Although core inflation declined in December (CPI all items less food and energy), it is still hot, hot, hot at 4% Year-over-year (YoY). This raises the following question: Is The Fed tightening too much? Aka, yet another Fed policy error?? Since The Fed target rate is 5.50% and core inflation is now 4%?
Headline Consumer Price Inflation printed hotter than expected in December, +0.3% MoM vs +0.2% exp and +0.1% prior, pushing the YoY headline CPI up to +3.4% (from +3.1% prior and hotter than the +3.2% exp)…
Source: Bloomberg
Services (Shelter mostly) costs re-accelerated and energy deflation stalled in December…
On the brighter side, core CPI according to the BLS rose 0.3% MoM as expected, dropping the YoY change below 4.00% for the first time since May 2021…
Source: Bloomberg
Goods deflation has stalled as the used cars and trucks index rose 0.5 percent over the month, after rising 1.6 percent in November.
More problematically for The Fed (and the rate-cut ‘hypers’), is the fact that Core CPI Services Ex-Shelter (SuperCore) rose 0.4% MoM, upticking the YoY rise to +4.09%…
Source: Bloomberg
This is a category that Fed Chair Jerome Powell and other policymakers have highlighted as a focus.
All the subsectors of SuperCore rose MoM with the shelter index increased 6.2 percent over the last year, accounting for over two thirds of the total increase in the all items less food and energy index.
But shelter inflation is slowing (slowly):
Shelter inflation was up 6.15% YoY in Dec, down from 6.51% in Nov and the lowest since July 2022
Rent inflation was up 6.47% YoY in Dec, down from 6.87% in Nov and the lowest since July 2022
And the next time someone from the Biden administration says ‘inflation is down’ in an attempt to gaslight the public into believing ‘prices are down’ – show them this chart…
Headline costs at record highs
Core costs are record highs
Food costs at record highs
Fuel costs on the rise again
Source: Bloomberg
Four of the six major grocery store food group indexes increased over the month.
The index for meats, poultry, fish, and eggs rose 0.5 percent in December, led by an 8.9-percent increase in the index for eggs.
The index for food away from home rose 5.2 percent over the last year.
The index for limited service meals rose 5.9 percent over the last 12 months, and the index for full service meals rose 4.5 percent over the same period.
The White House was quick to note that real hourly earnings was positive in December (+0.8% YoY) but that number is the aggregate of ALL American workers.
If we drill down to the ‘average joe’ – production and non-supervisory jobs – their wages are up 17% since Biden was elected… The only problem is, the cost of food since then has surged almost 21%…
Is this a pause before the re-plunge? M2 thinks so…
So what happens next?
Not so much Goldilocks perfection.
Powell is in a real pickle now – does the Fed begin shrinking QT in March (which it has to if it is terminating BTFP and Reverse Repo is drained) without starting rate cuts.
Here we sit with core inflation rate BELOW the current Fed Funds Target Rate (upper bound). So is it time to start withdrawing its more than ample monetary stimulus. Like the Bank Term Funding Program.
The Federal Reserve is likely to retire the Bank Term Funding Program in March. This would entail an additional ongoing headwind for reserves, and thus liquidity, through 2024. At the margin, this adds weight to the case for the Fed cutting interest rates sooner in the year.
The BTFP was created in the wake of the SVB crisis to help struggling banks get access to liquidity when bond prices were dropping. However, its use in recent months has jumped to over $140 billion. That is not, however, a sign of banking stress.
The chart below shows the usage of the BTFP along with the rate paid at the 99th percentile in the fed funds market relative to the upper bound of the range for fed funds.
As can be seen, this is under zero, i.e. banks are not having to pay up to get liquidity.
This is in stark contrast to last March at the time of SVB’s fall when some banks were having to pay 15 bps above the fed funds upper bound for liquidity.
This time the rise in BTFP usage is good old-fashioned arbitrage. After the Fed’s pivot, term rates have come down relative to the policy rate. The cost to use the BTFP is 1y OIS + 10 bps, which is ~4.90%. Banks can post USTs at par as collateral, borrow at this rate, then deposit the funds back at the Fed at the IORB rate (interest on reserve balances), i.e. 5.40%, for a juicy risk-free profit.
This is not good optics, so it is unlikely the program will be renewed when it is due to expire on March 11. Michael Barr, the Fed’s vice chair for supervision, hinted as much on Tuesday when he emphasized the BTFP is an “emergency program.”
And it seems clear the emergency is over. Deposits of small banks (for whom the program was aimed at) have been rising since their drop after SVB’s collapse (both on a seasonally and non-seasonally adjusted basis). That, along with the quiescent fed funds market, suggests banks are not facing stress. Furthermore, the Fed’s pivot has also increased collateral values, making banks’ hold-to-maturity portfolios less underwater.
The BTFP’s expiry would mean another ongoing drain on reserves as the loans expire over the year.
With the Fed now seemingly focused on liquidity in this new paradigm, this adds to reasons why the central bank may cut earlier in the year.
The market is currently pricing 17 bps of cuts for the March 20 meeting, so that’s not an attractive risk-reward, but at under ~7 bps or so that proposition changes – more so if the BTFP is no more.
Meanwhile, the futures market is forecasting rate cuts of over 200 basis points!
The Federal Reserve is a private enterprise that works with The Federal government like in the film “Prometheus” or “Chariots of the Clods.”
Unfortunately, that period of relative stability appears to be ending.
The pace of layoffs really seemed to pick up steam at the end of 2023, and the outlook for the coming year is not promising at all. In fact, a survey that was just conducted by Resume Builder discovered that a whopping 38 percent of U.S. companies anticipate that they will conduct layoffs in 2024…
38% of companies say they are likely to have layoffs in 2024
52% are likely to implement a hiring freeze in 2024
Half say anticipation of a recession is a reason for potential layoffs
4 in 10 say layoffs are due to replacing workers with artificial intelligence (AI)
3 in 10 companies reducing or eliminating holiday bonuses this year
If you currently have a job that you highly value, try to hold on to it as tightly as you can.
Because the employment market is starting to shift in a major way.
Nike has announced a $2 billion cutback over the next three years, with an uncertain number of job cuts included. Toy giant Hasbro will cut nearly 20% of its workforce in 2024, according to reports from the Wall Street Journal. Music service Spotify announced a third round of layoffs. A recent email from CEO Daniel Ek says the company plans to cut its workforce by nearly 20%. Roku is going to be limiting new hires, and laying off about 10% of its workforce, while Amazon layoffs are effecting its new gaming division (all 180 jobs there are being eliminated). Citi CEO Jane Fraser announced layoffs in September, and sources have told CNBC that the bank could let go of at least 10% of its workforce, across several business lines. Flexport Logistics plans to cut up to 30% of its employees, and financial services company Charles Schwab is cutting back by 5-6% of its workforce, according to reports from Business Insider.
Unfortunately, this is just the tip of the iceberg.
With the continued rise of online shopping, along with record inflation, it’s no wonder that retailers are suffering steep financial losses. Unfortunately, this means that companies all across the U.S. are downsizing brick-and-mortar storefronts to make ends meet. In 2023, we’ve seen closures from big-name retailers and local shops alike—and the shutdowns don’t appear to be easing up anytime soon.
More than 3,000 retail locations were shut down in 2023, but that is nothing compared to what is coming…
According to UBS equity analyst Michael Lasser, the U.S. remains over-retailed. Lasser estimated that the U.S. will shed almost 50,000 retail stores by 2028. He cites rising operating costs and a higher proportion of e-commerce sales, causing retailers to look closely at store locations and performance.
Can you imagine what our communities will look like if that projection is even close to accurate?
As economic conditions deteriorate, people are going to get more desperate and the conditions in our streets will become even more chaotic.
A mob of over 100 looters purposefully crashed a Kia into a small bakery in Compton, Calif., before they flooded in and ransacked the store during a night of rampage on the streets earlier this week.
The thieves had gathered in the area for an illegal street takeover around 3 a.m. Tuesday before making the mile-long trek to Ruben’s Bakery & Mexican Food.
When they got to the locked store, a white Kia backed into the front doors, clearing an entryway for the crowd of pillagers to get to their loot.
And so it goes. Lawlessness is bad for retail businesses. Not to mention the morale of US citizens.
And then we have the office market. The office space vacancy rate in the US has reached its highest level since 1979. In the fourth quarter of 2023 19.6% of office space in major US cities was not leased according to data collected by Moody’s Analytics.
The increase in remote work since the COVID-19 pandemic has caused a large decline in demand for office space, despite increasing attempts to get Americans back in the office. What’s more, on the demand side the stock of office space in the US is the result of earlier booms in commercial real estate construction. The last boom took place between 2012 and 2017, when demand for commercial real estate loans strengthened. On the supply side, lending standards loosened between 2012 and 2015. This era coincides with a strong rise in the commercial real estate price index, which may have motivated banks to expand lending. Loan standards tightened during the pandemic, then loosened again when the economy rebounded, but have tightened since 2021.
Since the Great Recession, commercial real estate prices have more than doubled in nominal terms, but have moved sideways since 2021. This suggests that prices have reached a plateau. However, in recent years inflation has obscured the movement of commercial real estate prices in real terms, which shows a peak in 2021, but since then there has been a decline, almost to the level during the COVID-19 pandemic. In other words, commercial real estate prices are already failing to keep up with inflation. Is this an indication that the commercial real estate bubble is already deflating? With nominal commercial real estate prices remaining elevated, most of the nominal price correction is likely still to come. Since small banks are heavily exposed to commercial real estate, the enduring problems at small banks and the fragility of commercial real estate could provide a dangerous mix that could explode during a recession. For more details, we refer to The commercial real estate-small bank nexus.
I noticed that The Administration has handed propaganda duties off to John Kirby and relegated KJP to relief pitching away from Peter Doocey!
Joe Biden can be called “Sloppy Joe” because of the economic havoc he has sprung on an unsuspecting middle class. The following seven charts are what keeps me up at night (unlike what keeps multimillionaire Michelle Obama up at nights).
First, US interest payment on Federal debt is rising faster than our bloated military budget. Thanks mostly to The Fed raising rates to fight inflation under Biden.
Second, contrainer shipping rates are soaring thanks to Iran’s interference in the Middle East and Biden’s failed diplomacy with Iran.
Third, food prices are over 20% more expensive under Biden while gasoline prices are over 28% more expensive under Biden. Housing is also more expensive under “Sloppy Joe” as in 33.5% more expensive.
Fourth, Bidenomics is about adding more non-productive government jobs.
Sixth, Grayscale Bitcoin Trust $GBTC traded close to half a billion on Monday. Which shows the lack of confidence in Biden’s handling of the economy.
Seventh, purchasing power of the US Dollar is down 15% under Sloppy Joe.
While some may view Biden’s policies are planned destruction of the US economy, it could simply be that Biden (who is one of the stupidest people in Washington DC) simply is grossly incompetent and … sloppy.
Bidenomics has taken the US economy to the underworld. Where households have to run up credit cards to ridiculous levels to cope with inflation under Bidenomics. Under Bidenomics, food prices are up 20.4%, home prices are up 33.5% and regular gasoline prices are up 28.2%. Whip out those credit cards!!!!!
According to the latest monthly consumer credit report from the Fed, in November, consumer credit exploded higher by $24.75BN, blowing away expectations of a “modest” $9BN increase after the surprisingly subdued $5.8BN (upward revised from $.5.1BN) in October and the $4.3BN average of the past 6 months. This was the biggest monthly increase since last November, and was the first $20BN+ print since Jan 2023.
When looking into the details we find something remarkable: while non-revolving credit rose a modest $4.6BN…
… in keeping with the subdued increase in recent months as rates on auto loans make them prohibitive for most consumers while student loans are actually shrinking for the 2nd quarter in a row…
… what was the big shock in today’s data was the blowout surge in revolving credit, which in November exploded by a whopping $19.133BN, a record surge from the $2.9BN in October, and the second biggest monthly increase in credit card debt on record!
This, despite the average interest rate on credit card accounts in Q4 flat at a record high 22.75% for the second quarter in a row.
What is especially surprising about this conirmation that the bulk of holiday spending was on credit is that it takes place after several months of relative return to normaly, when consumers appeared increasingly reluctant to max out their credit cards due to record high rates, and at a time when the personal savings rate in the US has collapsed back near multi-decade lows in recent months.
Well, it now appears that Americans have once again done what they do so well: follow in the footsteps of their government and throw all caution to the wind, charging everything they can (and whatever they can’t put on installment plans which also hit a record late last year) including groceries, on their credit card, and praying for the best… or not even bothering to worry about what comes next.
While ”Angry Joe” Biden screams about democracy (while having his attorney general prosecute his likely Presidential election opponent), and he and Congress continue to spend and borrow like there is no tomorrow (not a bad assumption since Biden is a sickly 81, Pelosi is 83 and assorted other aging policitians in the District of Corruption will never live beyond 10 more years), we are now seeing more attention to the boiling frog problem facing our children and grandchildren. I call this “Biden Stew.”
Michael Cembalest, who runs JPMorgan’s market and investment strategy unit in the bank’s asset management division, predicted dire consequences for the economy if the Biden administration doesn’t start tackling the debt.
Cembalest wrote in a newsletter published last week by JPMorgan that the country cannot sustain higher deficits and ballooning net interest payments, which are soon expected to exceed the federal government’s total revenue by early next decade.
“The problem for the US is the starting point; every round of fiscal stimulus brings the US one step closer to debt unsustainability,” Cembalest wrote in the newsletter titled “Pillow Talk.”
“However, we’re accustomed to deteriorating US government finances with limited consequences for investors, and one day that may change (the boiling frog analogy).”
The “boiling frog” concept comes from a metaphor used to describe a situation whereby an undesirable set of circumstances is tolerated for an extended period of time — such as a frog that is thrown into water that is gradually heated.
Cembalest predicted that by early next decade, “all Federal government revenues will be consumed by entitlement payments and interest on the Federal debt.”
“Entitlement payments” refer to Medicaid, Medicare, Social Security, unemployment insurance and other aspects of the federal welfare safety net.
Cembalest wrote that before the next decade he anticipates that “a combination of market pressure and rating agency downgrades” will “force the US to make substantial changes to taxes and entitlements.”
In November, Moody’s lowered the US government’s credit ratings outlook from “stable” to “negative.”
Last summer, Fitch Rating downgraded the federal government’s long-term credit rating from AAA to AA+.
While Biden pushes for MORE Ukraine war funding and cancelling student debt (like a demonic Daddy Warbucks from Little Orphan Annie), he ignores unfunded entitlements of $213 TRILLION.
To be sure, the Biden Stew has been a trainwreck for decades, but Biden has the golden opportunity to act like a leader instead of “Angry Joe” screaming about Democracy as he and his minions attempt to cancel their politicial opponents.
One of the biggest public pension plans in the US plans to borrow tens of billions of dollars to maintain liquidity instead of triggering a fire-sale of its assets.
Borrowing to lever up its real estate-laden portfolio when CRE returns are negative??
Calstrs board members will review the first draft of the policy next Thursday. If approved, the leverage would be used “on a temporary basis to fulfill cash flow needs in circumstances when it is disadvantageous to sell assets,” a CalSTRS policy document stated.
According to Calstrs consultant Meketa Investment Group, the public pension fund already deploys leverage upwards of 4% of its portfolio, adding the proposed increased leverage won’t be used for a new asset allocation policy but rather used to smooth cash flow and as an “intermittent tool” to manage the portfolio.
The need to increase leverage comes after a report from the Financial Times last April explained that CalSTRS was planning to write down the value of its $52 billion commercial real estate portfolio after high interest rates crushed the values of office towers.
At the time of the FT report, CalSTRS Chief Investment Officer Christopher Ailman told the media outlet that:
“Office real estate is probably down about 20 percent in value, just based on the rise of interest rates,” adding, “Our real estate consultants spoke to the board last month and said that they felt that real estate was going to have a negative year or two.”
For Calstrs, CRE was one of the best-performing asset classes until Covid and the Fed embarked on the most aggressive interest rate hiking cycle in a generation. Real estate had delivered double-digit returns over a 10-year period for its million-member plan, according to an update last March.
FT noted real estate makes up about 17% of Calstrs’ overall assets.
We’re sure Calstrs is one of many pension plans under pressure from the CRE downturn. Also, regional banks have high exposure to CRE and are still not out of the woods.
On a non-seasonally-adjusted basis, deposits rose almost in line, up $20.3BN (the fifth week of inflows in a row)…
Source: Bloomberg
Interestingly the sizable deposit inflows are occurring alongside sizable money-market fund inflows…
Source: Bloomberg
…now we know where all that reverse repo liquidation cash is going…
Source: Bloomberg
Excluding foreign bank flows, the picture is even rosier with domestic bank deposit inflows of $33.8BN (SA) and $38.7BN (NSA) – the 5th week in a row of NSA inflows…
Source: Bloomberg
While it may surprise some, on an NSA basis, domestic bank deposits are now back above pre-SVB levels…
Source: Bloomberg
Large banks saw $24BN inflows last week and Small Banks $9.4BN (on an SA basis) and for the 5th week in a row both large and small banks saw NSA inflows (+$30BN and +$8.7BN respectively)…
Source: Bloomberg
On the other side of the ledger, loan volumes continued to shrink (despite the deposit growth). Large bank loan volumes fell $8.2BN (the 4th week of falling loan volumes in a row)…
Source: Bloomberg
Which leave us continuing to highlight the fact that there is potential trouble brewing still as the key warning sign continues to flash red (Small Banks’ reserve constraint – blue line), supported above the critical level by The Fed’s emergency funds (for now)…
Source: Bloomberg
As the red line shows, without The Fed’s help, the crisis is back (and large bank cash needs a home – green line – like picking up a small bank from the FDIC).
All of which keep us wondering, are we setting up for another banking crisis in March as:
1) BTFP runs out…
It was only a 12 month temporary program, and it is going to be hard for The Fed to keep it alive. The BTFP-Fed Arb continues to offer ‘free-money’ (and usage of the BTFP has risen by $32BN since the arb existed), but the spread has narrowed a smidge from a peak near 60bps to 50bps today…
Source: Bloomberg
Which will make it hard for The Fed to defend leaving the facility open after March when its “temporary” nature is supposed to expire.
“In justifying the generous terms of the original program, the Fed cited the ‘unusual and exigent’ market conditions facing the banking industry following last spring’s deposit runs,” Wrightson ICAP economist Lou Crandall wrote in a note to clients.
“It would be difficult to defend a renewal in today’s more normal environment.”
2) RRP drains to zero…
…at which point reserves get yanked which means huge deposits flight.
Source: Bloomberg
Is this the real reason why The Fed ‘pivoted’? It knows what’s coming??
Income is rising and so are wages. Even real income is up. But real wages are another matter.
Personal income data from the BEA, hourly wages from the BLS, real hourly earnings and chart by Mish.
Personal Income vs Hourly Wages Notes
DPI means Disposable Personal Income. Disposable means after taxes.
Real DPI means inflation adjusted using the Personal Consumption Expenditures (PCE) deflator. Real DPI is a BEA calculation.
Average hourly earning are for production and nonsupervisory workers.
Real wages are deflated by the Consumer Price Index (CPI) not the PCE.
The BLS does not report a real hourly wage. I used the CPI-W index for production and nonsupervisory workers, produced by the BLS, as the deflator.
Personal Income Definition
The BEA defines personal income as “Income that people get from wages and salaries, Social Security and other government benefits, dividends and interest, business ownership, and other sources.”
Rental income is a part of other sources.
Three Rounds of Fiscal Stimulus
Round 1, March 2020: $1,200 per income tax filer, $500 per child(CARES Act) – Trump
Round 2, December 2020: $600 per income tax filer, $600 per child (Consolidated Appropriations Act, 2021) – Trump
Round 3, March 2021: $1,400 per income tax filer, $1,400 per child (American Rescue Plan Act) – Biden
The three rounds of free money fiscal stimulus (literally a helicopter drop), plus eviction moratoriums put an unprecedented amount of money in people’s hands. In addition, unemployment insurance paid people more to not work than they received working.
The third round of stimulus under Biden was totally unwarranted. However, it is also worth noting that Trump wanted a much bigger second stimulus package than the Republican Congress gave him. Trump is no fiscal hero.
The three stimulus packages, on top of supply chain disruptions, energy disruptions due to the war in Ukraine, and Bidenomics in general, set in motion the biggest wave of inflation in over 30 years.
Biden went from an approval rating of 17.2 percent to a disapproval rating of 17.2 percent.
Peak Free Money
In addition to declining real wages, perhaps Biden’s big problem is the free money has run out.
Biden’s popularity peaked in March of 2021 along with stimulus. Was that a honeymoon impact or peak free money?
[ZH: While not a perfect indicator, the lagged US credit impulse perhaps provides a proxy for US fiscal excess and when overlaid with Biden’s approval rating, it is clear that 2022’s re-acceleration did nothing for people’s faith in him… and it’s only got worse…]
I suspect a bit of each coupled with hope of more free money, especially student loan forgiveness.
Sending free money to Israel and Ukraine does not help perceptions of how Biden is doing. And neither does the border or ridiculous energy regulations that cost people money.
Biden keeps telling people what a great job he has done.
I don’t believe it and most don’t either. And that shows up in the polls no matter what reason you assign.
Can Biden scrounge up some more stimulus? Because the private sector is not doing well under “Open Borders Biden.”
In another episode of “Government Gone Wild” we see that total Federal debt just broke through the $34 trillion mark.
Some context: US debt increased by…
$1 trillion in the past 3 months
$2 trillion in the past 6 months
$4 trillion in the past 2 years
$11 trillion in the past 4 years
The Congressional Budget Office (CBO) is flashing the alarm.
Reckless spending in Washington DC by the administration and Congress is projected to drive US Debt to GDP to rise like the nuclear reactor in the film K-19: The Widowmaker.
Today the crypto market flash-crashed this morning with Bitcoin instantaneously puking from $45,500 to $41,000…
And Ethereum followed suite…
Over $550 million in crypto long positions were liquidated in the past 24 hours, per data from CoinGlass, including $104 million in Bitcoin longs in the past hour alone.
The extremely volatile cryptos are rallying. But still down on the day.
Confounded Interest - Anthony B. Sanders 
You must be logged in to post a comment.