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“We Expect A Sea Change”: Morgan Stanley Admits It Was Wrong, Now Sees Liftoff In 2022 As Goldman Goes All-In With 7 Rate Hikes

"We Expect A Sea Change": Morgan Stanley Admits It Was Wrong, Now Sees Liftoff In 2022 As Goldman Goes All-In With 7 Rate Hikes

At the start of the month, not long after Goldman capitulated and brought forward its first Fed rate hike forecast

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"We Expect A Sea Change": Morgan Stanley Admits It Was Wrong, Now Sees Liftoff In 2022 As Goldman Goes All-In With 7 Rate Hikes

At the start of the month, not long after Goldman capitulated and brought forward its first Fed rate hike forecast by one year to July 2022, virtually every Wall Street bank promptly followed in Goldman's footsteps turning uber hawkish and expecting several rate hikes and/or accelerating tapering over the coming year. All, expect Morgan Stanley, which stubbornly refused to yield to peer pressure and continued to forecast no rate hikes in 2022 whatsoever.

This remarkable divergence in Fed outlooks between the two most influential banks promoted us to tweet on Dec 1 that "2022 shaping up as a huge showdown between Goldman and Morgan Stanley. Former says 2, maybe 3 hikes; latter say no hikes. One will be spectacularly wrong."

Just a few days later, with inflation soaring to a fresh 39-year-high (although perhaps finally topping out), Morgan Stanley decided to gracefully and quietly tap out and this week the bank's -chief US economist Ellen Zentner, pulled forward the bank's rate hike path by 6 months to September 2022, acknowledging that it was wrong and admitting that there has been a "pivot in the Fed's reaction function."

Even so, Morgan Stanley still remains well beyond market expectations, saying it has "even greater conviction" in its call that core inflation moves off its highs in 1Q 2022, which however further validates concerns that the Fed is engaging in a policy error and tightening into a recession. 

Here are some more details from Zentner's note:

Before investors close out the year, we need to get past the FOMC's final meeting next week, and it comes with every opportunity for  surprise. On Wednesday, we expect the Fed to move to a hawkish stance by announcing that it is doubling the pace of taper, highlighting continued inflation risks and no longer labeling high inflation as transitory, and showing a hawkish shift in the dot plot. We think this shift will shake out in a 2-hike median in 2022, followed by 3.5 hikes in 2023 and 3 hikes in 2024.

At the end of the meeting, we think the FOMC's median view will align more closely with ours – we look for 2 hikes in 2022, followed by 3 hikes plus a halt in reinvestments in 2023. Moreover, we expect the Fed's median forecast for core PCE and the unemployment rate will also come in reasonably close to our own, which now has higher inflation receding to around 2.5% 4Q/4Q next year, and the unemployment rate back to its pre-pandemic low around 3.5% in 4Q22.  The incoming data on the labor market and inflation has strayed materially from the Fed's outlook and therefore warrants what we deem to be a sea change in its stance on the appropriate path for policy.

At the same time, Zentener also says that the timing of liftoff in the bank's forecast is tied closely to inflation outcomes, with its base case expectation that following the current re-acceleration in inflation we have been expecting, core PCE shows some slowing beginning in February next year. The pace of this deceleration will be important in determining how much of a breather the Fed takes between the end of its asset purchases and the first rate hike.

Separately, on Friday we received data on inflation for the month of November showing that on a year-over-year basis, core CPI increased to 4.9% from 4.6%. Headline CPI ran at the highest rate since 1982. Despite the alarming headlines, financial markets seemed to be relieved at the results. Why? Because, according to Morgan Stanley, for the first time in months the month-over-month increase of 0.5% was in line with expectations instead of delivering an upside surprise.

Going back to Morgan Stanley's mea culpa, Zentener writes that in her outlook, the biggest out-of-consensus call has been the view that core inflation will show signs of slowing in 1Q22 as pandemic-related price pressures, particularly in goods, are slowly abating. She says that today she has "even more conviction in that view" and here's why: 

We are seeing nascent signs that pipeline inflation pressures are easing – based on evidence from company earnings transcripts, ISM comments, Korea trade data, China's inflation data, the Fed's Beige Book, a department huddle with our equity analysts, and our own survey.

While Zentener admits that these sources by no means suggest that normalization "is well under way," but at the very least they indicate that "bottlenecks have peaked" and the chief economist expects that in a few months, "this trend will work its way through the pipeline to finished goods prices at the consumer level." It is unclear if Morgan Stanley's previous thesis of a huge - and deflationary - inventory glut as supply chains blockages ease,

In parting, the Morgan Stanley economist tries to deflect some of the blame for having been wrong in its call, and says that "to be right on our Fed call for 2 hikes in 2022, not only do we have to be right on the path for core PCE, but Chair Powell has to be willing to direct attention to slowing inflation as a way of pushing back on market expectations that are now pricing in nearly 3 hikes, with a healthy probability the Fed could begin as early as March."

But while Morgan Stanley is at least somewhat cautious about going hawkish, Goldman no longer has any such qualms, and moments ago on Saturday afternoon, the bank went all in on its hawkish relent... and so one month after pulling forward its call for a rate hike by over a year to July 2022, the bank now says that "the FOMC is very likely to double the pace of tapering to $30bn per month at its December meeting next week, putting it on track to announce the last two tapers at the January FOMC meeting and to implement the last taper in March." As a result, Goldman now expects the FOMC to deliver rate hikes next year in May, July, and November (vs. June, September, and December previously) and another 4 in 2023 and 2024 (spread evenly 2 and 2). Some more details from the full note, which as usual is available to professional subs.

New information about both inflation and the labor market since the FOMC last met supports a faster taper pace and an early liftoff. Inflation has increased further as prices of durable goods and shelter have continued to rise rapidly, though wage growth has slowed since enhanced unemployment benefits expired in September. Labor market slack has diminished rapidly, roughly in line with our expectations but faster than Fed officials expected.

Chair Powell has indicated that the FOMC is likely to retire the word “transitory” from its statement and instead explain that it thinks the current period of elevated inflation is unlikely to “leave a permanent mark” by raising long-term inflation expectations. More meaningful changes to the statement, especially to language about inflation having run persistently below 2%, are also possible.

We expect the Summary of Economic Projections to show somewhat higher inflation and lower unemployment. Our best guess is that the dots will show 2 hikes in 2022, 3 in 2023, and 4 in 2024, for a total of 9 (vs. 0.5 / 3 / 3 and a total of 6.5 in September). We think the leadership will prefer to show only 2 hikes in 2022 for now to avoid making a more dramatic change in one step, especially at a meeting when the FOMC is already doubling the taper pace. But if Powell is comfortable showing 3 hikes next year, then we would expect others to join him in a decisive shift in the dots in that direction.

In conclusion, Goldman's forecast calls for 3 hikes in 2022 (vs 2 for Morgan Stanley) and then 2 per year starting in 2023. The bank also expects two hikes per year starting in 2023 because like MS, it also expects inflation to fall to moderately above 2% and growth to slow to just above potential by then.

That said, Goldman's Jan Hatzius says that he "inferred from the September dots that Powell and Governor Brainard envision hiking twice per year in that environment, a slower pace than last cycle that we assume reflects the new monetary policy framework." However, the bank will watch the December dots to see if they still view that as the default pace.

Or, one can just look at what the market is saying and the conclusion there is clear: with the 4Y1Y - 2Y1Y curve inverting...

... as STIR traders now expect rates in 2023 to be higher than in 2025, the verdict is simple: not only is the Fed engaging in policy error, hiking into an economic slowdown - with inflation having already peaked, someone has yet to explain to us how monetary policy will help alleviate supply chains, for example - but it will then proceed to rapidly cut rates (perhaps to negative) while injecting trillions more in QE once markets crash (amid the coming rate hike panic detailed meticulously by BofA CIO Michael Hartnett) to reflect the Fed's panicked actions (which an objective observer could say reek suspiciously of political pandering to appease Joe Biden who is clearly freaking out about his collapsing rating and the impact inflation is having on it) some time in late 2022, just before the midterms.

Tyler Durden Sat, 12/11/2021 - 20:00

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Survey Shows Declining Concerns Among Americans About COVID-19

Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat"…

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Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat" to the health of the US population - a sharp decline from a high of 67% in July 2020.

(SARMDY/Shutterstock)

What's more, the Pew Research Center survey conducted from Feb. 7 to Feb. 11 showed that just 10% of Americans are concerned that they will  catch the disease and require hospitalization.

"This data represents a low ebb of public concern about the virus that reached its height in the summer and fall of 2020, when as many as two-thirds of Americans viewed COVID-19 as a major threat to public health," reads the report, which was published March 7.

According to the survey, half of the participants understand the significance of researchers and healthcare providers in understanding and treating long COVID - however 27% of participants consider this issue less important, while 22% of Americans are unaware of long COVID.

What's more, while Democrats were far more worried than Republicans in the past, that gap has narrowed significantly.

"In the pandemic’s first year, Democrats were routinely about 40 points more likely than Republicans to view the coronavirus as a major threat to the health of the U.S. population. This gap has waned as overall levels of concern have fallen," reads the report.

More via the Epoch Times;

The survey found that three in ten Democrats under 50 have received an updated COVID-19 vaccine, compared with 66 percent of Democrats ages 65 and older.

Moreover, 66 percent of Democrats ages 65 and older have received the updated COVID-19 vaccine, while only 24 percent of Republicans ages 65 and older have done so.

“This 42-point partisan gap is much wider now than at other points since the start of the outbreak. For instance, in August 2021, 93 percent of older Democrats and 78 percent of older Republicans said they had received all the shots needed to be fully vaccinated (a 15-point gap),” it noted.

COVID-19 No Longer an Emergency

The U.S. Centers for Disease Control and Prevention (CDC) recently issued its updated recommendations for the virus, which no longer require people to stay home for five days after testing positive for COVID-19.

The updated guidance recommends that people who contracted a respiratory virus stay home, and they can resume normal activities when their symptoms improve overall and their fever subsides for 24 hours without medication.

“We still must use the commonsense solutions we know work to protect ourselves and others from serious illness from respiratory viruses, this includes vaccination, treatment, and staying home when we get sick,” CDC director Dr. Mandy Cohen said in a statement.

The CDC said that while the virus remains a threat, it is now less likely to cause severe illness because of widespread immunity and improved tools to prevent and treat the disease.

Importantly, states and countries that have already adjusted recommended isolation times have not seen increased hospitalizations or deaths related to COVID-19,” it stated.

The federal government suspended its free at-home COVID-19 test program on March 8, according to a website set up by the government, following a decrease in COVID-19-related hospitalizations.

According to the CDC, hospitalization rates for COVID-19 and influenza diseases remain “elevated” but are decreasing in some parts of the United States.

Tyler Durden Sun, 03/10/2024 - 22:45

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Rand Paul Teases Senate GOP Leader Run – Musk Says “I Would Support”

Rand Paul Teases Senate GOP Leader Run – Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump…

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Rand Paul Teases Senate GOP Leader Run - Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump into the race to become the next Senate GOP leader, and Elon Musk was quick to support the idea. Republicans must find a successor for periodically malfunctioning Mitch McConnell, who recently announced he'll step down in November, though intending to keep his Senate seat until his term ends in January 2027, when he'd be within weeks of turning 86. 

So far, the announced field consists of two quintessential establishment types: John Cornyn of Texas and John Thune of South Dakota. While John Barrasso's name had been thrown around as one of "The Three Johns" considered top contenders, the Wyoming senator on Tuesday said he'll instead seek the number two slot as party whip. 

Paul used X to tease his potential bid for the position which -- if the GOP takes back the upper chamber in November -- could graduate from Minority Leader to Majority Leader. He started by telling his 5.1 million followers he'd had lots of people asking him about his interest in running...

...then followed up with a poll in which he predictably annihilated Cornyn and Thune, taking a 96% share as of Friday night, with the other two below 2% each. 

Elon Musk was quick to back the idea of Paul as GOP leader, while daring Cornyn and Thune to follow Paul's lead by throwing their names out for consideration by the Twitter-verse X-verse. 

Paul has been a stalwart opponent of security-state mass surveillance, foreign interventionism -- to include shoveling billions of dollars into the proxy war in Ukraine -- and out-of-control spending in general. He demonstrated the latter passion on the Senate floor this week as he ridiculed the latest kick-the-can spending package:   

In February, Paul used Senate rules to force his colleagues into a grueling Super Bowl weekend of votes, as he worked to derail a $95 billion foreign aid bill. "I think we should stay here as long as it takes,” said Paul. “If it takes a week or a month, I’ll force them to stay here to discuss why they think the border of Ukraine is more important than the US border.”

Don't expect a Majority Leader Paul to ditch the filibuster -- he's been a hardy user of the legislative delay tactic. In 2013, he spoke for 13 hours to fight the nomination of John Brennan as CIA director. In 2015, he orated for 10-and-a-half-hours to oppose extension of the Patriot Act

Rand Paul amid his 10 1/2 hour filibuster in 2015

Among the general public, Paul is probably best known as Capitol Hill's chief tormentor of Dr. Anthony Fauci, who was director of the National Institute of Allergy and Infectious Disease during the Covid-19 pandemic. Paul says the evidence indicates the virus emerged from China's Wuhan Institute of Virology. He's accused Fauci and other members of the US government public health apparatus of evading questions about their funding of the Chinese lab's "gain of function" research, which takes natural viruses and morphs them into something more dangerous. Paul has pointedly said that Fauci committed perjury in congressional hearings and that he belongs in jail "without question."   

Musk is neither the only nor the first noteworthy figure to back Paul for party leader. Just hours after McConnell announced his upcoming step-down from leadership, independent 2024 presidential candidate Robert F. Kennedy, Jr voiced his support: 

In a testament to the extent to which the establishment recoils at the libertarian-minded Paul, mainstream media outlets -- which have been quick to report on other developments in the majority leader race -- pretended not to notice that Paul had signaled his interest in the job. More than 24 hours after Paul's test-the-waters tweet-fest began, not a single major outlet had brought it to the attention of their audience. 

That may be his strongest endorsement yet. 

Tyler Durden Sun, 03/10/2024 - 20:25

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The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While “Waiting” For Deporation, Asylum

The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several…

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The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several months we've pointed out that there has  been zero job creation for native-born workers since the summer of 2018...

... and that since Joe Biden was sworn into office, most of the post-pandemic job gains the administration continuously brags about have gone foreign-born (read immigrants, mostly illegal ones) workers.

And while the left might find this data almost as verboten as FBI crime statistics - as it directly supports the so-called "great replacement theory" we're not supposed to discuss - it also coincides with record numbers of illegal crossings into the United States under Biden.

In short, the Biden administration opened the floodgates, 10 million illegal immigrants poured into the country, and most of the post-pandemic "jobs recovery" went to foreign-born workers, of which illegal immigrants represent the largest chunk.

Asylum seekers from Venezuela await work permits on June 28, 2023 (via the Chicago Tribune)

'But Tyler, illegal immigrants can't possibly work in the United States whilst awaiting their asylum hearings,' one might hear from the peanut gallery. On the contrary: ever since Biden reversed a key aspect of Trump's labor policies, all illegal immigrants - even those awaiting deportation proceedings - have been given carte blanche to work while awaiting said proceedings for up to five years...

... something which even Elon Musk was shocked to learn.

Which leads us to another question: recall that the primary concern for the Biden admin for much of 2022 and 2023 was soaring prices, i.e., relentless inflation in general, and rising wages in particular, which in turn prompted even Goldman to admit two years ago that the diabolical wage-price spiral had been unleashed in the US (diabolical, because nothing absent a major economic shock, read recession or depression, can short-circuit it once it is in place).

Well, there is one other thing that can break the wage-price spiral loop: a flood of ultra-cheap illegal immigrant workers. But don't take our word for it: here is Fed Chair Jerome Powell himself during his February 60 Minutes interview:

PELLEY: Why was immigration important?

POWELL: Because, you know, immigrants come in, and they tend to work at a rate that is at or above that for non-immigrants. Immigrants who come to the country tend to be in the workforce at a slightly higher level than native Americans do. But that's largely because of the age difference. They tend to skew younger.

PELLEY: Why is immigration so important to the economy?

POWELL: Well, first of all, immigration policy is not the Fed's job. The immigration policy of the United States is really important and really much under discussion right now, and that's none of our business. We don't set immigration policy. We don't comment on it.

I will say, over time, though, the U.S. economy has benefited from immigration. And, frankly, just in the last, year a big part of the story of the labor market coming back into better balance is immigration returning to levels that were more typical of the pre-pandemic era.

PELLEY: The country needed the workers.

POWELL: It did. And so, that's what's been happening.

Translation: Immigrants work hard, and Americans are lazy. But much more importantly, since illegal immigrants will work for any pay, and since Biden's Department of Homeland Security, via its Citizenship and Immigration Services Agency, has made it so illegal immigrants can work in the US perfectly legally for up to 5 years (if not more), one can argue that the flood of illegals through the southern border has been the primary reason why inflation - or rather mostly wage inflation, that all too critical component of the wage-price spiral  - has moderated in in the past year, when the US labor market suddenly found itself flooded with millions of perfectly eligible workers, who just also happen to be illegal immigrants and thus have zero wage bargaining options.

None of this is to suggest that the relentless flood of immigrants into the US is not also driven by voting and census concerns - something Elon Musk has been pounding the table on in recent weeks, and has gone so far to call it "the biggest corruption of American democracy in the 21st century", but in retrospect, one can also argue that the only modest success the Biden admin has had in the past year - namely bringing inflation down from a torrid 9% annual rate to "only" 3% - has also been due to the millions of illegals he's imported into the country.

We would be remiss if we didn't also note that this so often carries catastrophic short-term consequences for the social fabric of the country (the Laken Riley fiasco being only the latest example), not to mention the far more dire long-term consequences for the future of the US - chief among them the trillions of dollars in debt the US will need to incur to pay for all those new illegal immigrants Democrat voters and low-paid workers. This is on top of the labor revolution that will kick in once AI leads to mass layoffs among high-paying, white-collar jobs, after which all those newly laid off native-born workers hoping to trade down to lower paying (if available) jobs will discover that hardened criminals from Honduras or Guatemala have already taken them, all thanks to Joe Biden.

Tyler Durden Sun, 03/10/2024 - 19:15

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