. I mean, I love it. But I recognize that they put out a statement every six to eight weeks that’s basically the same,” he says. “The first thing I do when I get the statement is go look at which words changed,” explaining that he runs a compare-and-contrast function in Microsoft Word and focuses on what shows up in red. On the way back, he usually picks up a sandwich or salad from Pret.
In researching his book, Timiraos read all of the Fed meeting minutes going back to World War II. “I’m kind of a history nerd,” he says. But he adds that he by no means sees himself as a reliable economic forecaster. “I don’t feel like most of the time I have a great read on what’s happening,” he says. Case in point: He’d been coveting a house in the D.C. suburbs at the beginning of the pandemic but decided to wait it out. “I looked at it and said, ‘Oh my God. We’re going to be back in foreclosure city here,’” he says. (Residential real estate went on a historic run instead.) “So not great financial insight on my part. I should have bought a house two years ago.” He won’t opine on whether we are headed for a recession. “I don’t think that’s my job. If you get into trying to form opinions about things, you probably shouldn’t be a news reporter,” he says.
Lately, he has been talking to his barber about the economy. “I like to ask him how business is doing,” Timiraos says. “Barbers are good: They kind of have their finger on the pulse of things — if people were getting more haircuts or not. My barber, who works downtown, wants to know if I’m in the office again, because his customers are not coming back to the office.”
Timiraos, who covered the 2008 election, is keeping an eye on how the Fed’s actions, and the economy’s response, could have electoral consequences. “I saw a tweet thread from the head of a labor union today kind of preemptively criticizing the Fed for raising interest rates. And that’s interesting to me, because there was a political dimension to this,” he says. “What if, a year from now, we’re dealing with a much higher unemployment rate but still high inflation? What does that look like politically?”
To write about what the Fed is going to do means that being wrong would be very obvious; unlike, say, a scoop about White House plans (where even spending-bill amounts fluctuate), Timiraos’s reporting on interest rate hikes has a very exact number attached. He has never been wrong, according to Henderson. But Timiraos rejects the suggestion that being in this specific prediction game could be stressful. “I don’t feel high pressure,” he says. “I’m not a war reporter.” (He says he’s focused on reporting facts: “It’s not like I’m trying to predict what’s going to happen.”) He does worry, though, that readers might interpret his writing as being the voice of the Fed, even when he’s just analyzing. “I think sometimes there’s a danger that people will think you’re saying something that you’re not,” he says.
When it comes to covering the Fed announcements themselves, though, the job is “actually easy,” says Timiraos. “The story will write itself. It’s like covering the playoff game: You know something interesting is going to happen, and you just have to show up.”
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Rickards - >>> The Fed’s Critical Leak to the Mainstream Press
BY JAMES RICKARDS
OCTOBER 24, 2022
https://dailyreckoning.com/the-feds-critical-leak-to-the-mainstream-press/
The Fed’s Critical Leak to the Mainstream Press
The Fed will raise interest rates 0.75% at the end of its next FOMC policy meeting on Nov. 2.
That’s not an official announcement, but it might as well be because it came from the Fed’s unofficial official source. If that sounds confusing, please allow us to explain…
The Fed never announces its rate policy decisions in advance. These are announced in the form of a press release and statement distributed at precisely 2:00 p.m. ET on the second day of each Federal Open Market Committee (FOMC) meeting.
The next meeting is Nov. 1?–2, and the announcement will be made at 2:00 p.m. ET on Nov. 2.
This will be followed by a press conference with Fed Chair Jay Powell who will explain the policy change and answer reporters’ questions. On the other hand, this is the “no drama” Fed.
They want to avoid shocks to the market. They want to avoid surprises. So they have to find a way to let the world know what they are going to do in advance of the formal announcement so that stock and bond markets can adjust smoothly to the new rate policy.
How do they accomplish that?
Don’t Tell Anyone — Wink, Wink
They do it by leaks to the media. But not just any media. The Fed settles on a chosen reporter who then becomes the unofficial channel for the official leak. This reporter changes from time to time.
Formerly it was a guy named Greg Ip. Today the chosen one is Nick Timiraos of The Wall Street Journal.
Timiraos is reporting that “Federal Reserve officials are barreling toward another interest rate rise of 0.75 percentage points at the meeting Nov. 1?–2 and are likely to debate then whether and how to signal plans to approve a smaller increase in December.”
This reporting is doubly informative. Not only do we learn that the Fed will raise rates by 0.75% on Nov. 2, but we receive a strong indication that the rate hike at the following meeting on Dec. 14 will be 0.50%.
That would put the fed funds target rate at 4.50% by year-end, which is what Powell indicated at his Sept. 21 press conference.
Of course, any reporter can speculate on what the Fed will do and use whatever sourcing they chose. But there’s only one definitive conduit for leaks at a time. To see what the Fed is doing in advance you only have to know the chosen reporter (Nick Timiraos) and believe what he says.
That’s because it’s actually coming from the Fed.
More Leaks
Besides that, there’s other solid reporting about Fed activity coming from a number of outlets including The New York Times. The Times’ Jeanna Smialek reports that “Investors have entirely priced in a fourth consecutive three-quarter-point move at the Fed’s Nov. 1-2 meeting, and officials have made no effort to change that expectation.”
That’s not as definitive as the Nick Timiraos report in The Wall Street Journal but it’s strongly worded and sends the same message. But Smialek goes further and offers a good analysis of what comes next at the Fed meetings on Dec. 13?–14, 2022, and its early calendar for 2023 including meetings on Feb. 1 and March 22, 2023.
Smialek speculates that after the 0.75% rate hike on Nov. 2, the Fed may still engage in a strip of 0.50% rate hikes on Dec. 14, Feb. 1 and March 22.
If all four of those future rate hikes happened, the Fed funds target rate would be 5.50% by March 22, 2023. That’s an amazing amount of monetary tightening considering that rates were 0.0% as late as March 14, 2022.
The reasons offered for this forecast include the persistence of inflation through September 2022 despite five rate hikes from March to September.
Powell’s Serious
Fed Chair Jay Powell made it clear both in his Aug. 26, 2022, remarks in Jackson Hole, Wyoming, and again at his Washington, D.C., press conference on Sept. 21 that fighting inflation is Job 1 and the Fed will tolerate both higher unemployment and a recession to achieve that goal.
There’s little doubt that the Fed can crush inflation given enough time. The difficulty is that the cost will be high in terms of lost growth, lost income, business failures and much higher unemployment. The Fed could probably stop monetary tightening today and inflation would come down because growth is already slowing around the world.
But the Fed needs to see headline inflation come down both for political and policy reasons before they stop tightening. That’s a recipe for over-tightening since the drop in inflation lags the monetary tightening. It wouldn’t be the Fed’s first blunder (there are many) and it won’t be the last.
That likelihood becomes more apparent based on Smialek’s reporting.
I’ll tell you who isn’t happy about current Fed policy — the Biden administration and Democrats who are up for reelection in two weeks.
The Fed’s “Independence” From Politics
First off, the Fed likes to make a big deal about how it’s “independent” of political influence. But nothing could be further from the truth.
In reality, the Fed is a highly political institution. It’s just that they do a better job of hiding their politics than most inside-the-Beltway organizations. The Fed can support or frustrate White House policies by easing or restricting monetary policy to counteract the effects of tax cuts, increased spending or budget belt-tightening.
Fed chairman Arthur Burns accommodated Nixon’s “request” in the early 1970s to ease monetary policy ahead of the 1972 presidential election.
A German reporter supposedly asked Burns why he did it. Burns replied that a Fed chairman has to do what the president wants or else “the central bank would lose its independence.”
Can you imagine a more ridiculous answer?
Make Sure Trump Doesn’t Get Reelected!
Meanwhile, before the 2020 presidential election, Bill Dudley suggested that the Fed should oppose Trump’s re-election efforts by rejecting easier monetary policy.
Dudley is the former president of the highly influential New York Fed, so it wasn’t just some crank saying this.
Dudley said the outcome of the election was “within the Fed’s purview” because a second Trump term threatened the global economy as well as the Fed’s political independence (hah!).
The pandemic came along later, so the Fed was forced to ease policy. But the point is the Fed is hardly independent of politics.
What does it mean that the Fed has been continuing to aggressively raise rates ahead of the midterm elections?
The Fed Abandons Politics — for Now
Well, it’s certainly not because the Fed is looking to help get Republicans elected. For every Republican economist the Fed has, it has at least 10 Democrats.
And within the Fed’s Board of Governors, the ratio of Democrat economists to Republican economists is 48 to 1. So you can rule politics out.
The reason the Fed’s been aggressively tightening ahead of the midterm elections is because the Fed is deeply concerned about inflation and is willing to put politics aside in order to get inflation under control — for now at least.
The Fed’s strategic leaks to the media are proof of it. If the Fed can wipe out inflation by the 2024 election, it’ll insert itself into politics again.
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>>> After $13 Trillion Stock Crash, Signs of a Turn Are Now Mounting
Bloomberg
by Elena Popina
October 23, 2022
https://finance.yahoo.com/news/13-trillion-stock-crash-traders-123243360.html
Judging by the ominous pronouncements from Wall Street luminaries, every trader under the sun should be prepping for fresh turmoil in the world’s biggest stock market.
Yet hedging for doom and gloom is falling out of fashion fast, thanks to a historic equity rout that’s already erased $13 trillion in market value this year and flushed out both retail and institutional investors.
In the options marketplace, the relative cost of contracts that pay off if the S&P 500 Index sinks another 10% has collapsed to the lowest since 2017. Appetite for bullish wagers is on the rise. And the popular Cboe Volatility Index is sitting far below multi-year highs even as equity benchmarks plumb bear-market lows.
All that might sound strange given the Federal Reserve is still hellbent on delivering aggressive rate hikes just as recession risk snowballs. But traders are getting tired of reciting the same-old bearish mantras. Equity exposures have already been slashed to historic lows, while elevated inflation and monetary hawkishness are hardly new threats.
“When there is so much skepticism out there, maybe things aren’t actually as bad,” said Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, Texas. “We’re awfully close to having all the headwinds priced in. The narrative is getting repetitive, and traders are slowly getting fed up.”
A sense of exhaustion, a low bar for good news and a higher bar for bad news help explain why the S&P 500’s slow-burn crash appears to be creating fewer day-to-day fireworks. Meanwhile, an impulse to chase potential stock-market gains into a historically strong time of year has been on display of late. During the rare sessions when the S&P 500 actually advanced in October, it posted a 2.4% average gain, a move that’s 1.8 times bigger than the average decline this month. It’s the widest ratio since October 2019, data compiled by Bloomberg show.
That’s not to say traders are bullish. The VIX is still hovering near 30, reflecting expectations that equity prices will swing around more than normal in these uncertain times. Yet given historic inflation and a scary outlook for interest rates, it could be much higher. The thinking goes that cut-to-bone positioning is reducing the need for bearish hedges. The equity exposure of systematic managers, for example, is hovering near lows only seen twice over the past decade -- during the European debt crisis and the March 2020 pandemic rout -- according to Deutsche Bank AG.
With cash on the sidelines, some investors are warming to the idea that most of the bad news is over and favorable seasonal patterns may yet come into play. Since 1990, the three-month period starting on Oct. 10 has brought the S&P 500 a median gain of 7%, data compiled by Bespoke Investment Group show. On a rolling basis, that’s the strongest three-month trading window for the entire year.
“The perception is that while we’re not there yet, maybe we’re a step closer to finding the optimal bottom,” said Steve Sosnick, chief strategist at Interactive Brokers LLC. “We have a healthy package of unknown unknowns, but after a 10-month rout, we could be getting closer to figuring things out.”
All the same, a full-scale economic recession threatens to land next year and the Fed looks powerless to deliver a dovish offset like in previous downturns. That’s why Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, urges caution.
“A lot of people that are trading this market are still using the buy-the-dip playbook,” he said in a phone interview. “It’s worked before, but this is the first time in 40 years when inflation is a significant problem, and things are different.”
For now though, fits of panic are hard to see in the world of options hedging. Take the Cboe Skew Index, which tracks the cost of out-of-the-money S&P 500 options, reflecting demand for tail-risk protection. The gauge fell in six of the past eight weeks to hit the bottom decile of readings going back to early 2010.
Meanwhile, there is little appetite to bet on a higher VIX by buying calls, with the Cboe VVIX Index, a measure of the gauge’s volatility, hovering at muted levels. And more generally demand for bullish S&P 500 contracts is rising relative to downside hedges.
“Client demand is totally focused on right-tail/crash up,” Charlie McElligott at Nomura Securities International Inc. wrote in a note to clients. “They’re terrified about missing the big rally when they don’t own any/enough underlying.”
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>>> U.S. Fed lines up another big hike while mulling eventual downshift
Federal Reserve officials are preparing to roll out another super-sized interest-rate increase in early November.
Bloomberg News
by Jonnelle Marte
Oct 22, 2022
https://vancouversun.com/pmn/business-pmn/fed-lines-up-another-big-hike-while-mulling-eventual-downshift/wcm/9e7d0c81-5417-4778-973d-b4d1e8e1c0af
Federal Reserve officials are preparing to roll out another super-sized interest-rate increase in early November, when they will also likely debate tactics for completing the most aggressive tightening cycle in four decades.
Officials have been rapidly raising rates after being slow to tackle inflation that proved more persistent than expected. But with rates now approaching levels that could weigh on economic growth, policymakers are beginning to lay the groundwork for shifting to smaller moves that get them to the finish line without going too far, while leaving the door open to going further if inflation doesn’t abate.
“Front loading was a good thing,” Chicago Fed President Charles Evans told a community banking symposium hosted jointly by his bank Friday, reminding his audience that rates were down near zero in March. “But overshooting is costly too, and there is great uncertainty about how restrictive policy must actually become. So this is going to put a premium on the strategy of getting to a place and a level where policy can plan to rest and evaluate.”
Officials, who now enter their blackout period ahead of the Nov. 1-2 policy meeting, want to raise rates to a level that restricts growth and hold them there for some time while inflation comes down. After they hiked rates by 75 basis points at each of the last three Fed meetings, the central bank’s benchmark rate is now at a target range of 3% to 3.25%.
Policymakers see rates rising to a median of 4.6% next year, according to projections released last month. Investors bet that the Fed will hike by 75 basis points at their Nov. 1-2 meeting, move by either 50 or 75 basis points in December, and end the tightening cycle at a peak around 4.9% in early 2023.
US central bankers worry inflation will continue to spiral higher if they stop their rate hiking campaign too early. But if they raise rates too much, they risk pushing the economy into a painful recession.
San Francisco Fed President Mary Daly said Friday the central bank should start planning for a reduction in the size of rate increases, though it’s not yet time to “step down” from large hikes.
“It should at least be something we’re considering at this point, but the data haven’t been cooperating,” Daly said during a moderated discussion hosted by the University of California Berkeley. If officials raise rates by 75 basis points at the November meeting, “I would really recommend people don’t take that away as, it’s 75 forever,” she said.
What Bloomberg Economics says
“The Federal Reserve is primed for another 75-basis-point rate hike at the November meeting, even as chatter picked up late in the week about a possible downshift in the rate-hike pace after that.”
Downshifting to more incremental rate increases, such as a 50 basis-point increase in December, could give them room to keep hiking rates next year if inflation doesn’t start to decelerate as expected, said Derek Tang, an economist at LH Meyer in Washington. That reduces the risk that they bring rates higher than they would like, a helpful strategy since officials’ own forecasts show they are hesitant to cut rates next year.
But policymakers could face a communications challenge if investors misinterpret the downshift, stock markets rally and financial conditions ease, as they did after the Fed’s meeting in July, said Kathy Bostjancic, chief US economist at Oxford Economics. “That’s counterproductive for the Fed,” she said.
Even if officials slow to a 50 basis-point increase in December, their next summary of economic projections, to be released after that meeting, could be deployed to send a hawkish signal that they’re willing to take rates higher, said Matthew Luzzetti, chief US economist for Deutsche Bank Securities.
Still, the size of their move in December, and any shifts in their projections, will depend on what happens with the economy before then, he said. Officials will need to digest a slew of economic reports before they gather for their final policy meeting of the year, including two updates on consumer prices and two monthly jobs reports before their decision at the two-day meeting ending Dec. 14.
Some officials have said they want to see labor market demand come into better balance with supply and for there to be several monthly declines in US core consumer prices, which strip out food and energy. But the measure rose 6.6% in September from a year ago, the highest level since 1982, according to a Labor Department report published earlier this month.
“Until that evidence shows up in the data, I think it’s hard to have strong conviction that they’ve done enough in terms of the terminal rate,” said Luzzetti.
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Silver up big today, over 6%, and other metals also up nice. The dollar has sold off somewhat after peaking last week. Nice to see the metals finally clawing back somewhat from their extended swoon.
The CPI and PPI data is this week, and the Fed rate hike next week. Looks like another 3/4 point rise is likely. No Fed meeting in Oct, so next rate hike decision will be early Nov. I see Europe and Canada are also in tightening mode, with recent 3/4 point raises. Europe is facing severe energy shortages this winter, and the ECB is tightening into a an almost certain recession, so not a great backdrop.
Corporate earnings will be the next aspect to watch. Considerable weakening is expected, which might send the stock market back down to test the June lows. Fwiw, I used the recent bounce in the S+P 500 to lighten up on the stock allocation.
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Fwiw, took some profits today in the S+P 500 (SPY, VOO), but left VTI long in case the pullback doesn't materialize. At 73 the RSI is clearly overbought. The market might just keep elevating for a while, but profits can be 'fleeting', so grabbed them while they are there :o)
Current stock allocation is 14%, down from the prior 20%. 10% is the core buy/hold allocation, so could take profits on an additional 4% if the market continues climbing before a pullback.
The eventual plan is for a 25% allocation in stocks, of which 15% is permanent buy/hold, and 10% flexible depending on market conditions. Might boost it up to 30% or 35% should the market get really cheap again, but will try to keep the 15% as a core permanent long allocation. Still a 'work in progress' :o)
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Looks like a test of the 50 MAs could be next for the broad indexes :o)
Targets -
S+P 500 --- 4332 (4210) +2.9%
DJIA -------- 33,927 (33,309) +1.9%
Nasdaq ---- 13,532 (12.854) +5.3%
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>>> The U.S. housing market has gone cold
Yahoo Finance
Sam Ro
July 24, 2022
https://finance.yahoo.com/news/the-us-housing-market-has-gone-cold-153657282.html
Low financing costs, excess savings, and a demand for more space during the pandemic fueled a frenzy in the housing market that sent home prices surging.
Homebuyers, however, are now confronting an increasingly unaffordable housing market that’s been plagued by shortages.
And with the Federal Reserve forcing financing costs higher in recent months, housing market activity has cooled off considerably.
“Housing is likely just at the beginning of recession,“ Tom Porcelli, chief U.S. economist at RBC Capital Market, wrote on Monday. “Of course, a large amount of activity was pulled forward during the pandemic and then you layer on top of that the sharp rise in rates (monthly mortgage payments up about +60% over the last year) and housing was sure to fall hard.“
Last week came with a flood of housing market data, and none of it looked good for those in the market.
For starters, affordability is a big problem.
According to Zillow’s monthly housing market report released Tuesday, the monthly mortgage payment on the average U.S. home was $1,613 in June, up 4.5% from a month ago and 62.2% from a year ago.
Again, you can thank cash-flush consumers for helping to fuel a housing market boom that caused home prices to surge over the past two years.
More recently, you have a Fed that’s been tightening financial conditions, which has come with surging mortgage rates. This has made affordability worse.
According to Freddie Mac data, the average rate for the 30-year fixed rate mortgage was 5.54% as of July 21. Mortgage rates have surged to levels last seen in December 2008.
High home prices and high mortgage rates have turned off potential home buyers.
According to the Mortgage Bankers Association (MBA), mortgage purchase and refinance application activity last week fell to its lowest level in 22 years. Bill McBride, author of Calculated Risk, charted the slowdown:
“Purchase activity declined for both conventional and government loans, as the weakening economic outlook, high inflation, and persistent affordability challenges are impacting buyer demand,” the MBA’s Joel Kan said on Wednesday.
This is all reflected in the declining number of homes being sold.
Sales of previously-owned homes fell 5.4% in June to an annualized rate of 5.12 million units, according to the National Association of Realtors (NAR). It was a 14.2% drop from a year ago.
“Both mortgage rates and home prices have risen too sharply in a short span of time,” NAR chief economist Lawrence Yun said on Wednesday.
Indeed, the price of the average existing home sold was a record $416,000 in June, up 13.4% from a year ago.
Part of what’s going on in housing is limited supply. But are builders clamoring to take advantage of high selling prices? No.
“Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home,” Jerry Konter, Chairman of the National Association of Home Builders (NAHB), said on Monday.
According to NAHB data released Monday, home builder sentiment plunged in July to its lowest level since May 2020.
“Apart from April 2020, this was the largest one-month decline in the 37 year history of the series,” UBS economist Sam Coffin observed. “The housing market index had been trending down gradually since the start of the year, but now, its decline is steeper than at the equivalent time seven months into the housing crisis. In short, it suggests significant further deterioration in homebuilding.“
Home construction data confirm the depressed sentiment.
According to Census Bureau data released Tuesday, home construction starts fell to an annualized rate of 1.559 million units in June, down 2.0% from a month ago and down 6.3% from a year ago.
By most measures, housing market activity is cooling and looks ripe to cool further as long as affordability problems persist.
That said, we may soon see prices broadly move lower sooner than later as more and more sellers are finding that they’re listing their homes for too high a price.
“On average, 7.3% of homes for sale each week had a price drop, a record high as far back as the data goes, through the beginning of 2015,” Redfin analyst Tim Ellis wrote.
All that said, what we’re witnessing in the housing market is the desired outcome of the Fed, which continues to use tighter financial conditions — including rising mortgage rates — to cool economic activity in its effort to bring down inflation.
Elsewhere in the economy
Labor market data continues to go from hot to less hot.
Last week, we learned Apple, Google, and Microsoft were among companies slowing their hiring.
Also, initial claims for unemployment insurance benefits increased to 251,000 during the week ending July 16. It was the fourth consecutive week of increases, and it represented the highest print since November 2021.
While these developments aren’t favorable for job seekers, they’re exactly the kinds of developments the Fed has been hoping for as it battles inflation.
Early signs of contraction
According to S&P Global’s preliminary US Manufacturing PMI report released on Friday, the headline index dropped to 47.5 in July from 52.7 in June. Any reading below 50 signals contraction, and this was the first sub-50 print since June 2020.
The services business activity index fell to 47.0 from 52.7 a month ago. And the manufacturing output index fell to 49.9 from 50.2.
“Excluding pandemic lockdown months, output is falling at a rate not seen since 2009 amid the global financial crisis, with the survey data indicative of GDP falling at an annualized rate of approximately 1%,” Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said on Friday. “Manufacturing has stalled and the service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest rates and growing gloom about the economic outlook.”
S&P Global’s findings were echoed by the Philly Fed’s Manufacturing Business Outlook Survey released Thursday. The report’s general activity index plunged 9 points to -12.3 in July. Any reading below 0 signals contraction.
The big picture
We continue to live in a world where the Federal Reserve has been trying to slow the economy by bludgeoning financial markets in its efforts to get inflation down.
Indeed, markets have been doing terribly and the economic data has turned decidedly south. And prices for some stuff, including gasoline, have been coming down.
But, it may still be difficult to argue that inflation is moving lower in a “clear and convincing” way, which means we should expect the Fed to remain very hawkish.
The Fed holds its regular monetary policy meeting next Tuesday and Wednesday. At the conclusion, Fed chair Jerome Powell will update us on the central bank’s assessment of inflation and its outlook for monetary policy.
A hawkish or dovish tilt in Powell’s tone could spark volatility in the markets.
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>>> Ocean Shipping Rates Begin to Decline
Transport Topics
July 13, 2022
https://www.ttnews.com/articles/ocean-shipping-rates-begin-decline
Transpacific shipping costs have fallen by 53% in the past three months, and on July 8 it cost $7,409 to transport a 40-foot container from China to the nation’s largest gateways for trade on the West Coast on a long-term contract.
According to the Freightos Baltic Index, that same container cost $15,764 to transport April 15. The drop in shipping prices comes as the Ocean Shipping Reform Act has been in effect for about a month. The law gives the Federal Maritime Commission more tools to regulate the shipping industry, and the relatively small federal agency is now in the process of hiring more investigators to oversee and monitor ocean carriers.
“I think the congestion caused by the pandemic has caused all sorts of challenges,” FMC member Carl Bentzel told Transport Topics, referencing the ongoing but lessening challenges the ports have had on the Atlantic and Pacific coasts. “I don’t think the shippers have been manipulating intentionally the market, but when you have nine carriers left, it doesn’t take much to figure out where the market is, and they have taken advantage of a very hot market.
“There is no proof of collusion, but this was created as a result of consumer demand because of COVID, but there’s only a small number of ocean carriers.”
On the East Coast, shipping rates from China to the Atlantic Ocean are down 43%. On April 15, it cost $17,150 to move a 40-foot container, and in early July the price was $9,882.
Bentzel said the soaring price of shipping imported items from China to the U.S. is a key factor in the increasing inflation, and he’s encouraged that shipping costs are declining. But that doesn’t mean the soon-to-be larger FMC will be backing off of its newly expanded mission. In fact, he said the new law will provide just the opposite.
“Small is a kind term. There is going to be some growth at FMC,” Bentzel said. “We have six investigators, area representatives we call them, and right now, we’re pretty minuscule. That covers the entire United States, and we do roughly $6 trillion in commercial cargo and services, related to that cargo movement.
“So, we have one investigator for each $1 trillion in commerce. Compare that to the Securities and Exchange Commission, and they have 150 for every trillion dollars, so it gives you an idea of the scope of the challenge we face ramping up.”
FMC now has fewer than 130 employees, and he anticipates the agency reaching 160 with the addition of investigators and attorneys, especially those that have experience in transportation-related issues.
“The immediate activity will be related to enforcement,” he said. “But we’ll also be looking at maritime data and the new requirements on sharing maritime data and the new information on intermodal cargo shipping through U.S. ports, and there will be some needs there.”
The next big stumbling block for the ports could be the ongoing contract negotiations between the 22,000-member International Longshore and Warehouse Union and the Pacific Maritime Association.
PMA represents employers at 29 West Coast port and warehouse facilities, including the ports of Los Angeles and Long Beach. Between them, they are on target to process more than 21 million containers this year, which would be a record.
“While we await the signing of a new contract between ILWU and PMA, other aspects are also important when forecasting where rates are heading,” Xeneta Chief Analyst Peter Sand wrote in an online post. He said strong continued consumer spending and inflationary pressures, as well as the level of disruptions across the U.S.’s logistics network, also will impact prices.
Negotiations are ongoing in San Francisco, but the current contract expired July 1. Still, both sides have pledged they will not begin a labor action and they anticipate a multiyear agreement will be reached this summer or fall.
Both sides say they are in a news blackout, and the union and management are sending out statements on talks only occasionally.
“Both the PMA and ILWU agree that they are unlikely to reach a deal before July 1 expiration of the current agreement,” the last statement on June 14 said, just days after the two sides met with President Joe Biden during a visit to the Port of Los Angeles. “The timing is typical, and cargo operations continue beyond the expiration of the contract. Neither party is preparing for a strike or lockout, contrary to speculation in news reports. The parties remain focused on and committed to reaching an agreement.”
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>>> War inflation is slowing. Here’s the S&P 500 level where a Bank of America strategist says investors should ‘gorge’ on stocks.
Market Watch
July 15, 2022
By Steve Goldstein
https://www.marketwatch.com/story/war-inflation-is-slowing-heres-the-s-p-500-level-where-a-bank-of-america-strategist-says-investors-should-gorge-on-stocks-11657884920?siteid=bigcharts&dist=bigcharts
Are we past the worst financial side effects of Russia’s invasion of Ukraine?
Michael Hartnett, chief investment strategist at Bank of America, created a war inflation chart. It’s a simple index of Brent crude oil BRN00, 2.54%, European natural gas and wheat W00, -2.61% prices — the three commodities mostly clearly tied to the direction of the conflict.
Wheat prices have dropped 44%, Brent oil has dropped 24% and European gas has dropped 21% from their peak. Hartnett says it doesn’t make sense for Russia to close the Nord Stream 1 gas pipeline indefinitely. That pipeline is shut until July 21 for scheduled maintenance.
Hartnett, who’s been pessimistic on stocks, said there are risks to the consensus view of both a shallow recession, and that shallow recession will kill inflation, allowing a pivot by the Fed to refocus on growth. He says in real terms — that is, adjusted for inflation — policy rates are still deeply negative, at -6.7% in the U.S., -8.8% for the eurozone, -6.1% in the U.K. and -2.5% in Japan.
A spiking dollar DXY, -0.54%, he adds, often portends credit events, as it did in 1998, 2008 and 2020. The dollar reached new 20-year highs this year as the greenback rallied against the euro and the Japanese yen.
All that said, he gave levels where investors want to buy stocks. A S&P 500 SPX, 1.69% at 3,600 would be grounds to “nibble,” at 3,300 would be room to “bite,” and at 3,000, it would be time to “gorge.”
The S&P 500 index ended Thursday at 3,790.
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Bill Dudley (Fed) - >>> What It Will Take for the Fed to Tame Inflation
The Washington Post
Analysis by Bill Dudley
Bloomberg
July 14, 2022
https://www.washingtonpost.com/business/what-it-will-take-for-the-fed-to-tame-inflation/2022/07/14/4cda4606-036d-11ed-8beb-2b4e481b1500_story.html
Developments in the US economy have recently been going the Federal Reserve’s way, with price pressures peaking even as economic growth and strong payroll gains have been sustained. But don’t be fooled: The task of getting inflation back to the Fed’s 2% target remains extremely daunting, both practically and politically.
Economic indicators — including the employment report for June, industrial production, and the Institute for Supply Management’s activity indices — suggest that growth has slowed but the economy is not in recession. Meanwhile, energy prices have fallen, core inflation is decelerating, wage inflation might be declining and longer-term inflation expectations remain well-anchored. To some, this might look like the beginning of a soft landing and a potential triumph for the Fed.
Far from it. For one, the Fed hasn’t made much progress in curbing the excessive demand for workers. Despite months of large employment gains, the ratio of job openings to unemployed workers remains at 1.9, nearly twice the level Fed Chair Jerome Powell has indicated as desirable. To get inflation back to 2%, the central bank will have to push the unemployment rate up significantly from the current 3.6%. Even an 0.5-percentage-point increase would probably mean a recession, because that’s what has always happened in the past when the unemployment rate has breached that threshold.
Second, the Fed needs to be confident that it has succeeded in pushing inflation back down on a sustainable basis. Chair Powell correctly understands that the costs of not hitting the 2% target over the next year or two outweigh the costs of a mild recession – because failure would cause inflation expectations to rise, necessitating an even tighter monetary policy and a deeper downturn later. In the late 1960s and the 1970s, the central bank tightened monetary policy enough to push inflation lower at times, but it reversed course too soon. As a result, the peaks and the troughs for inflation kept moving higher — until the 1980s, when Paul Volcker had to force a deep recession to regain control. Given this history, officials will be hesitant to stop tightening until they’re highly confident (probability greater than 80%) that they’ve done enough — that the labor market has sufficient slack to keep inflation low and stable, and that easing financial conditions won’t lead to a inflation rebound.
Third, tightening will create political challenges for the Fed. Aside from the pain of job losses and economic contraction, higher interest rates will generate operating losses for the Fed, as the interest it pays on bank reserves far exceeds the return on its holdings of Treasury and mortgage securities. The central bank’s own estimates suggest that it will start losing money in the fourth quarter of this year, and post large losses in 2023 if interest rates evolve in a way close to what they and markets expect. Fed losses, which will be at the taxpayers’ expense, could embolden opponents of quantitative easing to argue that the Fed has breached the boundary between monetary policy and fiscal policy. Congress could even seek to take the tool away, undermining the Fed’s ability to provide further monetary stimulus the next time that short-term interest rates reach the zero lower bound.
Beyond that, operating losses could make the Fed reluctant to sell mortgage-backed securities, despite its commitment to eventually return to an all-Treasuries portfolio. Such sales would realize losses on the securities, which have declined considerably in price as interest rates have risen.
All told, the Fed still has an extraordinarily difficult path to navigate and a long way to go.
Bill Dudley is a Bloomberg Opinion columnist and senior adviser to Bloomberg Economics. A senior research scholar at Princeton University, he served as president of the Federal Reserve Bank of New York and as vice chairman of the Federal Open Market Committee.
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Here's an excellent summary from Nouriel Roubini of the current economic landscape -
>>> Unconvincing price moves as the economy cools
Yahoo Finance
by Sam Ro
July 3, 2022
https://finance.yahoo.com/news/unconvincing-price-moves-as-the-economy-cools-152444988.html
Inflation data released last week was mixed. It certainly wasn’t the “clear and convincing” evidence of cooling prices that the Federal Reserve has been looking for.
The core PCE price index — the Fed’s preferred measure of inflation — climbed 4.7% in May from a year ago (chart above), which was cooler than the 4.8% rate economists expected. It was also down from the 4.9% rate in April, the 5.2% rate in March, and the 5.3% peak rate in February.
On a month-over-month basis, the core PCE price index climbed by 0.3% in May, which was cooler than the 0.4% economists expected. It was the fourth straight month the metric climbed at a 0.3% rate.
While the metric is generally moving in the right direction, it remains elevated.
“That is not the ‘clear and compelling’ evidence the Fed needs to shift to less aggressive rate hikes,” Michael Pearce, senior U.S. economist at Capital Economics, wrote on Thursday.
“Federal Reserve Chairman Jay Powell has underscored that the Fed would like to see a cooling of inflation on both a month-to-month and year-over-year basis,” Diane Swonk, chief economist at Grant Thornton, wrote on Thursday. “The former is most important and is not yet happening. Core PCE remains more than double the Fed’s 2% target, which is just too hot.“
It doesn’t help that consumers remain gloomy on the outlook for prices.
According to the Conference Board’s June Consumer Confidence survey (via @RenMacLLC), consumer expectations for the inflation rate 12 months from now was a record high 8%.
Cooler prices may be on their way
Inventory levels across industries continue to rise.
This week alone, Nike, Bed Bath & Beyond, and Micron were among big companies flagging elevated inventory levels.
Ed Yardeni of Yardeni Research has a composite index consisting of delivery times and order backlogs — two good proxies for supply chain delays — from five regional Fed bank surveys. The metric has tumbled to lows last seen before anyone mentioned anything about pandemic-related supply chain disruptions.
“June's surveys of five of the 12 district Federal Reserve Banks strongly suggest that supply-chain disruptions have eased significantly in recent months,“ Yardeni wrote.
This confirms other indicators of loosening supply chains. From Bank of America’s biweekly trucker survey published July 1 showed: “The Truck Capacity Indicator was 70.9, up from 67.0 last survey, as more shippers see available truckload capacity.“
Loosening supply chains are a good sign for lower inflation.
They would be a great sign if they were reflecting improving supply.
But it looks like slowing demand is playing a significant role here.
Manufacturing is cooling
According to S&P Global US Manufacturing PMI report released on Friday, the headline index fell to 52.7 in June. This suggests manufacturing activity is growing at it slowest pace since July 2020.
Similarly, the ISM Manufacturing PMI fell to 53.0 in June, its lowest level since June 2020.
Both reports saw significant declines in new orders.
“Forward-looking indicators such as business expectations, new order inflows, backlogs of work and purchasing of inputs have all deteriorated markedly to suggest an increased risk of an industrial downturn,“ Chris Williamson, chief business economist at S&P Global Market Intelligence, wrote on Friday.
The June durable goods orders report, which will be released on July 27, will bear watching. According to the May report, orders — including the important core capex orders — were still rising.
“Some welcome news is that the drop in demand for inputs has brought some pressure off supply chains and calmed prices for a wide variety of goods, which should help alleviate broader inflationary pressures in coming months,” Williamson added.
Keep in mind that bad news about the economy can be good news for inflation. And so if decelerating manufacturing activity is causing prices to come down, then it’s the bad news the Fed is looking for.
Is the consumer cracking?
Consumer spending data has been less than spectacular.
According to a BEA report released Thursday, personal consumption expenditures (i.e., consumer spending) increased by 0.2% in May from the prior month to a new record high.
On one hand, it’s good that consumers are continuing to spend albeit at a decelerating rate.
On the other hand, inflation played a significant role here. When adjusted for inflation, real spending actually fell 0.4%.
And consumers are very aware of the inflation.
The Conference Board’s Consumer Confidence Index fell to its lowest level since February 2021 as deteriorating inflation expectations caused the survey’s Expectations Index to plunge to its lowest level since March 2013.
“Consumers’ grimmer outlook was driven by increasing concerns about inflation, in particular rising gas and food prices,” Lynn Franco, senior director at The Conference Board, said on Tuesday. “Expectations have now fallen well below a reading of 80, suggesting weaker growth in the second half of 2022 as well as growing risk of recession by yearend.“
While consumer sentiment continues to sour, actual consumer spending behavior doesn’t seem to reflect an economic downturn. It’s a bullish contradiction that’s been playing out for months. Bank of America recently analyzed its customers’ card spending activity and published its findings in a June 24 report:
“Our analysis suggests the consumer is not displaying the usual recessionary patterns at this time…Interestingly, we find that consumers do not necessarily dine out less during downturns, but rather they tend to shift to cheaper restaurants. Aggregated Bank of America card data indicates consumers currently are not shifting to this direction…Travel spending also usually drops during recessions. However, aggregated Bank of America card spending data as of June points to the highest travel spending share since the pandemic began.”
Indeed, the number of passengers going through TSA checkpoints are at pre-pandemic levels and continue to climb. And despite lots of unfavorable headlines about flight cancellations and surging airfares, searches for flights remain very high.
Keep in mind that consumer finances continue to be very robust. And there is a growing number of consumers earning income: U.S. employers have added 2.4 million jobs during the first five months of 2022 alone.
Meanwhile, unemployment continues to be low.
Initial claims for unemployment insurance declined to 231,000 for the week ending June 25 from 233,000 the week prior. While the number is up from its six-decade low of 166,000 in March, it remains near levels seen during periods of economic expansion.
Zooming out
There continue to be massive tailwinds — including excess savings, capex orders, and demand for workers — bolstering the economy and limiting the negative impacts of tight monetary policy. Perhaps, this will buy the economic recovery some time as supply catches up with demand.
But until we get “clear and convincing” evidence that inflation is coming down, the Fed is going to keeping putting pressure on financial markets in its effort to destroy demand in the economy. So don’t be surprised to see economic data continue to sour and stock prices continue to not go up.
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