Imagine for a second that the Chinese government arrested the CFO of Apple and extradited him to the US. While it’s not the case, also imagine if the CFO was the child of Steve Jobs. I’ll leave my comments at that.
In yesterday’s Beige Book, the Fed described the US economy as having “expanded at a modest or moderate pace from mid October through late November, though both Dallas and Philadelphia noted slower growth compared with the prior Beige Book period. St. Louis and Kansas City noted just slight growth.” They also went on to say, “Most Districts reported that firms remained positive; however, optimism has waned in some as contacts cited increased uncertainty from impacts of tariffs, rising interest rates, and labor market constraints.”
A continued drum tight labor market was clear. “Labor markets tightened further across a broad range of occupations. Over half of the Districts cited firms for which employment, production, and sometimes capacity expansion had been constrained by an inability to attract and retain qualified workers. In fact, several Chicago firms reported that some employees have simply quit, with no notice nor means of contact.” Because in part of the difficulty in finding workers, “most Districts reported that employment growth leaned to the slower side of a modest to moderate pace.” What did this mean for labor costs? “Conversely, most Districts reported that wage growth tended to the higher side of a modest to moderate pace. In addition to raising wages, most Districts noted examples of firms enhancing nonwage benefits, including health benefits, profit sharing, bonuses, and paid vacation days.”
With respect to price inflation, “On balance, prices rose at a modest pace in most Districts, although a few noted moderate increases. Nearly all reported that input costs rose faster than final goods prices. Reports of tariff induced cost increases have spread more broadly from manufacturers and contractors to retailers and restaurants.”
Bottom line, it is these cost pressures that remain that create the tough spot the Fed is in. What do they respond to? Sticky inflation pressures or worries about growth? I do want to point out the 10 yr inflation breakeven which at 1.94% is down from a peak this year of 2.20% but that’s only a 25 bps decline. In the middle of last year it was at 1.67% and one year ago it was at 1.88%. So, while it’s fallen alongside the drop in oil prices, it’s not really down that much.
I’ve made the point recently that what will separate the next economic downturn from previous ones is the limited ability of central bankers to play savior. That is because they’ve kept rates for too low for too long and waited so long to reverse themselves. Yesterday, the Bank of Canada as expected did not raise interest rates from their current level of 1.75%. It was back in October when they were gearing up for a hike to 2%. The sharp drop in oil prices were certainly a contributing factor in the pause but they also said the “data suggest less momentum going into the fourth quarter.” If the BoC can’t get their benchmark rate much higher, they of course have less to cut when needed. The Canadian $ is down for a 3rd day to the weakest level vs the US dollar since June 2017.
Also yesterday, BoJ Governor Wakatabe expressed concerns with not getting inflation higher and even had the nerve to say they “shouldn’t hesitate to add stimulus if needed” as “there is room for further stimulus if necessary. Outside of already owning 40% of the JGB markets, a chunk of the ETF market and having a balance sheet of 100% of GDP, they still don’t understand that this type of easing is NOT “stimulus.” How can it be if they are damaging the profitability of its country’s banks which are the flow thru of this policy. Thus, the BoJ will be another central bank with nothing new to do in the next slowdown.
The ECB meets next week and they are running the risk that they will already have rates below zero when/if their slowdown picks up as it’s already here.
Certainly not reflecting Tuesday’s selloff but instead the perceived Powell put and Trump/Xi dinner optimism that ended Monday at 4pm, Investors Intelligence said Bulls rebounded rather sharply to 46.7 from 38.3. No one wanted to miss that year end rally. Those expecting a Correction dropped almost 10 pts to 31.8 from 41.1. Bears though remained steadfast, rising to 21.5 from 20.6 and that is the most since late 2016 although remain a small bunch.
In Germany, October factory orders rose .3% m/o/m, better than the forecast of down .4% but partially offset by a two tenths downward revision to September. Driving the gain was a pick up in orders to other Eurozone countries as foreign orders rose only slightly and they fell within Germany. On a y/o/y basis however, overall orders have fallen for 5 straight months. After the contraction seen in Q3 with a lot of that due to the auto emissions issues that delayed shipments, growth is forecasted to rebound by .5% q/o/q in Q4.
The unemployment rate in Greece fell to 18.6% in September, the lowest since July 2011 but still way too high. It peaked at 27.9% in July 2013 but was as low as 7.3% in May 2008. Hopefully Greece has a new leader named Kyriakos Mitsotakis after next years election.