Posts with tag interest-rates

PRICE INCREASES OFFSET WAGE GAINS - So, Put a Hold on Profits and Pay Workers More

Guest Writer, February 12 2022

Neil Irwin reminded us yesterday morning that a lot of hopes are riding on inflation easing this year. But it hasn’t happened yet—or over the last year.

Consumer prices surged more than expected over the past 12 months, suggesting a bleak outlook for inflation and increasing the likelihood of more than a few interest rate hikes this year.

The CPI (all urban index) rose 7.5% in January over a year ago, the Labor Department reported yesterday—the highest since February 1982. Economists were expecting an increase of 7.2%.

The so-called core CPI, which excludes volatile food and energy prices, increased 6%, compared with the estimate of 5.9%—its highest since August 1982.

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JOBS UP BY 428,000 IN APRIL - But the Level of Returning Jobs Greatly Differs Across Industries

Guest Writer, May 11 2022

Friday’s latest government jobs report shows two ongoing trends:

First, with employers adding 428,000 in April, the economic rebound from the brutal pandemic seems to be holding together.

And second, as shown in the chart above, the level of the job rebound since the early days of the pandemic continues to depend on what industry you work in.

On the one hand, April’s seasonally adjusted figures are virtually the same as March’s, according to the Labor Department, with the growth in jobs broad-based across every major industry.

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HOUSING MARKET SHOWING CRACKS - Are We Facing Another Bursting Bubble?

Guest Writer, June 22 2022

The average mortgage rate is up 80bps or 50% in just over one week. As a result, applications for a mortgage are now roughly half the level they were one year ago. 

Homebuilder sentiment is at a two-year low. And online real estate companies Redfin and Compass have announced layoffs of 8% and 10% of their workforces, respectively.

What can go wrong in the housing industry?

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INFLATION IS SOARING, INTEREST RATES ARE UP - What Could Go Wrong?

Guest Writer, July 16 2022

Before anyone had time to fully explain June's inflation numbers, the growls had already begun on trading desks and research shops: 

Maybe in two weeks the Fed will raise interest rates by a full percentage point — the most at a single meeting in its modern history. 

This increasingly likely scenario shows the jam the Fed has gotten itself into, with Fed officials seeking to express to the country a whatever-it-takes attitude. Neil Irwin and Courtenay Brown say that’s put them in a corner.

            It’s a precarious situation where high inflation reports demand a mounting series of interest rate hikes and other policy moves that end with reduced consumer and business spending and a cratering economy.

Just last month, a high May inflation reading drove Fed leaders to make a last-minute shift to raise interest rates by 75 basis points, not the 50-point increase they had been signaling.

Well, here we go again. Wednesday's BLS report showed a 9.1% rise in the Consumer Price Index over the last year — and perhaps more significantly, the uptick of monthly core inflation to 0.7% in June.

And yesterday’s Producer Price Index, which essentially reflects wholesale prices charged to retailers, was even higher – at 11.3%.

It was a "major league disappointment," as Fed governor Christopher Waller said in a speech afterwards. The stock markets agreed.

The reports set off alarm bells throughout the financial world that recent history would repeat itself and, by day's end, the CME futures markets would almost fully price in a one-percentage-point rate hike at the end of the month.

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HOW MUCH WILL UNEMPLOYMENT RISE AS FED RATE HIKES CONTINUE?

Guest Writer, August 3 2022

Debate is flourishing on Wall Street and at Main Street kitchen tables over the Federal Reserve's fight to lower inflation and how high unemployment will jump as a result.

            On the one hand, Fed policymakers believe its rate hikes will eventually drive down strong demand in the economy without causing too much pain in the job market – in other words, a soft landing.

On the other hand, influential economists like Larry Summers say the Fed's ideal outcome hasn't materialized before, and there's no reason to think it will now.

The fight is being debated in various academic papers, but the real stakes for workers and their families are high. 

Courtenay Brown and Neil Irwin write today that the issue “is not whether unemployment rises, but by how much as the Fed tightens.”

They believe the crux of the debate is the inverse relationship between unfilled job openings and the unemployment rate. 

Other things being equal, as job vacancies rise, unemployment falls and vice versa.

As of May, job openings trended lower but remained near their highest levels ever at 11.3 million. 

Plus, the headline unemployment rate is holding near a half-century low (remember, the headline rate is significantly underreported).

The result is an unprecedented 1.9 job openings for each unemployed worker.

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DO CONSUMER INFLATION EXPECTATIONS SUGGEST RELIEF IS COMING?

Guest Writer, August 10 2022

Americans expect inflation to drop precipitously over the next three years, according to the New York Fed. 

And Neil Irwin says “that's great news for anyone who doesn't want current prices to become the new normal.”

The NY Fed’s July Survey of Consumer Expectations, released today, shows marked drops in how households expect inflation to be across a variety of time horizons.

History shows that the higher we expect inflation to be, the more likely it becomes a self-fulfilling prophecy as businesses feel more comfortable raising prices and workers demand steeper wages.

In that sense, Irwin says falling inflation expectations “are a welcome sign that the high inflation of the last year is not causing a long-lasting shift in Americans' psychology around money.”

But inflation expectations in the July survey remain far above the levels that we saw in the years before the pandemic and are above the 2% inflation rate the Fed target.

In fact, consumers expect inflation to be 6.2% over the next year. That’s down from 6.8% in June and is the steepest one-month drop since the survey began nine years ago (CPI rose an annual 9.1% in June).

The potential good news lies in expectations over the next three years having fallen to 3.2% from 3.6%, and 5-year expectations to 2.3% from 2.8%

Irwin reports that the drop was most evident among survey respondents making less than $50,000.

He surmises that’s a possible reflection of those consumers, who were most affected by soaring oil and gasoline prices, seeing relief at gas pumps last month.

Fed chair Jerome Powell mentioned the NY Fed's results as a reason to continue aggressive rate increases at the Federal Open Market Committee’s June policy meeting. 

Thus, Irwin believes the falling expectations “will likely give comfort to the central bank.”

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The Powell Doth Speak

Bob Rinear, August 27 2022

And oh what a week it’s been.  Let’s go back to last week for a minute. Last Tuesday the market capped off a blistering to week run, by having the S&P run “smack dab” into its 200 day moving average. Now a lot of people will tell you that the 50 and 200 day moving averages don’t carry as much weight as they used to, but they still carry some clout.

When the S&P hit that 200 day, that whole two week climb came to a screeching halt and we started heading down a bit, but nothing major. Until Friday. Friday the wheels fell off and we plunged. That carried into Monday of this week as the market puked for another big drop. Tuesday and Wednesday the market sort of “ran in place” trying to figure out if they had over reacted on the big sell down.

Meanwhile over in Wyoming at the Jackson Hole economic meeting, all the movers and shakers were talking about the economy, inflation, and interest rates. Despite several fed heads telling folks that they think rates must go higher, most of the talking heads began to tell folks that it seemed the Fed might only do a 50 basis point hike at its next meeting.  (Hogwash, you’ll see why)

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FED TIGHTENING PUSHING HOME SALES DOWN - Is Housing Headed for (or In) a Recession?

Guest Writer, October 5 2022

Pending home sales dropped for the 3rd straight month in August and the 7th drop of 2022.

It’s another sign that the Fed’s campaign to rein in the effects of high inflation appear to be sending a critical industry into recession. https://www.axios.com/2022/09/29/housing-affordability-income-sales-decline

According to the National Association of Realtors, 3 out of the 4 major regions across the country experienced month-over-month decreases in sales (the West saw a minor gain). All 4 regions saw double-digit declines.

The NAR’s Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, fell 2.0% to 88.4 in August. Year-over-year, pending transactions dwindled by 24.2%. 

An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined. 

The PHSI is a leading indicator for the housing sector, based on pending sales of existing homes. 

A sale is pending when a contract has been signed, but the transaction has not closed (the sale usually is finalized within one or two months of signing).

According to NAR, pending contracts are considered good early indicators of upcoming sales closings. 

Variations in the length of that process – from pending contract to closed sale – are caused by difficulties with buyers getting a mortgage, home inspection issues, or appraisal issues.

The index is based on a sample that covers about 40% of multiple listing service data each month. 

In developing the model for the index over 20 years ago, it was shown that the level of monthly sales-contract activity matches the level of closed existing-home sales in the following two months.

Coincidentally, the volume of existing-home sales in 2001 fell in the range of 5.0-5.5 million, which is considered normal for the nation’s current population.

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TRICK OR TREAT? Gouls and Goblins Handing Out Higher Interest Rates

Guest Writer, November 2 2022

As you were handing out candy to – or walking the ghostly neighborhood among – the Nemos, Princess Ariels and Lightning McQueens, the Gouls and Goblins were scheming.

In fact, the fix is in – for another 75-basis point hike in the Fed Funds interest rate, that is. The horror of it all!

Even though 11% of Fed futures traders believe the Fed will raise its target rate by a mere 50 basis points on Wednesday, a 4th-straight increase of 0.75 percentage points is locked in. 

The Federal Reserve just can’t help itself.

But Courtenay Brown and Neil Irwin say the more important thing to watch is what Fed Head Jerome Powell says at his post-meeting presser about what comes next.

They add that Powell and Co. face “a delicate balance” between signaling to Wall Street on the one hand that they will eventually slow down to “a more cautious pace of tightening” – without appearing to no longer being as committed to bringing down inflation on the other.

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Lies, Lies and Yeah, More lies

Bob Rinear, November 5 2022

So Friday was jobs day. The “Non-Farm payroll report” it’s called. And as usual, when the headline hit, it seemed acceptable. Well that’s what the headline’s supposed to do, give you a quick hit of “good” so that you wander off thinking things are pretty good out there.

They said that overall, 261,000 jobs were created and that was better than the estimates. Even taking out any Government employment, it was still up 230K, better than they hoped.

But as usual in this day and age, the report was total crap. Lies and distortions of epic scope. First off let’s look at that headline number. Okay so 261K jobs were created. Or… were they? Uhm, NO. In fact our friends at the BLS sprinkled so much of their fairy dust on the report, it was unreadable. Let me explain.

The Bureau of Labor each month takes verified job numbers, and counts them. But they also figure “hey there are probably jobs out there that we didn’t get proof of yet, so we need to calculate them into the mix.”  This is called the “Birth/Death” model.

You can go to the BLS website and read the mumbo jumbo about how they come up with these extra jobs, but it’s an exercise in futility.  They’ll give you all these fancy equations and academic mental gymnastics, and it won’t make a lick of sense. Let me sum it up for you…

Basically what they’re saying is that for every “X” amount of businesses that close (that’s the death part) Some “X” amount of those now unemployed employees, will go out and open “X” amount of new businesses. Well new businesses need employees, so they take a random-assed guess about how many that comes to also.

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Powell

Bob Rinear, November 30 2022

Hi all, this letter might be a bit shorter than usual. Our office girl came down sick Sunday night, and now my wife’s a bit under the weather. I’m playing nursemaid.  Anyway…

Last week, the day ahead of Thanksgiving, the minutes from the last fed meeting were released. Now let me set the stage for you all. On Wall Street, when a big holiday is on deck, the senior management usually gets a one or two day jump on things.

They get their Hamptons beach house all ready for guests and frolicking with much food and drink. And yeah, some coke might be found too. The point being that on the day before the true holiday, if the market is open, it’s not being manned by all the heavy hitters. No, they’re in their cozy beach homes, and keeping in touch via internet and phone with the juniors they’ve left to man the stations.

But usually the word given is “don’t rock the boat.” In other words, the major players don’t want the second string guys to do anything stupid and lose them money.  So what usually happens is this…say the market has been trending slightly higher into that holiday. Well, those junior players will figure “hey, the market was inching higher when the bosses were here, we’ll just keep the motion going.”

This became pretty evident to me when those minutes hit. Yes there was talk in them about possibly slowing the “size” of the upcoming rate hikes. Wall Street apparently loves that idea. Why? Well they figure that if they’re no longer needing to stomp on the brake pedal with 75 basis point hikes, then surely that means they’re getting much closer to their target rate and soon they’ll do their pause and stop hiking.

So the report hit and the market which had slumped a bit perked up and ended the day nice and green. Even on Friday with the shortened market session, they eeked out some more gains.

But I didn’t read those minutes like they did. What came blaringly important to me was that most of them agreed that while they might chop down on the size of the hikes, the ultimate rate they think they want is HIGHER than they had previously considered.  That to me was a major warning sign. 

Let’s face it, there’s a decades old adage that says don’t fight the fed. I get it. When they’re cutting rates, you go with the flow and buy equities. When they’re hiking, you tend to sell down some. But here’s where I think they’ve misread the fed. What difference does it make how big each rate hike is, if your end goal is higher than you originally stated?  For instance 2 75 basis point hikes is 1.5%, right? Well isn’t 3 50 basis point hikes the same? It is.

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INFLATION EXPECTATIONS ARE FALLING AGAIN… Should We Even Care?

Guest Writer, December 14 2022

As the Federal Reserve converges on the nation’s capital this week for its last policymaking meeting of 2022, consumer inflation expectations are falling again.

According to the New York Fed’s latest Survey of Consumer Expectations, consumers expect a median inflation rate of 5.2% in the year ahead. That’s almost 0.75 percentage points lower than what they expected in October.

Over the next three years, consumers expect a median rate of 3% – a tenth of a percentage point lower than in October. And their median expectation over 5 years is slightly down at 2.3%.

The move downward reverses an increase in expectations shown in the prior month that, if unbroken, would certainly have given the Fed an excuse to continue with their 75 basis point rate hikes well into the new year. 

The NYFed’s monthly survey is “a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads.”

According to the NYFed, “Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month.”

As it is, there’s no guarantee that Powell & Co. will step down their aggressive tightening on Wednesday with a presumed 50bp increase – although Fed Funds futures traders believe there’s 75% chance of that.

That would take rates to a range of 4.25%-4.50% – up from 0%-0.25% before the campaign to rein in non-transitory inflation began in March. 

As Courtenay Brown and Neil Irwin point out, perception is usually reality – that is, if consumers believe high prices will stick around, they can (and usually do) become a reality; the same goes for expected lower inflation.

Turns out that October's jump now appears to have been a blip on the radar screen of an otherwise months-long downward trend of inflation expectations – consistent with rising prices at the gas pump. 

Fortunately, for consumers, the cost of crude oil and gas has been falling since late spring/early summer and is now an average $3.26 a gallon across the country (it was $4.99 in mid-June), according to AAA.

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