Peter Boockvar

Much of the Fed speak we heard last week was really nothing new in terms of revealing any special insight that we don’t already know. They will hike by the slower pace of 50 bps in December to 4.25-4.5% and maybe, just maybe, we’ll get a few more 25 bps after that in 2023. Thus, as we’re likely coming to the end of this I believe it is what happens next that now should matter. Atlanta Fed’s head Bostic over the weekend gave his opinion that we won’t be seeing a quick shift to lower rates thereafter, “if economic conditions weaken appreciably – for example, if unemployment rises uncomfortably – it will be important to resist the temptation to react by reversing our policy course until it is clear that inflation is well on track to return to our longer run target of 2%.”

To those Fed members, like Bullard and Kashkari, who just want to keep on hiking well into 2023 until inflation is much lower, my friend Kyla Scanlon in her weekend piece said something smart about the continued desire even at this point to ” ‘do more now to do less later’ probably works in some cases, but maybe not in an economic environment where turning the oven up to 400 degrees won’t cook the cake any faster.” 

We get more Fed speak in the coming days but no one we haven’t already heard from last week. Not really discussed on the Fed debate is their balance sheet and as of last week is now $339b smaller than the peak seen in April. 

Fed’s Balance Sheet

Breathing a sigh of relief is the ECB after the largest German trade union, IG Metall, agreed to a wage boost for its members of only 8.5% over two years. They will get a bonus of 1,500 euros early in 2023 and a pay raise of 5.2% next June to be followed by another bonus in early 2024 of 1,500 euros and a 3.3% wage boost in May 2024. The chair of IG Metall said “Employees will soon have significantly more money in their pockets – permanently.” With inflation in Germany running at 10%+, this could have been much worse for the ECB, German industry and much better for IG Metall members than it was. This agreement sets the standard for about 3.9mm metal and electrical workers in the country. 

Also lending some relief was the 4.2% m/o/m drop in PPI in October in Germany mostly due to drops in natural gas and electricity prices. This is after massive jumps in the prior 3 months of 2.3%, 7.9% and 5.3% respectively. The estimate was for a rise of .6% m/o/m and prices are still up 35% y/o/y. Notwithstanding this data point, the German 10 yr inflation breakeven is up by 5 bps to 2.29% but well off the May high of 2.98%. The euro is lower but bund yields are slightly higher. 

Evidence of continued global slowing, South Korea said its November exports in the first 20 days of the month fell 16.7% y/o/y, the 3rd straight month of y/o/y declines and led by a drop in semi’s while auto shipments rose. Exports to China fell 28.3% y/o/y, dropped by 1.5% to the EU and rose by 11% to the US. Imports were weaker by 5.5% y/o/y. 

Anything China related, including iron ore, copper and crude, are lower with it being apparent there will be no ripping the band aid off when it comes to a reopening until at least after the winter.