The Fed is planning to hike rates beyond 5% in 2023 and company analysts are holed up with the C-suite in a fantasy world, disconnected from reality like kids running a crypto exchange from an expensive treehouse in the Bahamas.
Those are two takeaways from my Tuesday afternoon reading. This is shaping up to be one of those weeks where there’s a lot worth mentioning, but most of it is incremental rather than groundbreaking, a somewhat annoying conjuncture that’s conducive to the buildup of open browser tabs.
In situations like that, the most expedient thing to do is dive right in, mention what needs mentioning, close the tabs and move on. So, without further ado, allow me to do just that.
The Fed is in its pre-meeting quiet period this week, but Nick Timiraos isn’t required to stop writing in the days ahead of a policy decision. In the normal course of business, I wouldn’t mention a random journalist’s Fed take a day after it was published, but Timiraos is no random journalist. The Timiraos “wink, wink” Fed dynamic is lamentably transparent at this point. Or at least in my opinion, and that makes me reluctant to perpetuate it in real-time by amplifying the smoke signals that go up whenever he hits the publish button. Try as I might, though, it’s impossible to ignore him because even if he isn’t speaking for the Fed, traders think he is.
“Federal Reserve officials have signaled plans to raise their benchmark interest rate by 0.5 percentage point at their meeting next week, but elevated wage pressures could lead them to continue lifting it to higher levels than investors currently expect,” Timiraos wrote Monday, effectively confirming that if wage growth doesn’t abate, 5% isn’t the peak for Fed funds this cycle.
You scarcely need anyone else’s December FOMC preview. 50bps it is, with a lot of talk from Powell about wage-setting and the read-through for inflation. Powell spoke at length about the labor market last week during a speech that markets interpreted as a green light to press ahead with variations on FCI easing trades. In light of the average hourly earnings print that accompanied November payrolls, Powell may well endeavor to reverse that price action next week, ironically by talking about the very same macro dynamics, only this time being careful to preserve the “bad cop” feel of his Jackson Hole address. (If November CPI comes in hot, the sense of urgency will only increase.)
“Brisk wage growth or higher inflation in labor-intensive service sectors of the economy could lead more [officials] to support raising their benchmark rate next year above the 5% currently anticipated by investors,” Timiraos went on to say. He quoted the Brookings speech before noting that Powell “made his comments two days before the Labor Department reported that hourly earnings growth increased in November at its strongest pace since January.”
Again: This could scarcely be any more transparent. If you’re not picking up what Timiraos is laying down, you might as well quit.
Meanwhile, Morgan Stanley Wealth Management’s Lisa Shalett was back with another somewhat caustic cameo on Bloomberg TV. In June, Shalett chided company analysts in abrasive terms, implicitly (and nearly explicitly) accusing bottom-up consensus of being involved in a (legal) conspiracy to keep forward estimates artificially elevated. “It’s horrifying there is very little proactivity among bottom-up analysts to go out on a limb and cut numbers without corporate management telling them exactly what to do,” she said, five months ago.
Fast forward to Tuesday and she called the C-suite “delusional.” I’d be totally remiss not to quote Shalett at length. Hers is the kind of refreshingly candid take you only get from someone with a lot of job security, a dedication to sincerity or both. Speaking to the Bloomberg Surveillance crew (Keene, Ferro and Abramowicz), Shalett said that,
While the labor market is still strong — and we’re in the camp that says there are structural changes in the labor market that are going to keep it robust — the reality is that consumers are starting to run out of dough. And the savings rate is back where we were in 2007, we’ve got credit card balances building up… and so as we get into 2023, we think everything rests with the consumer.
What analysts seem to be forgetting — and look, I’m going to throw CEOs in there — I still think a lot of corporate guidance is delusional in terms of the fact that over the past two years, they benefited from both a pull-forward in volume and 7% to 8% pricing power. So you’re talking about nominal top lines that were growing in double digits. If the Fed succeeds, that pricing power is at best going to halve, and at worst is going to go away completely at the same time that your volumes are slowing. It’s that kind of negative operating leverage that I just don’t think [is] in the numbers.
Much to the delight (I’m sure) of Bloomberg’s audience, Shalett shouted out Mike Wilson, who’s having himself one helluva year in terms of top-down forecasting, where that means he’s nailed every single twist and turn almost without exception.
“I started my career covering companies like Caterpillar and Deere. I know what negative operating leverage looks like. Mike Wilson, my colleague, started his career as a specialist on semiconductors,” Shalett said. “He knows what negative operating leverage looks like. And we don’t think there’s enough attention [being paid] to that in the consensus numbers.”
On Monday morning, before the opening bell, Wilson suggested investors take profits on a tactical bullish call instituted in October amid his otherwise bearish bent in 2022. That call (the tactical bullish recommendation) was dead on. “We are now sellers again,” he said Monday, in an abrupt turn. 36 hours later, the S&P was down 3.5% for the week.
It’s pretty difficult to see the Fed continue to tighten if consumers stop spending and profits crater. They are going 50 next week that’s pretty much in the cards. After that, I want to see all the macro numbers prior to the Feb meeting, and to see if there is any more “broken china”. My guess for a stop/pivot would be a noteworthy credit event. No credit event means a tightening bias keeps going.
i agree, liquidity crunch is whats required at this point for a real pivot. anything short of that market will front run the fed so the fed will always need to keep conditions tight.
Can they go above 5%? Sure if labor and wage numbers continue to remain elevated the Fed will hike past 5%, I doubt they can stay there long, dominoes will fall fast once something breaks.
I wonder where the Fed-stopping breakage will come from. In the last few months, we’ve seen GBP/Gilts teeter, USD soar, various emerging economies pushed to the edge of default, JPY plunge, UST liquidity dry up, crypto implode, even some FOMC members worrying publicly about stresses, and yet the Fed has pushed relentlessly on.
Evidently, risk of breakage won’t force the Fed to abandon its fight against inflation. Neither will actual breakage of things that are peripheral and expendable. Crypto was peripheral. El Salvador or Pakistan’s debt will be expendable. To stop the Fed, the broken thing has to be something big that is central to the US financial system.
Markets should be able to identify the breakage candidates. If the Fed is soon going to be halted, there should be a price, a CDS, a premium, an I.V., somewhere out there that is starting to scream. Is there?
I’m suspicious of the depth and longevity of any recessionary earnings hit – I think it may be another example of things happening faster this cycle than anyone expects. For example, on the goods side, we don’t have an earnings hit coming in 2023 from an inventory correction; we’re having it right now, as it started in 3Q. China is seeing 40% order declines from the US – right now. Ocean shipping rates are presently at nadir, down 90% – as of last month. A freight analytics firm sees this downturn in goods having corrected by next summer, meaning order data and confidence may start improving in late 1Q while investors are still nervously listening to 4Q earnings calls. I suspect that analysts projecting withdrawal symptoms from Covid demand pull in ’23 are behind the game by a quarter, at least. We may find analysts are right in their calls, but they need to be playing their tune on a 78 rpm turntable to keep up with this cycle.
I guess consumers are gonna borrow and borrow until they can’t borrow no ‘mo.
Total consumer credit rose $27.1 billion in October, up from a revised $25.8 billion gain in the prior month.
Here’s the Federal Reserve’s release.
https://www.federalreserve.gov/releases/g19/current/default.htm
Thats a 6.9% annual rate, up from a revised 6.6% in the prior month.
Economists had been expecting a $26 billion gain.
Revolving credit, mainly credit cards, rose 10.4% in October after an 8.2% increase from the prior month.
Credit card balances increased 15% over the past year ended in September, according to separate New York Fed data. This is the largest increase in in more than 20 years.
Forgot to mention that Heisenberg’s pages have already extensively covered the fact that this build-up in consumer debt is coming as savings have deteriorated.