To follow up on my point yesterday that most violent rallies happen in bear markets (well known by many for sure), there are also times when huge rallies occur at the beginning of bull markets (thanks to my good friend Barry Ritholtz for some stats) but are much less common. In March 2009 we saw two days of north of 6% S&P 500 bounces. In March 2020 and early April 2020 we saw four spikes of between 6-9%+. I still believe the bear is alive and has further to play out in 2023.
You’ve heard me talk endlessly about the Bank of Japan, their obsessive attempt at raising inflation via yield curve control and NIRP and the dangers if/when this fails. Nikkei Asia had a wild story today saying that the “Central bank’s ownership exceeded 100% of instruments issued.” They do this by lending out bonds they’ve already bought that traders then short into the market and the BoJ repurchases them and double counts them on their balance sheet. “The shocking figure was announced on November 2nd. The BoJ’s holdings of the 368th issuance of 10 yr Japanese government bonds (the most recent offering) as of the end of October exceeded the amount actually issued.” I don’t see how this doesn’t all end badly but I know we’ve been waiting for that for a long time, //asia.nikkei.com/Business/Markets/Bonds/BOJ-buys-up-newly-issued-JGBs-in-fight-against-bond-vigilantes.
Thanks mostly to higher expectations for gas prices, yesterday’s October NY Fed’s Consumer Expectations survey saw one yr inflation expectations jump to 5.9% from 5.4% in September and the 3 yr look rising by 2 tenths to 3.1%. “Both increases were broad based across age, education, and income groups” said the NY Fed while “The median expected change in gas prices rose by 4.3 percentage points to 4.8%, the largest one month increase on record.” Higher food price expectations rose by 7 percentage points to 7.6% and rose one tenth for rents to a still very high 9.8%. The expected cost of college fell by 4 tenths while remaining unchanged for medical care.
There was deterioration on the views of the labor market as “mean probability that the US unemployment rate will be higher one yr from now increased to 42.9%, the highest reading since April 2020 from 39.1% in September” and was “most pronounced for respondents with no more than a high school education and those with annual household incomes between $50-100k.” But, there was a 7 tenths rise in “the mean perceived probability of finding a job (if one’s current job was lost).” One yr earnings expectations rose by one tenth to 3% and has been in a 2.8-3% range over the past year. Broadly for household income, the expected growth rose to 4.3%, a series high, from 3.5% in September.
On spending, growth expectations rose to 7% from 6% but more people are saying “it is harder to obtain credit than one yr ago increasing to a series high of 56.7%. Similarly, expectations for future credit availability also deteriorated in October, with the share of respondents expecting it will be harder to obtain credit in the year ahead increasing sharply.”
Bottom line, higher inflation expectations are tough to shake and the weakness in expectations for the labor market is the next phase of this economic cycle that will gain greater headlines. I mean that FedEx is putting some freight workers on furlough right smack in the holiday prep season is telling. FedEx said “The company will continue to evaluate the environment and bring back furloughed employees as business circumstances allow.”
As for transportation generally, the Cass Freight October index rose .3% m/o/m seasonally adjusted while rising by 2.9% y/o/y vs 4.8% in September. They said “with freight demand hit by inflation, substitution from goods back to services, and now excess inventory, the improvement in the past few months is still a little puzzling.” And they gave a few reasons why, “unique comparisons, inventory building ahead of the holidays, repositioning of mistimed inventory, consumers getting ahead of rising interest rates, and easing supply constraints, particularly in auto production.” They though don’t expect this to last as import trends are “quickly declining.”
The inferred freight rate “slowed to 7.9% y/o/y growth in October, from 16% y/o/y growth in September.” High fuel prices (and associated surcharges) are keeping it elevated but the slowdown is “as the result of the looser freight market supply/demand balance, and a downturn is nearing on a y/o/y basis.”
With respect to wages and the flow thru this means for profit margins, last week the Atlanta Fed updated its wage growth tracker and it saw a rise of 6.4% y/o/y for October vs 6.3% in September and just off the multi yr high fo 6.7% in June. For a ‘job switcher’, your wages were up 7.6% y/o/y vs 7.9% in September. For a ‘job stayer’, they rose 5.4% y/o/y, up one tenth from the month prior. Low skilled workers continue to see wage gains, rising by 6.7% y/o/y, a new high. Bottom line, looking back 25 years, this index has averaged 3.7%, so it puts the current 6.4% growth into perspective. While it still remains below the rise in the cost of living, wages are tough to take away and will be a MAJOR profit margin factor in 2023 I believe.
Atlanta Fed’s Wage Growth Tracker
We’ll have to wait until the Walmart conference call to hear what they have to say about the US consumer but on the stocking situation, “We significantly improved our inventory position in Q3, and we’ll continue to make progress as we end the year.” In other words, the discounting worked, as it always does. There was nothing in Home Depot’s press release of note in terms of commentary. The conference call is at 9am est.
The October economic data out of China was pretty mixed. The consumer continues to be under pressure (whether because they are locked up or just don’t want to spend) with retail sales declining by .5% m/o/m, worse than the estimate of up .7%. Industrial production rose 5% y/o/y but that was just under the estimate. Not surprisingly, property investment dropped by 8.85 ytd y/o/y while fixed asset investment (think broad infrastructure spending) was up 5.8% ytd y/o/y. To state simply, until China fully reopens, all the stimulus, whether fiscal or monetary, will be just spitting in the wind. That said, they are clearly taking steps to doing so and Chinese stocks rallied a lot again overnight on those hopes.
Shifting to Europe, the November German ZEW investor confidence index on their economy improved to -36.7 from -59.2 and that was well better than the estimate of -51. Current conditions also was less negative. The ZEW said “This is likely to be related above all to the hope that inflation rates will fall soon…However, the economic outlook for the German economy is still clearly negative.” On the inflation situation, the drop in natural gas prices with storage mostly full is for sure the main focus. The euro is higher in response but the dollar is weak across the board.
Lastly, the UK unemployment rate rose one tenth to a still low 3.6% for the 3 months ended September with 52k jobs lost, more than the estimate of 25k. Wage growth though continued to accelerate, rising by 5.7% y/o/y ex bonuses’, the best since last August but still well below the 10%ish inflation rate. October jobless claims rose slightly. The pound is quietly rallying to the highest in 3 months vs the dollar.