Sitting in Pittsburgh all week, but I had a hit on Bloomberg TV. Introduced by the host as someone who’s been in the business since the 70s, I said I still think we’re living that decade again. Stagflation, and we have reached the “peak” of inflation three times this decade! He remarked afterward that he hadn’t heard anyone refer to the ’70s in years. Malaise defined the 1970s. There is much talk of spike inflation, as the prices of gasoline, oil, and agricultural commodities rise, along with the prices of manufacturing and services (more below). Maybe. But slowing structural inflation can take a long time. The stickiest components, salaries and rents, are not letting up. The Atlanta Fed’s wage growth tracker has gone almost vertical (3-month average annual pace hit 6.7% in June), wages pushed the employment cost index second quarter to a 40-year high, July hourly earnings accelerated and small businesses said their biggest problem is finding workers. If it works like a wage-price spiral…. Even though job postings have slowed and jobless claims have risen again this week, the Fed still has a long way to go to cool a historically hot labor market where baby boomer retirements created a big hole. The surprise jump in payroll in July (more below) still left labor force participation 1.2 percentage points below its pre-pandemic level. Indeed, concerned about markets’ interpretation of the ‘Fed pivot’ of Powell’s ‘quasi-neutral’ comments after the meeting, ultra-dovish Fed governors this week downplayed expectations of a slowdown in upside. rates this fall and potential reductions as early as next spring. This morning’s jobs report reinforced those comments. Pivot, schmivot.
Rents can be an even bigger problem. They account for almost a third and are climbing even as house prices moderate. Goldman Sachs expects housing inflation to accelerate to 7% by the end of this year. One important factor: a massive shortage of units that pushed the housing vacancy rate to its lowest level in 4 decades. Supply chain bottlenecks and soaring mortgage rates have made it harder for builders to complete projects, potential buyers to afford homes and potential sellers to forgo mortgages at lower rates. “Inflation tends to be inflationary,” is how strategist Vincent Deluard put it at a recent Gavekal Research seminar. When countries experience annual inflation of +7%, as much as the world, inflation tends to stay high or even accelerate for years. Getting it below 3% usually requires hard tightening. With Europe and China struggling (more below) and pressure on Russia threatening energy shortages following the 1973-1974 oil embargo, growth will be tested even if it circumvents recession (current market odds are 50/ 50, versus 90% at the mid-June low). Housing, consumption of goods and manufacturing are weakening and likely to deteriorate further, and consumers are spending their Covid savings stocks (but racking up credit card debt). And it’s happening as wage pressures potentially worsen. So, recession or not, a period of lower growth and higher structural inflation. It sounds a lot like stagflation and the 70s.
Lots of debate over whether the post-Fed rally is a bear market trap. Citing sentiment, credit spreads and volatility, Renaissance Macro believes the evidence supports a bullish scenario. In its first significant change since its “cautious” call in late January, Evercore ISI believes a bottom has been put in place and would be a “buyer of dips, not a seller of tears”. Data from the New York Fed shows that there is still plenty of money in reserve. Easy to buy dips. But Piper Sander says all of this only prolongs an inevitable retest of lows as the Fed continues to tighten and inflation remains high. He recommends reducing rather than adding to current levels. “Bear market rallies are violent and kill bulls and bears alike.” With medium magnitude in the latest move, Fundstrat, still bullish, is equally cautious. “In our two decades on the streets, a hard lesson has been not to overreact to sudden, unsupported movements back and forth.” My presentation for the road includes a chart I’ve titled “Don’t Shoot the Messenger,” showing the historically close relationship between equity holdings as a % of household financial assets and 10-year subsequent returns on the market. From there he suggests low single digit Return. Saying goodbye to me, the Bloomberg anchor reminded her younger colleague how Bob Seger got us through the “gloomy” ’70s, not “Olivia Newton Anyway.” (Dismal? Personally, I have very fond memories of that decade – we were young and strong, running against the wind.) Millennials and Gen Z who never heard of him, you could listen to the music by Bob Seger. I think you will like it.
- The labor market continues to tighten This morning’s dramatic job numbers, with the 528,000 jump in payrolls coming in at twice consensus, dash hopes of a Fed pivot. The U6 underemployment rate, at 6.7%, is the lowest since the series began in 1994. Average hourly earnings surprised and were revised upwards for June. The unemployment rate of 3.5%, the lowest in 50 years, partly reflected a decline in the activity rate, itself driven by a decline in activity among workers aged 16 to 24. Hmm.
- It doesn’t look like a recessionJuly services surprised, hitting a 3-month high on broad-based improvement, including a recovery in new orders and business activity and a reduction in supply bottlenecks and service costs. inputs. The American Trucking Associations says trucking activity has returned to its pre-pandemic record high, factory orders in June beat consensus and car sales in July rose.
- The best cure for high gas prices is high gas pricesPump prices have fallen nearly a dollar since peaking at more than $5 nationwide in mid-June. Slowing global economies and a decline in driving here in the United States have contributed to this welcome relief.
- It doesn’t look good abroad Tighter restrictions exacerbated a slowdown in manufacturing in China, where it slipped back into contraction territory and authorities dropped a 5.5% growth target. Elsewhere, ‘s hit a 2-year low and is set to fall further as the Bank of England tightened 50 basis points, the most in a quarter-century, and warned of a looming recession that could last five terms. In Europe, only the Netherlands and the Austrians remained expanding, while in Germany retail sales recorded the biggest annual decline (in real terms) since records began in 1994.
- It’s not so bad here yetJuly manufacturing also slowed in consensus, but beat consensus as new orders and employment contracted and overall activity fell to a 2-year low. Prices softened noticeably to a 2-year low.
- Housing bites buildersConstruction spending unexpectedly fell 1.1% in June, the largest monthly decline since February 2021. A 1.3% decline in private construction, led by even larger declines in the residential and energy, led to the decline.
Always running against the wind Gavekal thinks the Fed is so focused on ‘well-anchored’ inflation expectations that it’s pretty relaxed on ‘retrospective’ data that shows prices are rising much faster than most businesses and workers have. never seen. This creates what is known in markets as the “there are no new eras” bias, in which most find it difficult to imagine events that never happened in their lifetime. The massive Millennials and Gen Z generations did not exist in the 70s. The current Covid-Russia interaction, with unprecedented monetary and fiscal expansion and all its fallout, ensures that the period ahead will be almost certainly very different from the past 40 years.
Consumption has legs With household savings rates falling below pre-pandemic levels, consumer spending growth will rely on still-high savings balances and aggregate incomes. The two main forces driving revenue: growth in wages and payroll, the latter being historically the most important factor.
do not consume gasoline Bank of America shares that if SUVs were a country, they would rank 6th in the world for emissions, ahead of Germany, South Korea and Saudi Arabia.
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