US GDP Amazes Despite Omicron, Here's Why.

Fed ready to 'digest' even an early 2022 with negative growth, priority is to scratch inflation

Three ideas clearly stated. Which open a new path for markets and monetary policy. 

Here, in summary, is the comment by Luca Tobagi, Investment strategist of Invesco, after the meeting of the Federal Reserve where Jerome Powell gave the line for the next few months. 

The markets reacted badly at first, considering the statements "aggressive", but - according to Tobagi - everything will be metabolized. And the accumulation of shares when prices drop a little is still a correct investment strategy to keep. And here are the three most important things said by Powell, which will mark the present and the near future.

First: even if no decision has been made. the way was opened for a first hike in March 2022 and monetary policy is once again the main instrument on the table of the US central bank.

Second: the Fed has made it clear that the reduction of the central bank's balance sheet will not take place by selling the securities that are in the portfolio, but not by reinvesting the proceeds of the securities that will mature. An important point to "calm down" the markets.

Third: The Fed gives importance to both "legs" of its mandate: on the one hand, rates and inflation, on the other, the pursuit of full employment. Too high a cost of living hurts workers. The dual mandate is always the North Star.

What the Government Doesn't Want You to Know About Inflation

At all inflation. But who has the last word, Fed or White House?

In the US, prices are at their highest since 1982 and for the senior officials of the White House the fault lies with the Chinese closures and the various lockdowns around the world. But many economists think otherwise, there is a hand in the emotional effect of Biden's pandemic plans. Which explains the problem to the Fed

Inflation is becoming a very serious problem. Both for Joe Biden and for the Americans and despite a post-pandemic GDP recovery (+ 2.3% in the third quarter), they see incomes and purchasing power threatened by price increases. 

And even for Jerome Powell, the Fed president forced to twist the schedule and rush into tapering, the central bank's disengagement from ultra-accommodative politics.

Over the weekend, a sort of rebound of responsibility for overheating prices took place, which risks getting out of hand, neutralizing the effects of the growth itself. 

As reported by the New York Times, some senior White House officials have repeatedly blamed the international economy for high inflation, starting with the Chinese lockdowns that stopped entire industrial segments, to reach the blockade in the Suez Canal by almost one year ago. 

In short, according to the men closest to Biden, American politics has little to do with the flare-up on prices. 

The faults are to be found elsewhere.

Too bad that, according to the New York daily, many do not think so. 

Starting with a large patrol of economists, many of them in a democratic orbit, according to whom inflation at record levels for 40 years now must be attributed to domestic politics. 

And here in the dock are the mammoth pandemic plans set up by the administration and the consequent decision to flood the economy with money. 

This is only partially true.

To date, Congress has not approved even the first of the packages, the Build Back Better which is worth 1.750 billion dollars, and this is because Dem Senator Joe Manchin has vetoed his plans by putting Biden on standby, but we must also remember that the president's promise to inject nearly $ 5 trillion into the market (such was the extent of the pandemic plans put together), however, had its psychological impact. 

Families and businesses, on the emotional wave of these efforts, although not yet materialized, have ignited demand, pushing up prices.

There are no shots from the White House. 

Biden himself, during the press conference on Wednesday in which he took stock of a year of presidency, clarified that if there is anyone who has to deal with the inflation problem it is the Fed. that high prices do not strengthen further. 

Given the strength of the economy and the pace of recent price increases, it makes sense, as Fed Chairman Powell has indicated, to recalibrate the support now needed, ”Biden said.

It cannot be said that Powell does not have this issue at heart, since the health of the labor market also depends on the cut in rates and the cooling of prices. 

Higher inflation also means reduced purchasing power and therefore the need to align wages. 

But on the other hand, the same Fed number one blamed the need for tapering precisely on the ultra-toned recovery of the labor market. A nice puzzle.

An Exclusive Sneak Peak at What's Next for Inflation

How much will inflation grow?

US inflation hit a 40-year high in December and rising yields helped value stocks outperform their growth rivals. The analysis by Richard Flax, Chief Investment Officer, Moneyfarm

US inflation reached 7% year-on-year in December, the highest level in nearly 40 years. 

In response, in the short term, the 10-year yield on US government bonds fell and stock futures appreciated. At first glance, this would not seem like the obvious reaction from the market.

A bit of context: in recent months, inflation has been higher than expected, for longer than many hoped. 

This has recently sparked a reaction from central bankers: the Bank of England has raised rates and the US Federal Reserve is expected to raise them as early as March: this has pushed the US 10-year yield up. 

The rate remains low, but the spike was quite sharp and this contributed to putting some pressure on growth stocks.

Rising yields helped value stocks outperform their growth competitors. The graph below shows the relative performance of US value equities versus growth stocks, relating everything to movements in the yield on 10-year 10-year stocks.

The chart below shows the long-term trend: the 15-year outperformance of US growth stocks ties in quite well with the low rate phase.

What can this report tell us about inflation today? We believe there are a couple of related variables to consider. 

First, have we peaked in inflation or will price growth decline from here on out? Second, now that central banks have started to move, how aggressively will they act? If the Fed raises rates four times this year (by 100 basis points), would that end up slowing the US economy dramatically?

One possible interpretation is that we are close to the peak of inflation in the United States, partly because of base effects and partly because the Fed will begin to withdraw stimulus perhaps a little faster than might have been expected a few months ago. 

From this perspective, the inflation we see today is high, but not higher than expected, and this could be enough to signal the end of the inflationary surprises. 

In such a scenario, the Fed may not raise rates as often as many expect this year, which could provide some support for growth stocks.

It is always difficult to draw too many conclusions from a single data, but if this thesis is correct, we think this scenario is largely positive for equities. 

As always, we will continue to monitor data in the future, particularly on the labor market, which will likely play an important role in determining the course of inflation.

A Deep Dive Into Troubles of the Us Economy in 2022

Between the rapidly spreading Omicron variant and rapidly rising inflation, 2022 did not start in the best way for the US. What to expect on the US economy?

About a year after Biden took office, the US does not shine for recovery.

The US economy will take a hit in 2022 from the Omicron variant, but the damage is not expected to last beyond the first quarter, according to the latest Bloomberg monthly poll.

Inflation forecasts have been strengthened for each quarter of 2023, reflecting the protracted problems with supply chains that risk being exacerbated by Omicron.

In this scenario, where the US president is clearly declining in the polls, 2022 appears full of obstacles for the world power.

The economic woes of the USA, between inflation and Omicron

The data are processed by Bloomberg: GDP growth expectations for the January-March period fell to 3%, from 3.9% in the previous monthly survey.

The new pandemic wave has disrupted travel and helped empty supermarket shelves in some areas, as workers are increasingly stopped by infections.

The latest disruption due to Covid also comes as the thrust of government aid is fading.

"The momentum of growth appears to have stalled," Jefferies' Aneta Markowska and Thomas Simons wrote in a report this week, forecasting a 1.5% expansion in the first quarter.

Among other indicators, there is a sharp decline in office employment that reversed almost all of last year's return-to-work drive and "will create negative knock-on effects in the short term as demand for services takes a severe hit. hit".

Restaurant reservations, which had more or less climbed back to pre-pandemic levels prior to the arrival of omicron in late November, are down about 30%.

Delta Air Lines

said sick employees, as well as winter storms, caused more than 2,000 flights to be canceled in the past few weeks

Inflation estimates, meanwhile, have been raised for each quarter of the year. In part, this is likely a consequence of the Omicron effect on already stressed supply chains, with the possibility of further factory closures in Asia and already tight labor markets at home.

Consumer prices have risen 7%, and the Bloomberg survey suggests that any slowdown in the coming months will be limited, with second-quarter inflation seen at 5.2% instead of 4.8% forecast a month ago.
Biden's political knots

Not just economic estimates. There are also some political issues that have become thorny for the White House to shake the US at the beginning of the year.

Biden is unable to unlock the green light for the big Build Back Better reform project, which is also opposed by the dem to the amount of investments.

Furthermore, the Supreme Court rejected the vaccination obligation that the president wanted to impose on some workers.

In addition, there is the grain of Russia and a threat of war, while the problem of skyrocketing prices is putting a strain on the president. A few weeks ago Biden had already challenged OPEC to release more oil to lower energy prices.

All You Need To Know About Misery Index.

Misery Index

What is the misery index?

Equal to the sum of the inflation rate and the unemployment rate, the original poverty rate was popularized in the 1970s as a measure of America's economic health during a president's term.
 

Key points

•     The first misery index was created by Arthur Okun and was equal to the sum of the inflation and unemployment rate data to provide a snapshot of the US economy.
•     The higher the index, the greater the misery experienced by average citizens.
•     It has recently expanded to include other economic indicators, such as bank lending rates.
•     In recent times, variations in the original misery index have become popular as a means of measuring the overall health of the global economy.

Understanding the misery index

The first misery index was created by economist Arthur Okun, who was second chairman of President Lyndon B. Johnson's Council of Economic Advisors and a professor at Yale. Okun's Misery Index used the simple sum of the nation’s annual inflation rate and unemployment rate to provide President Johnson with an easily understandable snapshot of the economy’s relative health. The higher the index, the greater the misery experienced by the average voter. During the 1976 election campaign for the presidency of the United States, candidate Jimmy Carter popularized Okun's misery index as a means of criticizing his opponent, Gerald Ford in office. At the end of the Ford administration, the poverty rate was relatively high at 12.7%, creating an attractive target for Carter. During the presidential campaign of 1980, Ronald Reagan pointed out that the poverty rate had risen under Carter.

The Okun Misery Index is considered a flawed indicator of the economic conditions experienced by the average American because it does not include data on economic growth. In recent times, the prevalence of low unemployment and low inflation figures in much of the world also means that the usefulness of the Okun index is limited.

Furthermore, the unemployment rate is a lagging indicator that probably underestimates misery at the start of a recession and overestimates it even after the end of the recession. Some critics also believe that the misery index underweights the unhappiness attributable to the unemployment rate, as inflation is likely to have less influence on unhappiness because Federal Reserve policy has been much more effective than managing inflation. in the last decades. Regardless, it's smart for investors to set up an emergency fund in the event of an economic downturn or job loss.
 

More recent versions of the misery index

The Misery Index has been changed several times, first in 1999 by Harvard economist Robert Barro who created the Barro Misery Index, which includes interest rate and economic growth data to assess presidents of the second after war.

In 2011, Johns Hopkins economist Steve Hanke based on the Barro Misery Index and began applying it to countries outside the United States. Hanke's modified annual poverty rate is the sum of unemployment, inflation and bank lending rates minus the change in real GDP per capita.

Hanke annually publishes its global list of misery index rankings for 95 countries that promptly report relevant data. Its list of the most miserable and happy countries in the world ranked Venezuela, Syria, Brazil, Argentina and Egypt among the most miserable countries. China, Malta, Japan, the Netherlands, Hungary and Thailand were ranked as the happiest countries.

The concept of the poverty index has also been extended to the asset classes. For example, Tom Lee, co-founder of Fundstrat Advisors, created the Bitcoin Misery Index (BML) to measure the misery of the average bitcoin investor. The index calculates the percentage of winning trades compared to total trades and adds it to the overall volatility of the cryptocurrency. The index is considered "in misery" when its total value is less than 27.
 

Example of a misery index

A variation of the original misery index is the Bloomberg misery index, developed by the online publication. Venezuela, a country hit by widespread inflation and unemployment, outperformed the latest version of the index. Argentina and South Africa, both economies with similar problems, completed the top three.

On the other hand, Thailand, Singapore and Japan were considered the happiest countries according to economists' estimates. But low inflation and low unemployment rates can also mask low demand, as the publication itself pointed out. Japan is a textbook case of persistently low demand due to an economy that has been in stagflation for the past two decades.

What is the CPI Rate for 2022

Powell's optimism about the Fed's ability to bring inflation back under control - beware - without hurting the economy and corporate earnings, contributed to a good rebound on Wall Street, with the S&P 500 rarely recovering 0.92% and the Nasdaq 100 even better (+ 1.47%). Treasury yields, consistent with this optimism, fell across the curve, albeit slightly. A commendable act of trust, if you think that the FED President is the same one who 8/9 months ago said that inflation was transitory, while in the second half of the year the CPI made the record since the 80s. the Fed Funds to zero and the Fed engaged in QE for a couple of months.

To think that the stance needed to bring inflation under control will not have any consequences on the cycle seems risky to me. Of course, it may be that, after the frenzied stimulus phase and the production bottlenecks have passed, the structural disinflationary forces reaffirm themselves, and the CPI re-enters largely autonomously. This appears to be the market's view, judging by bond levels. But this mean revertion has been insisting for a while, and in the meantime we are at 7%. Let's say that the concept of risk premium at the moment does not seem very popular among investors, ousted by more recent acronyms such as TINA (there is no alternative), FOMO (fear of missing out) and BTFD (buy the fucking dip).

Asia welcomed the turnaround in sentiment very well. All major indices except Jakarta (at the stake) show robust progress, with Chinese "H" shares leading, along with Hong Kong, with gains close to 3%. Third place, Tokyo, followed by Seoul and Vietnam, with the Chinese "A" shares showing more limited but still good progress. The soul of the rise in "H" shares is the tech, those stocks like Ali Baba also listed on Wall Street that were harassed by regulation and the risk of delisting in late 2021, and are now violently squeezed.

The good sentiment that prevailed among Chinese assets is presumably also due to the December CPI which dropped from 2.3% to 1.5% vs expectations for 1.7%. Producer prices also slowed (10.3% from 12.95 and vs expectations for 11.3%). The reasoning is always the same: falling inflation ergo more room for maneuver for the PBOC in the direction of easing. This places the Chinese central bank in direct antithesis to the other major banks. Won't this divergence fuel capital flight in the long run? And then, what will be the effect on prices of an increase in omicron lockdowns?

Apart from that, a lot of Chinese real estate debt is due to maturity shortly and a lot of spectacle is expected. Reuters reports that unpaid commercial papers are flying. Their assets continue to suffer a lot.

On the Covid front, a certain optimism is fueled by the fact that in the UK cases are starting to decline, while hospitalizations and musts have not risen that much. The UK's role as "sentinel of industrialized countries" on Covid bodes well.

Good news, certainly that it increases the probability that the bulk of the countries will see the peak of the wave in January. From the point of view of the markets, support for sentiment? It may be, but in reality Omicron's "dip" was recovered quickly, and a variable such as oil has already returned above the prevailing level before its appearance.

The European opening saw, once again, continental equities catch up with the Wall Street rally last night. After that, in the absence of any relevant data, markets waited nervously for the US CPI due out this afternoon. The same goes for the currency and the yields.

At 2.30 pm, the show.

The numbers are not too far from the consensus (matched in the case of the year-over-year headline data) but have all the characteristics to cause headlines in the media, with 7 as the first digit, and 5.5% and historical records.

It has been observed that a large contribution to strength comes from used cars, while housing, which is the largest component of the core data, has slowed the ride slightly. And then there is energy which has a very strong effect on the year-over-year data, even if the month-over-month contribution was negative. Too bad that oil is making new highs for the period today.

The market reaction is similar to that seen yesterday after Powell, and on other recent occasions in which the numbers were relevant, but expected and therefore discounted in the short term. Of course, from the point of view of the fundamentals it is so counterintuitive that it makes the desire to comment go away. In fact, in the face of a level of inflation at its highest for decades, and with the Fed clearly lagging behind, what do we have? Dollar and yields are falling, and stocks and commodities are rising. Obviously it is not the case to focus on the single session. But, as mentioned above, the risk associated with inflation entering 2022 at this level is not negligible. What if, once again, the return expectations turn out to be wrong? Especially since a wave of Omicron in China could further exacerbate supply difficulties in the coming months. Incidentally, in November there are Mid Term Elections in Congress, and Democrats are already panicking about price levels. Bet that if the CPI does not slow down quickly, the pressures on the FOMC will become high (or worse, we are talking about price controls, which are detrimental to margins).

The opposite reasoning is: if 7% inflation has not undermined expectations, and made meatballs of the rate curve, what can it do? What prevents us from continuing like this, with real Fed Funds negative by handfuls of percentage points, the best of all possible worlds for Corporate USA?

I don't know, but experience shows that if something sounds too good to be true, it usually isn't. Before Covid, a certain school claimed that one could make a fiscal deficit at will without fear of creating inflation, which was now dead. At this point I would say that we have proof to the contrary.

European equities were happy to take advantage of the US reaction, closing with good progress. Naturally, the correction of the Dollar resulted in a strengthening of the €, while the Eurozone yields fell in sympathy with the US ones. The spread is also down. The strength of commodities was spectacular, with copper up by 3%, oil by 2% and even precious metals up. A movement, that of industrial metals and energy that underlies a strong economy. On what basis, then, will prices slow down, with strong commodities and a resilient cycle? Posterity will judge.

 

US macro, Consumer Price Index (CPI)

The consumer price index (CPI) is one of the US macroeconomic data most followed by financial market operators. Inflation has in fact a strong impact on everyone's real life: consumers, by increasing the prices of goods and services; of companies; increasing the costs of loans and production inputs; of the financial markets, negatively affecting the prices of bonds and shares.

CONSUMER PRICE INDEX: WHAT IS IT

It is the most important inflation index. Measures the average change in retail prices for goods and services. It is a monthly index.

CONSUMER PRICES: HOW IT IS PROCESSED

The elaboration of the consumer price index is based on the survey of the prices of goods and services that belong to 200 product categories, then grouped into 8 large groups: housewares, food and beverages, transport, medical care, clothing, leisure, education, other goods and services. During the first three weeks of the month, the Bureau of Labor Statistics records the prices charged by 23,000 points of sale in 87 metropolitan areas of the United States of America. The same basket of goods and services is analyzed each month. Adjustments to the processing system are periodically made for products whose price can vary significantly due to seasonal factors such as, for example, oranges and other seasonal fruit. Other extraordinary variations can affect assets such as oil and its derivatives, often due to geopolitical reasons. To prevent variations of the two types just mentioned from altering the perception of the true trend of retail inflation, the so-called "core" index is calculated, in which the prices of food and energy products are not included. Every two years the associated "weights" from each category are changed to reflect the changes that have occurred in the consumption pattern of Americans.

CONSUMER PRICES: THE MOST IMPORTANT DATA

The monthly and annual variation of the overall index and of the "core" index. The price index of energy products is also followed very closely. Indeed, energy consumption is difficult to reduce, even in the case of large price increases. And the resulting increase in spending can negatively affect spending on other products or services.

CONSUMER PRICES: IMPORTANCE FOR THE MARKET

Inflation worsens the quality of life by reducing the purchasing power of citizens' incomes. In the short term it can increase the revenues of companies, but with a slightly longer run it ends up also increasing the costs of all production inputs, and of loans. If inflation grows at a high rate, then it is possible for the Federal Reserve to raise interest rates, and this usually has a negative impact on financial markets.

Bonds

If retail inflation turns out to be higher than expected, it is possible that bond prices will fall, and yields will rise. With inflation in line with expectations, or falling, it is possible that prices will not change, or even rise.

Actions

Inflation can lead to an increase in the cost of loans for businesses by following two paths: the dynamics of the bond markets, whereby expectations of a rise in consumer prices reduce the real return expected from the investment and the demand for more monetary returns. high that compensate for it; and through the Fed's possible decisions to raise interest rates to prevent further price hikes. Whatever the path followed, the increase in the cost of loans can cause a reduction in profits, and therefore in share prices.

Dollar

The effect of a price increase on the dollar rate is more uncertain than it has on bonds and stocks. Inflation, on the one hand, reduces the real return on any investment in dollars (bonds, shares, bank deposits ...) and therefore, via disinvestments of various kinds, its price in terms of other currencies. But if the currency market participants believe that the Fed is reacting adequately to the inflationary pressures underway, it is also possible that the price of the dollar will rise.