Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Good news on the wage front. Sort of .
US REAL average hourly earnings rose in September to -0.8% YoY.
Too bad that REAL home prices are growing at a 14.4% YoY clip.
The Federal Reserve’s new motto: making home unaffordable! With help from the US Treasury.
At least the Atlanta Fed’s President Raphael Bostic finally admitted that inflation isn’t as transitory as he previously believed. The Fed dumped trillions in liquidity into an economic system that was unprepared for it, and he is surprised that prices are going nuts?
The consumer price index increased 0.4% from August, according to Labor Department data released Wednesday. Compared with a year ago, the CPI rose 5.4%, matching the largest annual gain since 2008. Excluding the volatile food and energy components, so-called core inflation rose 0.2% from the prior month.
U.S. headline inflation rose more than forecast in September.
Source: Bureau of Labor Statistics, Bloomberg survey
The median estimate in a Bloomberg survey of economists called for a 0.3% monthly gain in the overall measure and a 0.2% advance in the core rate.
A combination of unprecedented shipping challenges, materials shortages, high commodities prices and rising wages have sharply driven up costs for producers. Many have passed some portion of those costs along to consumers, leading to more persistent inflation than many economists — including those at the Federal Reserve — had originally anticipated.
The pickup in price growth seen last month reflected higher food and shelter costs. Meantime, measures of used cars and trucks, apparel and airfares cooled.
U.S. equity futures fluctuated and Treasury yields were little changed following the report.
The CPI data reflects crosscurrents in the economy. Hotel fares fell, reflecting the impact of the delta variant on travel, but inflation is broadening out beyond categories associated with reopening.
Higher home prices are now starting to filter through in the data. Rent of primary residence jumped 0.5%, the most since 2001, while a measure of homeowners’ equivalent rent posted the biggest gain in five years. Shelter costs, which are seen as a more structural component of the CPI and make up about a third of the overall index, could prove a more durable tailwind to inflation.
The report will likely reinforce the Fed’s inclination to soon start tapering its asset purchases, especially as the supply-chain challenges plaguing businesses show little signs of abating. Minutes from last month’s Federal Open Market Committee meeting — out Wednesday afternoon — will provide further insight on policy makers’ views toward progress on employment and inflation goals for tapering.
A New York Fed survey out Tuesday showed U.S. consumers’ expectations for inflation continued to rise in September, with 1-year and 3-year expectations accelerating to record highs.
American consumers are also experiencing higher prices for new vehicles and household furnishings and supplies, which increased by a record 1.3%, the report showed. And looking ahead, elevated energy prices are set to take an additional bite out of workers’ paychecks.
While we know that apartment rents are growing at 15.5% YoY, the CPI for Owner’s Equivalent Rent only rose by 3.2% YoY.
Powell: Whoops, did I do that?
Everyone seems worried about it. Bridgewater Associates co-Chief Investment Officer Greg Jensen says spiraling prices that choke off growth are a “real risk” that many portfolios are massively overexposed to. A “fairly strong consensus” of market professionals believe that some kind of stagflation is more likely than not, according to a Deutsche Bank AG survey. And while Goldman Sachs Group Inc. urged investors to buy the dip, strategists said “stagflation” was the most common topic in client conversations.
Wherever you fall on the debate, alarm bells are ringing as energy prices head toward multiyear highs and persistent shortages crimp supply chains worldwide. That’s fueling price pressures and pushing up bond yields just as economic growth is cooling and central banks such as the Federal Reserve weigh scaling down pandemic-era stimulus. And after a second straight month of disappointing U.S. jobs gains, the stakes are rising heading into this week’s inflation report.
“The reality that inflation is more persistent and sustainable than the ‘transitory’ camp thought, and that inflation and its causes are in turn slowing economy growth,” said Peter Boockvar, chief investment officer for Bleakley Advisory Group.
Much of the stress is emanating from the energy market, where West Texas Intermediate crude oil broke above $82 per barrel for the first time since 2014 on Monday amid a power crisis from Europe to Asia. Prices of coal and natural gas have also jumped, with demand ahead of winter whittling worldwide stockpiles.
The commodity surge has thrust stagflation fears front-and-center in markets, given that higher energy prices have the potential to pinch consumers, according to Principal Global Investors. Gains in consumer spending are already expected to slow, leading Goldman economists to slash U.S. growth estimates over the weekend.
“The idea was already starting to take shape. The increase in commodity prices has just formalized those fears,” said Seema Shah, Principal’s chief global strategist. “While there have been complaints around higher food prices, higher lumber prices, higher clothes prices, it’s the increase in household bills that has really put fear into peoples’ minds, because it is so visible and rising gas prices are difficult to substitute away from for an average household.”
Sky-high commodity prices have filtered through to the Treasury market, where yields on benchmark 10-year notes broke above 1.6% for the first time since June last week. Driving the gain is an increase in breakeven inflation rates, while so-called real yields — often viewed as a proxy of growth expectations — have retreated so far this month.
“If we look at the composition within the TIPs market, we see an increase in breakevens to the detriment of real yields,” BMO strategist Ian Lyngen said on the firm’s “Macro Horizons” podcast. “We read this as the market’s focus on longer-term inflation has taken some of the optimism out of the growth profile going forward.”
Morgan Stanley strategist Andrew Sheets disagrees. Breakeven rates are still below their May peaks, while the cross-asset landscape is distinct from the stagflationary setup of the 1970s, he argued. Data compiled by Bloomberg shows gross domestic product is forecast by economists to rise 5.9% this year, 4.1% next year and 2.4% in 2023.
“Asset pricing also couldn’t be more different. Over the last century, the 1970s represented an all-time high for nominal interest rates and an all-time low for equity valuations,” Sheets wrote in a note Sunday. “Today we’re near a low in yields and a high in those valuations.”
Equity investors so far seem unperturbed. That’s the view of Matt Maley, chief market strategist for Miller Tabak + Co., given that the S&P 500 is just 3.9% lower from its all-time high. However, the mood music could change as the third-quarter reporting season kicks off and corporate executives sound off on supply chain issues and rising input costs, he said.
“The key should be this earnings season,” Maley said. “If a lot of companies start talking about margin pressures, the stock market will start pricing in stagflation rather quickly.”
So far, balance sheets have been resilient. Operating margins for the S&P 500 clocked in at 14.4% last quarter, a record high, with companies in many cases actually benefiting from the inflation uptick.
But should stagflation fears start to meaningfully rattle equity markets, shares of companies with higher pricing power — the ability to pass on costs — should profit, according to Goldman, after several weeks of underperformance.
“Stocks with strong pricing power have recently lagged but appear attractive if stagflationary concerns continue to build,” strategists led by David J. Kostin wrote. “If inflation remains high alongside a weakening economic growth outlook, firms with strong pricing power should be best positioned to maintain profit margins despite slowing revenue growth and rising input costs.”
Not to mention real-time GDP of 1.3%. And falling!
Of course, there will be cries in Washington DC to spend trillions … and trillions … and trillions.
金融政策に限界があるとは考えておりません
(I do not believe that there is a limit to the effect of monetary policy.)
Haruhiko Kuroda, Bank of Japan, 13 April 2016
The Bank of Japan is one of the top three Quantitative Easing (QE) Monsters in terms of the absolute amount of assets it purchased. The Fed and the ECB round out the trio. The BoJ started QE over 20 years ago, and went hog wild under Abenomics, which became the economic religion of Japan in 2013. But the era of Prime Minister Shinzo Abe ended in September 2020, and Abenomics is now finished.
What’s left of it is that the BoJ (and Bank of Japan Governor Haruhiko Kuroda) now holds about half of the huge pile of the central government’s debt. With their target rate at -0.10% and a gargantuan balance sheet, what could go wrong?
But BOJ’s QE has ended. The BoJ’s overall assets stopped growing, and its holdings of government bonds have started to decline.
As of the BoJ’s balance sheet dated September 30, released on Thursday, total assets declined to a still monstrous ¥724 trillion ($6.4 trillion), below where it had been in May 2021.
But look at Japanese home prices with the growth of the BOJ’s balance sheet and general decline in mortgage rates. Like the USA, there was a balance sheet spike associated with Covid and a resulting spike in home prices.
The USA? We also saw a surge in home prices following The Fed’s monetary “stimulypto.”
But will The Fed follow BOJ’s lead and stop asset purchases? Not yet, anyway. It seems that The Fed can’t turn market forces loose and let interest rates rise.
Bear in my that the US Misery Index is above 10% (U-3 unemployment + inflation).
And if I define the US Misery Index as U-3 unemployment + home price growth, we can see we are at record misery rates. Miserable for households that don’t own a home or are trying to move to a higher housing price area).
What I like about The Fed’s monetary policies?? Nada.
Like the poem, Casey At The Bat, the US economy struck out with a shockingly bad jobs report for September.
Oh, somewhere in this favored land the sun is shining bright;
The band is playing somewhere, and somewhere hearts are light,
And somewhere men are laughing, and somewhere children shout;
But there is no joy in Mudville USA—mighty Casey Biden has struck out.
The U.S. economy added fewer jobs than forecast for a second straight month in September. Nonfarm payrolls increased by just 194,000 last month after an upwardly revised 366,000 gain in August, Labor Department figures showed Friday. 500K was expected.
The U-3 unemployment rate declined to 4.8% (meaning that the labor force shrank due to people dropping out of the labor force). In fact, 338,000 people dropped out of the labor force.
Average hourly earnings YoY rose to 4.6%. While that is an improvement, but it is lower than the inflation rate of 5.25% YoY and house price inflation of 20% YoY.
This miserable jobs report is a victory for Fed doves that don’t want to raise rates or slow down the balance sheet growth.
Where were the jobs created? Leisure and hospitality, as usual, leads in job gains.
Mighty Biden’s economic policies have struck out. Good night, Irene.
Initial jobless claims dropped below their recent range last week, falling to the second lowest level since the COVID-lockdowns crushed the economy. Only 326k Americans filed for jobless benefits for the first time last week, down from 364k last week and below the 348k expectation.
The massive Covid stimulus for employment has worn out. Note the decline in Pandemic Unemployment Insurance and Pandemic Emergency Claims. The thrill is gone … of pandemic unemployment benefits.
Continuing claims also declined from the previous week, again largely from Pandemic Unemployment Assistance and Pandemic Emergency Claims programs ending.
On a related note, Challenger job cuts were down -84.9% YoY. But for September, there was a surge in low-paying retail jobs and transportation jobs as Panademic stimulus ran out and governments have pretty much stopped their destructive government shutdowns of economies.
So this is where all the Pandemic claimants have gone?
The Atlanta Fed’s real-time GDP tracker fell … again … to 1.33% as The Federal Reserve continues its bizarre monetary stimulus.
The culprits? Declining auto sales, manufacturing, etc.
I have discussed soaring prices since Biden’s election (food, energy, housing, rent, etc). But another soaring price component is shipping costs. Up 315% since mid-February.
While Trump’s slogan was “Make American Great Again”, Biden and The Fed’s slogan should be “Make America Far More Expensive For The Middle Class.” But that won’t fit on a bumper sticker.
And Biden/Democrats now want to RAISE taxes!
Can you say “All the king’s horses and all the king’s men ..” Or “All The Fed’s stimulus and all of Biden’s jobs bills ..”
Yes, the Atlanta Fed’s GDPNow Q3 tracker slumped to 2.3% despite the massive stimulus coming from The Federal Reserve and the Biden Administration. Down from 13.7% GDP growth as of 5/5/2021.
Federal Reserve Chair Jerome Powell calls inflation ‘frustrating.”
Only a multi-millionaire like Powell would call it frustrating. Most US consumers would call it “devastating.”
Look at home prices, natural gas, gasoline and food prices since The Fed turned on the money pump to combat the Covid shutdown by government. Well, at least food price growth has slowed, but that is more that offset by natural gas (heating) costs skyrocketing.
Rent? That too has zoomed upwards, although Powell likely isn’t worried about his rent rising by 11.5%.
I wonder if Powell is frustrated by banks parking their money at the Fed’s reverse repo facility? Ninety-two participants on Thursday placed a total of $1.605 trillion at the Federal Reserve’s overnight reverse repurchase agreement facility, in which counterparties like money-market funds can place cash with the central bank. The previous record, set the day before, was $1.416 trillion. Thursday’s leap was the biggest one-day increase in usage since mid-June.
Biden blames “greed” for rising prices, Powell is “frustrated” by bottlenecks. But why pump trillions into the economy when you know there are bottlenecks? Or meatpacking firms are “greedy”?
So much for the transitory inflation that The Federal Reserve keeps spouting on about.
(Bloomberg) — The pace of rent increases is heating up in the U.S.
Rent data for the past two months show no sign yet of the usual seasonal dip at this time of year, following peaks early in the summer, when many lease renewals come due.
A Zillow Group Inc. index based on the mean of listed rents rose 11.5% in August from a year earlier, with some cities in Florida, Georgia and Washington state seeing increases of more than 25%.
Since the start of the pandemic, the median rent for a two-bedroom apartment has soared 13.1% to $1,663, Zumper data show.
But rent on newly-signed leases rose 17% from the previous tenant’s lease.
For the New York market, landlords are raising rent prices as much as 70% now that people are flooding back into the city as offices and entertainment venues open up. In July, the median asking rent in New York City surged to $3,000, compared with the pandemic low of $2,750 in January 2021, data from StreetEasy showed.
Of course, rent surge is not surprising given that home prices have surged since Covid given limited inventory and massive Fed stimulus.
Perhaps if The Fed and Federales (Federal government) start reducing their apocalyptic-level stimulus, THEN we will see inflation as transitory.
Confounded Interest - Anthony B. Sanders 
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