“You don’t have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years” said Janet Yellen yesterday. When I heard this I had no choice but to post this chart again of the unemployment rate in blue and the recessions in gray. It reflects that since WWII recessions ALWAYS start when the unemployment rate is at its lows of the cycle.
The US 2 yr yield rise in the past two days was quite amazing in rising 39 bps to the highest level since November, almost adding back 2 rate hikes since the Powell presser and ahead of his comments today. Daly, Bostic and Kashkari (just on CNBC this morning) this week are all for more rate hikes. Kashkari, who wants to go to 5.25-5.5% though doesn’t vote, again blamed the models in not picking up on inflation coming out of covid. Some though didn’t need models in predicting the outcome and again, the Fed shouldn’t be so beholden to them.
As we’ve seen some stocks this past month in the market party like its 2021, nothing reflected this more than Bed Bath Beyond yesterday whose stock almost doubled as its 2024 bond is trading at 6 cents on the dollar. And in immediate response the Reddit traders are giving the company an opportunity to sell convertible preferred shares and warrants.
The Reserve Bank of Australia raised rates by 25 bps as expected to 3.35% but governor Lowe unexpectedly said they are going to keep on hiking. Markets were expecting a pause announcement. He said “The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.” Their bond market was left offsides and the 2 yr yield jumped by 15 bps to 3.23%, a one month high and the 10 yr yield was up by 14 bps to 3.60%, also a one month high. The Aussie$ is higher too while stocks sold off.
Whoever it is that replaces Kuroda at the BoJ is going to have a really tough job and the December wage data highlights that, in addition to the high inflation stats. Regular base pay rose 1.8% y/o/y. While that might not sound like much to you, it’s the quickest increase since 1994. If we include a 7.6% y/o/y rise in bonuses, we’re talking about a 4.8% y/o/y cash earnings figure.
From purely a monetary policy and inflation/wage standpoint, it’s an easy decision for the next governor to get rid of YCC and out of NIRP but because of the size of the Japanese government debt, small increases in interest rates gets VERY expensive in terms of government interest expense. The 10 yr yield is still stuck at .50% but the 40 yr yield rose 3 bps to 1.82% and the yen is rallying. The Nikkei was flat and we are still positive on Japanese stocks. They will benefit from the China reopening.
Base Pay in Japan y/o/y
The trade data out of Taiwan for January was pretty weak but as expected and should improve in coming quarters as China’s economy gets back to normal. Exports fell 21.2% y/o/y vs the estimate of down 20.3% and that’s the biggest drop since 2009.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.