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It’s A Mad, Mad, Mad, Mad Market

It’s A Mad, Mad, Mad, Mad Market

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It's A Mad, Mad, Mad, Mad Market Tyler Durden Tue, 08/04/2020 - 15:40

Authored by Peter Cecchini, Formerly Senior Managing Director, Cantor Fitzgerald via LinkedIn,

Preface

Tyler Fitzgerald (Jim Backus aka Thurston Howell III from Gilligan’s Island): Anybody can fly a plane, now here: I'll check you out. Put your little hands on the wheel there. Now put your feet on the rudder. There. Who says this ol' boy can't fly this ol' plane? Now I'm gonna make us some Old Fashioneds the old-fashioned way - the way dear old Dad used to!

Benjy Benjamin (Buddy Hackett): What if something happens?

Tyler Fitzgerald: What could happen to an Old Fashioned? 

– It’s a Mad, Mad, Mad, Mad World (1963)

I’m guessing some readers won’t remember this all-star, Oscar-winning classic. Indeed, it was made well before even my time, but I remember watching it on the ‘tube’ on more than one Sunday night in the late 1970s. I’d watch it with my Dad, who’d howl with laughter. I decided to watch it once again with my son. If you’ve never seen it, it’s worth the time. They just don’t make existential comedies like this one anymore. The story begins after a reckless driver named Smiler Grogan (Jimmy Durante) roars past a handful of cars on a winding California road and ends up launching himself over a cliff. Before (literally) kicking the bucket, he cryptically tells the assembled drivers that he's buried a fortune in stolen loot… under a mysterious ‘Big W.’ He says: “350G’s. I’m givin’ it to ya’ but watch out for the bulls. They are everywhere.” Yes, they are, albeit he had a different sense in mind. With little moral reservation, the motorists set out to find what they now consider their fortune.

The characters exemplify some of human nature’s best and worst qualities. At times, they are wildly creative and improvisational. However, they work together only to the extent necessary – double-crossing each other repeatedly. They lie. They cheat. They steal without a second thought. They have a singular focus: treasure - at any cost. Their sense of entitlement is overwhelming. In the scene quoting Tyler Fitzgerald, who is a high-society alcoholic, two of the treasure seekers (played by Mickey Rooney and Buddy Hackett) convince him to fly them to Sant Rosita in a brand-new Beechcraft twin. Blinded by greed, they seem to care little that he is too drunk to stand. In the end, they all find the Big W together along with the treasure beneath - but only to be bamboozled out of it. Eventually, the money ends up being lost completely and redistributed from atop a fire escape to a crowd in ‘Santa Rosita square.’ Helicopter money of sorts – easy come, easy go. Greed is not only their foremost motivation, but it’s their ultimate undoing.

There are more than a few similarities between the Mad, Mad, Mad, Mad World characters and today’s market participants.

So far at least, myopic greed and speculation have paid well. Analysis has been a handicap. Unprecedented fiscal policy stimulus combined with the Fed’s debt monetization has thus far maintained a pretense of normalcy in markets. There will be consequences to ballooning balance sheets (both corporate and federal). Few seem to be considering that the ultimate consequence of massive deficits is at the very least potentially crushing taxation. Or worse, if the Fed ever stops QE in an attempt to normalize policy by shrinking its balance sheet (soon to be an anachronistic concept), rates would likely rise steeply. The Fed is too busy bailing out the bottom of the boat to raise the sails.

Deficits are now so large that Treasury issuance monetization must occupy the vast majority of the Fed’s attention. This close the zero bound, the Fed can no longer significantly lower rates, it simply must prevent rate market dislocations due to massive supply. Fed action is no longer stimulative; rather, it is only palliative. Importantly, it’s not Fed ‘liquidity’ feeding market participants’ emotional impulse. While it remains an enabler, it’s fiscal policy that is putting money directly into gamblers’ bank accounts. This distinction is crucial to whether fiscal policy continues to provide enough liquidity for a return to the casino later this year. It seems that equity markets are priced for an aggressive second round of fiscal policy action, an efficacious vaccine by year end, and a healthy corporate America - free from defaults.

Takeaways

  • This time, there’s no treasure under the Big W. It’s just a big ‘W.’ We remain in a bear market with highly unfavorable return characteristics for large and small cap U.S. equities alike.

  • Equity and credit market performance is no longer all about monetary policy; it’s mostly about market participant emotion, which is largely dependent upon the pandemic fiscal policy response.

  • The Fed that is now hamstrung – now ‘forced’ to monetize massive, and otherwise unsustainable, policy deficits.

  • Fiscal policy stimulus has found its way directly into U.S. equity markets – particularly speculative names and technology.

  • Pre-existing fragility – especially excessive leverage – will make escape velocity for markets and the economy particularly difficult to achieve.

  • Liquidity will likely evaporate when personal and business defaults eventually sop up fiscal policy liquidity. The Fed is ill-positioned to act efficaciously. It’s too busy mopping up Treasury issuance.

  • Loans create deposits and without creditworthy borrowers, even a continued, fiscal-policy driven expansion of M2 may not result in higher asset prices.

  • Risk-asset markets are not correctly pricing the coming explosion in prospective personal, corporate, and commercial real estate (CRE) defaults.

Liquidity Trap

Let’s start with the often-cited reason to be long equity markets now. As the story often goes:

“Take a look at the money supply. The Fed has printed money… so much money. Just look at the monetary base and M2. It has exploded. It’s bound to find its way into equities. Don’t fight the Fed.”

Old Fashioned, anyone? Proponents of this rationale may be right on the result (higher equities) for a time, but they’d be right for the wrong reason. This time is different. First, the Fed ‘printing money’ is an anachronistic phrase I wish well-paid strategists would stop using all together. The Fed’s creation of excess reserves (‘money printing’) and subsequent purchases of assets are no longer lowering interest rates sufficiently to stimulate real economic growth. Rates are already low. It’s not the quantity of money that stimulates growth or increases inflation; it’s first and second order effects of lower capital costs – i.e. lower rates or yields. Now, the Fed’s reserve creation is solely for the purpose of preventing a rates market dislocation. After the GFC, the Fed lowered capital costs considerably; now, it’s simply treading water to keep them low. Importantly, not only does this make it more difficult for the Fed to stimulate the economy, but it also makes it tough for the Fed to help prevent corporate loan defaults when cash flows deteriorate. Thus, the Fed’s direct impact on risk-asset markets has diminished greatly, and I’ll soon explain why it matters.

For one, it’s helpful to understand that the Fed has often implemented QE without a consequent outsized increase in M2, to which so many have pointed as supporting equities now. The connection is more complicated. Frist, risk assets have often rallied without any M2 increase. Contrary to popular belief, the more or less consistent growth in M2 (due to natural growth of currency in circulation as loans are made) generally sees spikes when there is aggressive fiscal policy response. As Figure 1 shows, the Fed’s balance sheet expansions (the asset side of the balance sheet identity for reserve liability creation) often do not correspond well with significant M2 increases. This is particularly clear during the $1 trillion 2013 quantitative easing program; money supply growth didn’t budge above trend. In contrast, in both 2008, 2011 and most recently, M2 did increase. Those instances accompanied fiscal policy stimulus, and in each case M2 increased in line with the amount of the fiscal stimulus. For obvious reasons, the impact of recent fiscal stimulus on M2 has been outsized.

Figure 1: Top Panel – M2 (blue) and Fed Balance Sheet (orange); Lower Panel – Change in M2 (blue bars); Source – Bloomberg Data

To cut to the chase, M2 growth is supporting equities, but it’s not a monetary policy phenomenon – it’s fiscal policy one. While fiscal policy is driving both investor sentiment and the beginnings of an economic recovery, the Fed still plays a critical role. Without its current “QE to infinity” approach, the massive supply of Treasuries would have little place to go. Rates would likely move considerably higher, especially on the long end of the curve as demand would most certainly fall short of supply. Why? Precisely because of the massive policy deficits - already supersized even before the pandemic – required to combat the enormity of the pandemic shock. Fiscal policy is now the key – the Fed is the enabler but no longer the main actor.

Indeed, especially near the zero bound, low rates may lose their real-world stimulative efficacy. A liquidity trap typically occurs when interest rates are low yet consumers and businesses tend to save. Indeed, since last year, I have advocated for gold (in part) because of this phenomenon. Such behavior renders monetary policy ineffective. First described by economist John Maynard Keynes, during a liquidity trap, investors may choose to keep their funds in cash savings because they believe interest rates could soon rise, because they need to repair balance sheets, or because they wish to prepare for upcoming financial stress. At the same time, central bank efforts to spur economic activity are hampered as they are unable to lower interest rates sufficiently to incentivize corporations and consumers to invest or to consume, respectively. This is precisely why central bankers had been advocating for a fiscal policy response long before the pandemic shock. Ironically, because market participants no longer seem to perceive equities as a risky asset, saving appears to manifest vis-a-vis equity market speculation!

Fiscal Dominance

So, what is next on the fiscal policy front? Well, it seems this stimulus round is shaping up more modestly than the initial round. Over $500 billion in paycheck protection (PPP) and another almost $300 billion in direct to consumer programs (including supplementary pandemic unemployment insurance relief) accounted for the lion’s share of a ~$1 trillion increase in M2 (Figure 1). According to Bloomberg, after the White House dropped the idea of including a payroll tax cut, White House and Senate Republicans now have a “fundamental agreement” on a GOP plan for another round of pandemic relief. Instead of a payroll tax cut, the GOP will now back $1,200 checks for individuals who make up to $75,000 a year, just as in the March stimulus bill. Moreover, last week, Treasury Secretary Steven Mnuchin told CNBC that the Republican coronavirus relief plan will extend enhanced unemployment insurance “based on approximately 70% wage replacement.” Presumably, this will be something less that the current $600 for most Americans. In aggregate, the Republicans reportedly are looking to propose $1 trillion in relief versus over $3 trillion from Democrats. The timetable for releasing legislative text, which is key to beginning negotiations with Democrats, is uncertain. One thing seems clear: the package’s scope will be more limited than the initial round of stimulus.

While likely smaller, the second round of fiscal policy response will once again put cash into checking accounts. This will once again help increase M2 and may also help to support equities. This is what’s so different about this equity market. With an assurance that the economy will be directly supported by more consumer directed stimulus, retail market participants are driving the rally – not unlike the late 1990s. Just this weekend the WSJ put an exclamation point after the sentence. Figure 2 from the Journal shows the number of new E*Trade accounts retail investors opened in march. It dwarfs any previous month. It’s generally the same dynamic for the Robinhood platform about which I began writing in September of 2019. My favorite quote from the story is a woman who proclaims that her trading style is aggressive because ‘scared money makes no money.’ According to the Journal, “she read ‘Trading for Dummies,’ watched YouTube videos, opened an E*Trade account and dove in.” That sounds about right.

Figure 2: New E*trade Retail Accounts by Month; Source - WSJ

This is now the sixth month of a pandemic that has not yet significantly abated in the U.S.  In order to continue unwaveringly towards the Big W, it would seem to require market participants believe an efficacious vaccine is not only assured but that it is also distributed quickly to the population. Moreover, there remains much unknown about the immune response and evidence is growing that immunity may be short-lived. Nobody even seem to recall the slowdown that was already afoot before the pandemic occurred. In light of an extended first wave of virus cases and with continuing unemployment claims still above 16 million, how much long might market participants throw caution to the wind? (Figure 3 - not shown - illustrates just how enormous that unemployment statistic is.) Just how long will banks and investors continue to loan money based on a stimulus-based recovery thesis? The answer to the latter question is critical to not only asset prices but also to the main-street economy.

In the absence of unusual fiscal policy stimulus programs (as present) and under normal circumstances, loans create deposits. Deposits, in turn, contribute to a capital base for yet more loans. Defaults and delinquencies are surely one thing that destroys the loan-deposit cycle. Defaults will slowly start to sop up liquidity – as they always do. Lending standards, which had already begun to tighten in 2019, are now tightening significantly… it’s likely just the beginning (Figure 4 above). Corporate and consumer lending will continue to slow, and as the corporate sector begins to experience even more strain as leverage grows, speculative behavior should begin to dissipate. That’s when the narrative changes from ‘there’s so much liquidity out there’ to ‘what the heck happened to all the liquidity.’ Easy come, easy go.

Figure 4: Lending Standards for Large/Medium Firms (blue), Small Firms (orange) and Consumer Credit Cards (gray); Source – The Fed

Corporate sector leverage – particularly speculative grade loans and bonds – has been at the top of the list of concerns for at least the past twelve months. If it was a concern pre-pandemic, it is of far greater concern now – even taking into account the scope of fiscal and monetary policy action. Banks typically slow lending and non-bank lenders typically curtail funding when credit fundamentals begin to deteriorate. Policy action, especially fiscally funded support for performing corporate credit, has helped suspend lower-rated paper from wires above. While prices have rebounded, credit fundamentals are not improving. As Bloomberg’s Philip Brendel puts it:

“Distressed-debt supply fell by $3 billion in June to $195 billion, a 47% correction from the cycle's March peak of $366 billion. The stock market's rally, seemingly without a conscience, seems to be comforting credit markets as investors shrug off record Covid-19 cases and an upcoming parade of horrific 2Q earnings results. Yet sharp corrections are common in highly volatile distressed cycles, and we think the exuberance may mirror spring 2008's similar two-month window of calm, which didn't last.”

According to Bloomberg data and analysis, despite 26 issuers in North America already having become fallen angels as of June 30, about 47% of corporate debt carrying BBB tier ratings has either a negative outlook or is on credit watch negative. That’s about $2.6 trillion of BBB tier debt that carries a negative outlook or is on credit watch negative. This includes over $89 billion at risk of becoming high yield. Importantly, financials are the most at risk accounting for about 33% of the total (including issues from Intesa Sanpaolo, Discover Financial and Deutsche Bank).

Importantly, non-bank lenders and loan syndication vehicles are also challenged – specifically, collateralized loan obligation (CLO) and business development companies (BDCs). The CLO market is about $700 billion and supports the $1.2 trillion speculative grade loan market. BDCs account for over $200 billion of speculative grade loans outstanding. CLOs provide banks with a syndication mechanism, which helps them keep loans off their books and shifts the risk to third parties. BDCs on the other hand, originate loans and rely upon equity issuance to help fund loans. While best of breed BDC equities have rallied, second tier lenders have continued to struggle greatly. This will leave the smaller, capital constrained companies they were designed to serve without capital access. As reported by Bloomberg, about 30% of CLOs are forecast to have tripped OC tests with some being able to trade their way out by selling the CCCs and buying BBs at a discount. While playing defense, it’s difficult for CLO sponsors to promote new vehicles; thus, this important source of investor loan demand begins to evaporate. Credit expansion is an essential source of liquidity and M2 growth. It will be difficult for even extreme fiscal policy measures to supplant credit expansion indefinitely.

Conclusion

As I suggested in the Portnoy Top in early June, recklessness and bravado had become so extreme it seemed likely to have reached a crescendo that might correspond to a market top. Such extremes are indeed difficult to gauge – after all, what’s irrational can stay that way for some time. So far at least, the broader indices like the NYSE composite and the Russell 2000 appear to have topped on June 8th. Breadth has continued to narrow as a handful of large cap tech names are responsible for the advance in the S&P 500 ad Nasdaq. Technology shares have pushed even farther beyond the limits of rationality. When over a third of the S&P 500’s market cap is large-cap tech, that is a bad sign for market health. Trading for Dummies should add a chapter on that. Scared money may not make money today, but at least it lives to fight another day…

The monetary policy guardrails upon which so many have come to rely are flimsy. Monetary policy is no longer providing the safety it once did. Why is that important? Because we must all now be focused on fiscal policy above all else when assessing near-term sentiment and market action. Even with fiscal policy support increasing money supply by direct deposit, a liquidity trap is likely. Perhaps even more ironically, for now at least, this trap is somehow supporting equities because of a new breed of reckless equity market participant, who regards the equity market as a form of saving.

Ultimately, defaults and corporate distress will steamroll greedy bravado and force a reconnect of equity prices and economic reality. It’s happened once already this year. It will likely happen again. We don’t know for sure, but presumably Smiler was on his way the Big W when he went over the cliff. As he said, he spent twenty years earning every penny of that fortune, but he failed to live long enough to see it. Today, there’s no treasure under that Big W – it’s just a big ‘W.’ Live to fight another day, Smiler.

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‘Forgetful’ Fauci Could Not Recall Key Details Of COVID Crisis Response During Deposition: Louisiana AG

‘Forgetful’ Fauci Could Not Recall Key Details Of COVID Crisis Response During Deposition: Louisiana AG

Authored by Zachary Stieber via The…

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'Forgetful' Fauci Could Not Recall Key Details Of COVID Crisis Response During Deposition: Louisiana AG

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

Dr. Anthony Fauci said he could not recall key details about his actions during the COVID-19 pandemic, according to one of the officials who questioned him on Nov. 23.

Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, speaks in Washington on May 11, 2022. (Alex Wong/Getty Images)

Fauci, the director National Institute of Allergy and Infectious Diseases (NIAID) since 1984 and President Joe Biden’s chief medical adviser, was deposed by Louisiana Attorney General Jeff Landry and Missouri Attorney General Eric Schmitt, both Republicans.

“It was amazing, literally, that we spent seven hours with Dr. Fauci—this is a man who single-handedly wrecked the U.S. economy based upon ‘the science, follow the science.’ And over the course of seven hours, we discovered that he can’t recall practically anything dealing with his COVID response,” Landry told The Epoch Times after leaving the deposition. “He just said, ‘I can’t recall, I haven’t seen that. And I think we need to put these documents into context,'” Landry added.

“It was extremely troubling to realize that this is a man who advises presidents of the United States and yet couldn’t recall information he put out, information he discussed, press conferences he held dealing with the COVID-19 response,” Landry added later.

Fauci and NIAID did not immediately respond to requests for comment.

Landry declined to provide more details about the deposition until it is made public, which will happen at a future date. But he said officials would be able to take some of what they learned to advance their case.

Landry and Schmitt sued the U.S. government in May, alleging it violated people’s First Amendment rights by pressuring big tech companies to censor speech. Documents produced by the government in response bolstered the claims. U.S. District Judge Terry Doughty, the Trump appointee overseeing the case, recently ordered Fauci and seven other officials to testify under oath about their knowledge of the censorship.

Doughty concluded that plaintiffs showed Fauci “has personal knowledge about the issue concerning censorship across social media as it related to COVID-19 and ancillary issues of COVID-19.”

While Fauci qualified as a high-ranking official, the burden of him being deposed was outweighed by the court’s need for information before ruling on a motion for a preliminary injunction, Doughty said.

Wednesday was the first time Fauci testified under oath about his interactions with big tech firms, including Facebook founder Mark Zuckerberg.

Before the deposition, Landry said in a statement, “We all deserve to know how involved Dr. Fauci was in the censorship of the American people during the COVID pandemic; tomorrow, I hope to find out.”

“We’re going to follow the evidence everywhere it goes to get down to exactly what has happened, to get down to the fact that our government used private entities to suppress the speech of Americans,” Landry told The Epoch Times.

Louisiana Attorney General Jeff Landry (C) speaks during a press conference at the U.S. Capitol in Washington, on Jan. 22, 2020. (Drew Angerer/Getty Images)

Great Barrington Declaration

Jenin Younes with the New Civil Liberties Alliance, another lawyer representing plaintiffs in the case, said that Fauci claimed he did not worry about a document called the Great Barrington Declaration.

Penned in October 2020, the document called for focused protection on people most at-risk from COVID-19 while rescinding the harsh restrictions that had been imposed on children and others at little risk from the disease. Two of its authors, Dr. Jay Bhattacharya and Martin Kulldorff, are plaintiffs in the case.

I have a very busy day job running a six billion dollar institute. I don’t have time to worry about things like the Great Barrington Declaration,” Fauci said, according to Younes.

Fauci, though, has spoken multiple times about the declaration.

In internal emails that were later published, Fauci and Dr. Francis Collins, Fauci’s former boss, both criticized the declaration. “There needs to be a quick and devastating published takedown of its premises,” Collins wrote, prompting Fauci to send him a Wired magazine article he claimed “debunks this theory.”

In another missive, obtained by The Epoch Times through a Freedom of Information Act request, Fauci said the declaration reminded him of AIDS denialism.

Fauci also talked about the declaration in public, including defending his criticism during a congressional hearing in May.

I have come out very strongly publicly against the Great Barrington Declaration,” Fauci wrote to Dr. Deborah Birx in another email.

Other Depositions

The government moved to block some of the depositions, but not Fauci’s. It just won an order blocking the depositions of Surgeon General Vivek Murthy, Cybersecurity and Infrastructure Security Agency Director Jen Easterly, and Rob Flaherty, a deputy assistant to Biden.

Similar efforts to block the depositions of former White House press secretary Jen Psaki and FBI official Elvis Chan have been unsuccessful.

Chan is scheduled to answer questions next week. Psaki is scheduled to be deposed on Dec. 8.

Chan was involved in communicating with Facebook, LinkedIn, and other big tech firms about content moderation, according to evidence developed in the case and public statements he’s made. Psaki publicly said while still in the White House that platforms should step up against alleged mis- and disinformation.

Plaintiffs have already deposed several officials including Daniel Kimmage, an official at the State Department’s Global Engagement Center.

That center worked with Easterly’s agency to create a coalition of nonprofits called the Election Integrity Partnership, which pushed social media companies to censor speech.

Kimmage was also responsible for meetings during which censorship was discussed, with State Department official Samaruddin Stewart acting on his orders, according to documents produced by LinkedIn.

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Tyler Durden Sat, 11/26/2022 - 13:30

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COVID Lockdown Protests Erupt In Beijing, Xinjiang After Deadly Fire

COVID Lockdown Protests Erupt In Beijing, Xinjiang After Deadly Fire

Protests have erupted in Beijing and the far western Xinjiang region…

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COVID Lockdown Protests Erupt In Beijing, Xinjiang After Deadly Fire

Protests have erupted in Beijing and the far western Xinjiang region over COVID-19 lockdowns and a deadly fire on Thursday in a high-rise building in Urumqi that killed 10 people (with some reports putting the number as high as 40).

Crowds took to the street in Urumqi, the capitol of Xinjiang, with protesters chanting "End the lockdown!" while pumping their fists in the air, following the circulation of videos of the fire on Chinese social media on Friday night.

Protest videos show people in a plaza singing China's national anthem - particularly the line: "Rise up, those who refuse to be slaves!" Others shouted that they did not want lockdowns. In the northern Beijing district of Tiantongyuan, residents tore down signs and took to the streets.

Reuters verified that the footage was published from Urumqi, where many of its 4 million residents have been under some of the country's longest lockdowns, barred from leaving their homes for as long as 100 days.

In the capital of Beijing 2,700 km (1,678 miles) away, some residents under lockdown staged small-scale protests or confronted their local officials over movement restrictions placed on them, with some successfully pressuring them into lifting them ahead of a schedule. -Reuters

According to an early Saturday news conference by Urumqi officials, COVID measures did not hamper escape and rescue during the fire, but Chinese social media wasn't buying it.

"The Urumqi fire got everyone in the country upset," said Beijing resident Sean Li.

According to Reuters

A planned lockdown for his compound "Berlin Aiyue" was called off on Friday after residents protested to their local leader and convinced him to cancel it, negotiations that were captured by a video posted on social media.

The residents had caught wind of the plan after seeing workers putting barriers on their gates. "That tragedy could have happened to any of us," he said.

By Saturday evening, at least ten other compounds lifted lockdown before the announced end-date after residents complained, according to a Reuters tally of social media posts by residents.

Tyler Durden Sat, 11/26/2022 - 12:00

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US Jobs and Eurozone CPI Highlight the Week Ahead

Two high-frequency economic reports stand out in the week ahead:  The US November employment report and the preliminary eurozone CPI. The Federal Reserve…

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Two high-frequency economic reports stand out in the week ahead:  The US November employment report and the preliminary eurozone CPI. The Federal Reserve has deftly distanced itself from any one employment report. As a result, it would take a significant miss of the median forecast (Bloomberg survey) to alter market expectations for a 50 bp hike when the FOMC meeting concludes on December 14.

Economists are looking for around a 200k increase in US non-farm payrolls after 261k in October. In the first ten months of the year, the US has created 4.07 mln jobs. This is down from 5.51 mln in the Jan-Oct period last week but a strong performance by nearly any other comparison. In the same period before the pandemic, the US created about 1.52 mln jobs. Non-farm payrolls rose by an average of 150k in 2018 and 2019. It is averaging more than twice that now.

Average hourly earnings have increased in importance now with greater sensitivity to inflation and fears among policymakers that it could get embedded into wage expectations. The year-over-year increase in average hourly earnings peaked in March (when the Fed began hiking rates) at 5.6%. It has fallen or been unchanged since and fell to 4.7% in October. Economists expect the pace to have slowed to 4.6%. The 4% rate, seen as more consistent with the Fed's goals, assumes 2% productivity, which has been difficult to sustain outside crises (around the Great Financial Crisis and Covid) since the middle of 2004.

The ECB is a different kettle of fish. Nearly all the voting members at the Fed that have spoken, including the leading hawks, seem to accept a downshifting from 75 bp to 50 bp. However, at the ECB, there appears to be a genuine debate. It hiked rates by 75 bp at the last two meetings after starting the normalization process with a half-point move in July. As a result, the month-over-month headline inflation surged by 1.2% in September and 1.5% in October. The year-over-year rate stood at 10.7% in October, 300 bp above the US. On the other hand, core inflation was 5% above a year ago in the eurozone compared with 6.3% in the US. The median forecast in Bloomberg's survey sees the headline rate easing to 10.4%, with the core rate unchanged.

This is leading some, like the Austrian central bank governor Holzmann to suggest that unless there is a sharp fall in the November report, he would be inclined to support another 75 bp hike when the ECB meets on December 15. The preliminary estimate of November CPI will be released on November 30, but the final reading will not be available until the day after the ECB's meeting. That said, revisions tend to be minor. While Holzmann is perceived to be one of the more hawkish members of the ECB, the more dovish contingent seems to be pushing for a slowing the pace to 50 bp. It is a bit too simple to make it into a North-South dispute. The ECB's chief economist, Lane, from Ireland, is in the 50-bp camp. The swaps market sees a little more than a 30% chance of a 75 bp hike next month. Countering the elevated price pressures is recognizing that the eurozone is slipping into a recession. Still, officials say it will likely be short and shallow, arguably giving them more latitude to adjust rates.

To be sure, the US also reports inflation. The Fed's targeted measure, the PCE deflator for October, will be released the day before the employment report. But, in this cycle, in terms of the Fed's reaction function, it seems to have been downgraded, and the thunder stolen by the CPI. Indeed, when Fed Chair Powell explained why the Fed hiked by 75 bp instead of 50 bp in June as it had led the market to believe, he cited CPI and the preliminary University of Michigan consumer inflation expectation survey (which was later revised lower). While the methodologies and basket of the PCE deflator are different than CPI, the former is expected to confirm the broad developments of the latter. A 0.3% rising in the headline PCE deflator will see the year-over-year pace slip below 6% for the first time since last November. It peaked at 7.0% in the middle of the year. The core rate is stickier and may have eased to 5% after edging up in both August and September.

The US economic calendar is packed in the days ahead. The S&P CoreLogic Case-Shiller house prices 20-city index are expected to have fallen for the third consecutive month (September). That has not happened for a decade. The FHFA house price index is broadly similar. It fell by 0.6% in July and 0.7% in August. The median forecast (Bloomberg survey) is for a 1.3% decline in September. If accurate, it would be the largest monthly decline since November 2008. The October goods trade balance and inventory are inputs into GDP forecasts. There continues to be a significant gap between the Atlanta Fed's GDPNow tracker (4.3%) and the median estimates in Bloomberg's survey (0.5%).

The JOLTS (Job Opening and Labor Turnover Survey) has become a popular metric in this cycle and has often been cited by Fed officials. It peaked in March at nearly 11.86 mln. It has erratically trended lower and stood slightly below 10.72 mln in September. It is forecast to have softened in October. The low for the year was set in August at 10.28 mln. In the three downturns since 2000, the peak in JOLTS has come well before a recession, and the bottom after the recession has ended.

While the cost-of-living squeeze is impacting consumption, the supply chains are normalizing, which is a powerful tailwind. This is at least partly the story in the auto sector. US auto sales reached 14.9 mln (SAAR) in October, the best since January and almost 15% from October 2021. In fact, in the three months through October, US auto sales are running 8.8% above the same three-month period a year ago. Still, US auto sales have averaged 13.73 mln through October, nearly 11% lower, at an annualized pace in the first ten months of 2021. Still, S&P Global Mobility analysis warns of softer November figures (14.1 mln). However, if the projection is accurate, it would be about 9.6% more than in November 2021.

There was some optimism that after the 20th Party Congress, China's Xi would have the authority and inclination to pivot on Covid, property, and foreign relations. Yet, Chinese and international medical experts have warned that China is woefully unprepared to relax its Covid policy regarding inoculation rates and medical infrastructure. The surge in cases has seen restrictions imposed on an area responsible for more than a fifth of the country's GDP. China's composite PMI has been falling since the year's peak at 54.1 in June. It fell below the 50 boom/bust level in October for the first time since May, and Q4 GDP appears to be slowing from the 3.9% quarter-over-quarter jump in Q3 after the 2.7% contraction in Q2. The world's second-largest economy may be growing around a third of the pace in Q4, with risks to the downside. The median forecast (in Bloomberg's survey) is for Q1 23 growth of 0.9%.

Aid to the property market may help stabilize the sector in the short term. Iron ore prices surged by more than 27% at the end of October through November 18 amid the optimism. However, this seemed anticipatory in nature as many of the new measures are slowly rolling out. Many observers share our doubts that the excesses of a couple of decades have been absorbed or alleviated. News that separate from the list of 16 measures to support the property market announced earlier this month, the PBOC is considering a CNY200 bln (~$28 bln) of interest-free loans to commercial banks through the end of Q1 to induce them to provide matching funds for stalled property markets, seems to be a subtle recognition that more efforts are needed. While new supply has stalled, we are concerned that the more significant issue is effective demand.  

Japan, the world's third-largest economy, unexpectedly contracted (-1.2% annualized rate) in Q3 but appears to be rebounding, likely aided by the new support measures (JPY39 trillion or ~$275 bln). Japan reports October employment figures. The unemployment rate has been 2.5%-2.6% since March. Japan has been successful in boosting the labor force participation rate. It was at 61.8% in early 2020 before Covid and has been at 62.9%-63.0% for four months through September. This is the highest since at least 2001. Retail sales, reported in terms of value (nominal prices), rose 1.3% and 1.5% in August and September, respectively. Another strong report would not be surprising. Government travel subsidies were widened in October. 

Japanese businesses were pessimistic about the outlook for industrial output in October. They anticipate a 0.4% decline after production fell 1.6% in September. The auto sector is a source of pessimism. Supply chain disruptions were cited for the dour outlooks of Toyota and Honda. Foreign demand is weakening, and Japanese exports are slowing. Japan's preliminary November manufacturing PMI slipped below the 50 boom/bust level to 49.4, its lowest in two years. 

Australia reported October retail sales and some housing data, but the newly introduced monthly CPI may have the most significance. The market is not sure that the Reserve Bank of Australia will hike rates at the December 6 meeting. The futures market has a little better than a 60% chance of a quarter-point hike. The cash rate is at 2.85%. In September, CPI made a new cyclical high of 7.3%. The trimmed mean measure stood at 5.4%, which was also a new high. We would subjectively put the odds higher than the market for a quarter-point hike. The next RBA meeting is on February 9, which seems too long for Governor Lowe to make good on his anti-inflation commitment.

Canada reports Q3 GDP and the November jobs. The Canadian economy is downshifting after enjoying 3.1% and 3.3% annual growth rates in Q1 and Q2, respectively. The pace is likely to be a little less than half in Q3 and appears to be slowing down more here in Q4. The median forecast (Bloomberg's survey) is for the Canadian economy contract in the first two quarters of next year. Canada created an impressive 119k full-time positions in October. Adjusted for the size of the economy, this would be as if the US created 1.3 mln jobs. In four of the past five quarters, Canadian job growth has been concentrated in one month. As one would expect, the following month has been a marked slowdown, and twice there were outright declines in full-time positions. After hiking by 100 bp in July, the Bank of Canada slowed its pace to 75 bp in September and 50 bp in October. The central bank meets on December 7, and the swaps market seems comfortable with a quarter-point hike.

Lastly, we turn to the Taiwanese local elections on November 26. The key is the mayoral contest in Taipei. It is seen as the most likely path of the presidency when Tsai-Ing's term ends in 2024. The great-grandson of Chiang Kai-shek is the candidate for the KMT, which wants closer ties to Beijing but rejects claims it is "pro-China." The DPP candidate is the health minister and architect of the country's Covid policy. The Deputy Mayor of Taipei is running as an independent candidate, but it looks like a two-person contest. Despite the US and Chinese defense officials agreeing to improve their practically non-existent dialogue, there is unlikely to be a meeting of the minds about Taiwan. Changes in the constellation of domestic political forces within Taiwan seem to be the most likely component that may change what appears to be an inexorable deteriorating situation. Both Beijing and Washington have good reason to believe the other is trying to change the status quo. 




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