Invisible Fed Rate Hikes, U.S. Economy vs.
Inflation, and a Tale of Divergent Forecasts
By Victor
Sperandeo with the Curmudgeon
Markets React to Invisible Fed
Rate Increases:
For some reason the banks are talking
down the stock and bond markets with many incredible predictions of Fed
interest rate increases. As we noted in last
weeks column, some banks are even projecting seven rate rises this
year.
Fridays stronger than
expected BLS jobs number* (+467,000 in
January) and upward revision of November and December jobs added knocked
Intermediate Treasury Note prices down (yields up) to new two-year lows (yields
at highs). The 10-year T Note yield
closed at a daily high of 1.92% - a two year high.
The 5-year Treasury yield
ended at 1.78% on Friday. It was 35 bps
on 1/4/21 and yielded 1.23% on 12/14/21- the day before the Fed announced the
plan to increase rates in March. Thereby, the 5-year T Note yield increased 55
bps on the belief that the Fed will increase rates in about three months.
All this damage from doing
nothing but threaten? Thats a WOW!
*Note on the BLS Non-Farm Payroll Report for January 2022:
For the BLS to report +467,000
seasonally adjusted jobs is 100% subjective
a guess! That number is constantly adjusted throughout
the first half of the year. An
alternative measure of employment, based on a survey of households, fell by
more than a quarter-million. And economists warned that measurement issues and
other quirks made the January jobs data difficult to interpret.
The average seasonally
adjusted monthly increase in the last 10 years for January was +258,000. This
month is the largest increase in January jobs estimates in 10 years, except for
last year (+520,000). That was after -9,244,000 jobs were lost in 2020. Indeed, total non-farm employment has
increased by 19.1 million since April 2020 but is down by 2.9 million,
or 1.9%, from its pre-pandemic level in February 2020.
This projecting of Fed rate
increases in the future (without any corroboration) is new because its
building momentum for anticipated rate hikes months before the widely expected
25 bps Fed Funds rate increase in March.
Some Fed bank presidents (i.e., Minneapolis, San Francisco, Philadelphia)
even suggested the possibility of 50 bps rate increases to combat inflation but
none of that is even close to a guarantee!
Meanwhile, the Fed is still
buying U.S. government and mortgage debt for their own account ($8.873 Trillion of assets) with printed
money (aka keystroke entries). It
remains to be seen if that will stop after the March 2022 FOMC meeting.
Economy is Slowing but
Inflation Remains High:
Despite the manipulated jobs
numbers, the economy is slowing. The
widely followed Atlanta Fed GDPNow model estimate for real GDP growth
(seasonally adjusted annual rate) in the 1st quarter of 2022 is 0.1% as of
February 1st - unchanged from January 28 after rounding.
Also, the University of
Michigans Final January 2022 Index of Consumer Sentiment dropped to
a New Ten-Year Low, with January 2021 holding the distinction of being
the trough for both the decade and since the start of the pandemic. Its Index of Consumer Sentiment
was at 67.2 which was a year over year drop of -14.9%. The Current Economic Conditions Index came
in at 72.0 for a year over year decline of -17.0%.
NOTE: CONSUMER SPENDING COMPRISES ~ 70% of U.S. GDP as
the retail and service industries are critical components of the U.S. economy.
Obviously, consumer sentiment is a leading indicator of consumer spending.
..
Meanwhile, inflation is
increasing:
- Over the past year, workers hourly pay has
increased by 5.7%. The average
hourly wage for production workers was $26.92, up by 6.9% year over year.
- The supply of goods are
in short supply, so prices continue to rise.
- Climate change policy is driving oil to $100
per barrel and possibly to $125.
- The widely watched CPI is estimated at 7.3%
(year over year) through January 2022.
Consumer price data will be released on February 10th.
- Inflationary pressures are likely to last well
into the middle of 2022.
CPI monthly increases in 2021:
Huge UK
vs U.S. Economic Forecast Disparity:
Last week the Bank of
England said that UK families are about to suffer the biggest fall in
living standards since comparable records began three decades ago. Its new
forecasts say that disposable incomes (post-tax labor income, after inflation)
will shrink by 2% this year, and by another 0.5% in 2023.
Thats another WOW! Look at the huge discrepancy between the U.S.
and the UK economic forecasts - a recession in the UK vs up to seven rate
increases in the U.S. where no recession is forecast?
Those are 180 degrees
different or poles apart. How this plays
out is anyones guess?
End Quote:
It seems odd to me that I seem
to be the only one pointing out the real facts about U.S. jobs and the real
economy. To wit, I offer this quote:
Stay healthy, enjoy life,
success, good luck, and best wishes.
Till next time....
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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