For the last two months, I’ve parroted some version of the “hiking into a slowdown” narrative to describe the predicament facing Fed officials who waited too long to start down the road to policy normalization.
I’m not casting aspersions. Hindsight is a helluva lens. Everything seems obvious in hindsight. And everyone claims they “told you so.”
But it is what it is. The US economy could’ve easily funded a rate hike or two in 2021. And there was no need for the Fed to keeping buying assets past July.
Now, fiscal momentum is lost entirely. Consumer spending is on the wane, and it’s not just a fleeting slowdown tied to Omicron. Real wage growth is negative, and sentiment has responded accordingly. Americans are worried about inflation eroding their buying power and thereby undermining their personal financial circumstances. The figure (below) is from the University of Michigan’s dataset.
The demise of Build Back Better meant the end of a key monthly income stream for many families and the student loan moratorium ends soon.
In short, inflation is biting, government transfers are evaporating and any piecemeal approach to fiscal stimulus will proceed at a maddeningly slow pace on Capitol Hill, if it proceeds at all.
All of that said, it’s worth considering the possibility that the ongoing relaxation of COVID protocols as America’s caseload falls (figure below) and pre-midterm jostling compels state- and local-level politicians to reconsider how to weigh public safety against economic activity, could lead to upside data surprises, especially to the extent a contraction-territory Q1 GDP print becomes consensus.
Although you could argue January’s jobs stunner was a function of the survey period, and therefore Omicron’s impact won’t show up until February’s report, that argument will be null and void in the event this month’s NFP manages even a decent positive headline print. In that case, January payrolls will be seen in hindsight (again, a great lens through which to peer) as evidence of economic resiliency.
Somewhat paradoxically, though, the risks (for financial assets) associated with a Fed that’s tightening into an ongoing boom (as opposed to a slowdown) are even greater. In true “good news is bad news” fashion, the Committee would likely be compelled to withdraw even more transparency in an effort to reclaim as much policy optionality as possible.
“After Friday’s upside data surprise, this fear of a wage-price spiral element continues to escalate with every fresh headline on higher compensation for US workers to the point where it now feels like there’s ever-higher conviction that the prior ‘Q1 inflation peak’ view is being pushed into Q2 and beyond,” Nomura’s Charlie McElligott wrote Wednesday.
“So, in some ways, the zeitgeist has shifted from the potential ‘hiking into a slowdown’ view [to something that] looks a lot more like ‘hiking into a boom,'” he continued, noting that such an scenario would “perversely increase the volatility of the policy outcome range.”
Look at the world that Wall Street economists and strategists live in. They are surrounded by wealthy people who did just fine during the Covid rampage, both at and outside of work. So it should be no surprise that they are open to the idea that “everyone” is just chomping at the bit to run out and spend once mask mandates are lifted.
Peleton stock was driven up by the same dynamic = “everyone I know has bought two Peletons!”
Derek. Dead on, sir!
I think this misses the point. The thesis here is that this would be a bearish development — or, more accurately, a scenario conducive to more volatility, given the read-through for the Fed.
More generally, though, this criticism is misplaced. This article in no way seeks to downplay any kind of suffering. If you want to castigate a group of people, try politicians, whose mask policies (and COVID protocols more generally) seem to be dictated more by what Trump says (in 2020) and Biden’s poll numbers (in 2022) than they are by science.
Also, who do you think is worth more? The average sell-side equities strategist / economist, or senior members of Congress?
An interesting take on “plan for the worst hope for the best“ I always wish the best for the real economy
This is a reopening economy and I would not describe it as either a boom or a bust. Unless of course you are Larry Kudlow- who famously described the “Bush” boom right before the economy caved in…..
All of these scenarios seem to ultimately wind up with an unspoken “buy the dip” at the end.
Too-rapid tightening => sell-off => tighter FC => reduced fed pressure for rate action (and/or fed put) => BTD.
Tightening into a slowdown => nasty slowdown => reduced inflation => early end to rate cycle => BTD.
Tightening into a boom => earnings++ => earnings growth “pays for” fed => BTD.
Perhaps I’m simply one of those “conditioned by the bull” dip-buyers that H has described. But I’m in the camp that sees historic one-off inflationary factors receding soon enough and being replaced instead with obvious productivity, efficiency, and oversupply responses. I remember the 70’s, and this just isn’t the 70’s redux. It’s just not.
If this isn’t the ’70s — and I agree it isn’t — and rates are going higher — because of onshoring and a huge wave of millennials entering its household formation years — perhaps significantly so, how will dip-buyers justify a forward PE on the S&P of 26 (or higher)? Or is it different this time?
Onshoring seems a bit of a dream so far as imports into the US are still rising.
This article provides context for a potential 50 basis point rate hike in March imho…
H-Man, I buy the slow down camp because Joe Consumer is out of gas. I buy raising rates are coming. The issue is what the Fed is buying when it comes to inflation. I see a lot of hawk and not much dove.