Is it to be one more and done for the US Federal Reserve?

Yesterday brought something of an economic hiccup to the United States. Up until this point it had appeared to be cruising through the economic troubles of the latter part of 2022 with little apparent impact. But then we got this.

Advance estimates of U.S. retail and food services sales for December 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $677.1 billion, down 1.1 percent (±0.5 percent) from the previous month, but up 6.0 percent (±0.7 percent) above December 2021.

So the important Christmas season saw a decline. The annual numbers are nothing like as strong as they look because they are not adjusted for inflation, or if you prefer are value rather than volume. So if we try and adjust for inflation we are looking at unchanged or a small fall.

Adding to the concerns was the downwards revision for November.

The October 2022 to November 2022 percent change was revised from down 0.6 percent (±0.5 percent) to down 1.0 percent (±0.2 percent).

This means that growth fell back in the latter part of the year.

 Total sales for the 12 months of 2022 were up 9.2 percent (±0.4 percent) from 2021. Total sales for the October 2022 through December 2022 period were up 6.7 percent (±0.5 percent) from the same period a year ago.

Much of that will be the recent decline in inflation but especially in December it looks as though some real declines are present too. The bit below caught my eye because I have been seeing more and more anecdotal reports of problems with car sales in the US which now seems to be in the official data.

WASHINGTON, Jan 18 (Reuters) – U.S. retail sales fell by the most in a year in December, pulled down by declines in purchases of motor vehicles and a range of other goods,

An example of other news about car sales and prices is below.

Luxury car market is taking a beating. Here’s a good example:

2023 Audi S8 6 months ago: $5-10K over MSRP

Now: $10K below MSRP

( @CarDealershipGuy)

One thing I do like about the US Retail Sales release is the way that they show the numbers are in a range rather than the spurious accuracy we get from others.

Economic Growth

There was a quick response here from the Atlanta Fed.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 3.5 percent on January 18, down from 4.1 percent on January 10.

Whilst Retail Sales were the main mover there were other weaker numbers in there too.

 the nowcasts of fourth-quarter gross personal consumption expenditures growth, fourth-quarter gross private domestic investment growth, and fourth-quarter real government spending growth decreased from 3.5 percent, 6.8 percent, and 1.0 percent, respectively, to 2.6 percent, 6.6 percent, and 0.8 percent, respectively.

Whilst the end of the year is forecast by them to still bring growth of 0.9% or so in our terms which is better than its peers. the issue is the slowing. That fits with the Purchasing Managers Index Report.

Business activity declined in six out of seven US sectors
monitored by S&P Global PMI data in December 2022.
Technology was the exception, with output volumes
increasing for the fourth consecutive month…….Basic Materials and Consumer Goods both posted relatively
steep reductions in production volumes during December. In each category, the rate of decline was the fastest since May 2020.

Whilst I am no great fan of the PMI series they are consistent with other news this time around.

Inflation

We had already received news that consumer inflation had fallen on a monthly basis in December and that theme was reinforced yesterday by this.

The Producer Price Index for final demand declined 0.5 percent in December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices advanced 0.2 percent in November and 0.4 percent in October. On an unadjusted basis, the index for final demand increased 6.2 percent in 2022 after rising 10.0 percent in 2021.

As it happens they have faded rather neatly from 0.4% monthly to 0.2% and now a pick-up in pace to -0.5%. We see a switch also between goods and services.

In December, the decrease in the final demand index can be attributed to a 1.6-percent decline in
prices for final demand goods. In contrast, the index for final demand services rose 0.1 percent.

Goods are seeing some disinflation now to follow the past rises. Also there is more woe for central banking supporters of core inflation.

Leading the December decline, the index for final
demand energy dropped 7.9 percent. Prices for final demand foods decreased 1.2 percent.

Whilst the ordinary person will welcome lower prices for food and energy central bankers will be missing out on important price action yet again. One area receiving a lot of attention in America is the price of eggs which are bucking the good trend.

The indexes for chicken eggs and for
electric power also moved higher.

Some of the reports are not a little bizarre.

Eggs are now so expensive that people are choosing to raise their own chickens instead of buying eggs at the store. CNN is giving safety tips to new chicken owners, including a warning to not kiss or cuddle with them. ( @FreeBeacon)

The situation has been driven by a combination of higher costs and avian flu.

But the overall picture is of lower inflation coming along the chain although we are seeing a little services inflation.

Comment

So we have more evidence of a slowing economy in the US plus weakening inflation pressure. So over to you Federal Reserve.

I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward.

That was Patrick Harker of the Philadelphia Fed and the significant bit is the move to 0.25% changes. Now President Logan of the Dallas Fed.

“If you’re on a road trip and you encounter foggy weather or a dangerous highway, it’s a good idea to slow down. Likewise if you’re a policymaker in today’s complex economic and financial environment,” Logan said in her first major policy speech since taking the top job at the Dallas Fed last year. “That’s why I supported the (Fed’s) decision last month to reduce the pace of rate increases. And the same considerations suggest slowing the pace further at the upcoming meeting.” ( Reuters )

It was not all one way as this summary of James Bullard of the St.Louis Fed’s discussion with the Wall Street Journal shows.

Bullard said his SEP rate projection for 2023 would take the funds rate to 5.25%-5.5% this year He sounded open to raising rates by 50 basis points on Feb. 1 He likes the idea of taking out “insurance” against developments that could keep inflation high.

Shame he wasn’t as keen on action as inflation was building.

Overall though the Fed is catching up with our expectation of a 0.25% move next time as we now wonder when it will follow the Norway?

Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to keep the policy rate unchanged at 2.75 percent:

 

 

The central bankers have been forced into promising even more interest-rate rises

Yesterday was an intriguing day and no I am not referring to the record numbers watching Flight Radar to follow the flight carrying Nancy Pelosi to Taiwan. What we saw was a stepping up of open mouth operations by policymakers at the US Federal Reserve.

Aug 2 (Reuters) – The Federal Reserve’s work of bringing down inflation is “nowhere near” done, San Francisco Fed President Mary Daly said on Tuesday, adding U.S. central bank officials are “still resolute and completely united” in the task of achieving price stability.

She also denied that the Federal Reserve would switch to cutting interest-rates next year.

“That would not be my modal outlook,” she said. “My modal outlook, or the outlook I think is most likely, is really that we raise interest rates and then we hold them there for a while at whatever level we think is appropriate.”

She presented herself as a doughty inflation fighter.

“The number of people who can’t afford this week what they paid for with ease six month ago just means our work is far from done,” Daly said.

That is quite a change of view from someone who was previously an inflation fan. From February 2020

(Reuters) – A top U.S. central banker on Monday called for using new tools to push up stubbornly low inflation as an aging population slows economic growth worldwide and globalization and other trends keep a lid on prices.

“We need to embrace the mindset that inflation a bit above target is far better than inflation a bit below target in today’s economic environment,” San Francisco Federal Reserve Bank President Mary Daly said on Monday in remarks prepared for delivery in Dublin, Ireland.

So she has what she wished for. Indeed in 2021 she got the opportunity to vote for it. Apparently she is now not so keen or more realistically is afraid of what the response would be if she said that now.

This backed up the words of another Federal Reserve policymaker Neel Kashkari from last week.

“Whether we are technically in a recession or not doesn’t change my analysis,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told CBS’ “Face the Nation” on Sunday. “I’m focused on the inflation data. I’m focused on the wage data. And so far, inflation continues to surprise us to the upside. Wages continue to grow.” ( CNBC)

This was rather awkward for the man most associated with the policies that helped push inflation higher in the first place. In fact markets simply ignored him as a man with zero credibility.

The barrage of open mouth operations continued though.

In a separate interview on Tuesday, Chicago Fed president Charles Evans said he thought that a 0.5 percentage point increase at the next meeting in September would be appropriate. However, he left the door open to a larger 0.75 percentage point rise, which he said “could also be OK”. ( Financial Times)

A decade or so ago Charles Evans made the case for inflation at 3% or 4% to “catch up” on inflation being below target. This was based on the now abandoned claims from central bankers that they had the “tools” to reduce above target inflation and could do so easily. That was a complete lie as the present situation is showing. Sadly they never get challenged on this.

But I have selected these 3 because they have for years sung along with Prince.

This is what it sounds like
When doves cry

What does this mean?

We got some actual numbers from the President of the St.Louis Fed in a speech from New York.

Fed‘s Bullard: Repeats Wants Policy Rate At 3.75%-4% By Year-End – Fed Needs To Get Into More Restrictive Rates Territory ( @LiveSquawk)

He is in a different category to the others mentioned so far as he has been keener on dealing with inflation, but he does seem to have a bit of a problem with these thoughts.

The Fed and the ECB have considerable credibility compared with their 1970s counterparts, suggesting that a soft landing is feasible in the U.S. and the EA if the post-pandemic regime shift is executed well.

I would ask what is he smoking? But I doubt that there is anything strong enough to make you think that. As Earth Wind & Fire put it.

Every man has a place, in his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky, on our ship, Fantasii
All your dreams will come true, right away

We can now switch to the apparently rather similar thoughts of Charles Evans.

Evans noted that he thinks rates will have to rise to between 3.75 percent and 4 percent by the end of next year but cautioned against too quick a path to get there should the Fed have to retrench unexpectedly on the back of a changing landscape. ( thenews.com.pk)

So the same level but later. Although he is not much good at predicting the future.

April 19 (Reuters) – Chicago Federal Reserve Bank President Charles Evans on Tuesday said the Fed could raise its policy target range to 2.25%-2.5% by year end.

It is already there.

Comment

Let me start with what the Federal Reserve is trying to so here. It is not a coincidence that so many Fed speakers have appeared at the same time to sing in a chorus. The problem with attempting to set an agenda via open mouth operations comes from their most recent policy move.

“While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” Powell said, noting that there will be two full months of data before the Fed’s next meeting, in September. ( Reuters)

That was an abandonment of Forward Guidance which had become very strict even involving leaking interest-rate moves to Nick Timiraos of the Wall Street Journal. Now we are only one week later being guided again via all these speeches.

The reason for this is something that I have regularly pointed out which is that markets were ignoring the interest-rate rises and instead concentrating on the upcoming expected deterioration in the economy. So 1.5% increases in official interest-rates were accompanied by the benchmark ten-year yield falling by more than 0.8%. This left the Fed in quite a mess because they thought they had been clever in letting the rise in bond yields do the inflation fighting for them. The most obvious example of this is the way that the 15 and 30 year mortgage rates rose. But now they will be falling just as inflation has soared leaving the Fed with yet more egg on its face.

The response has mostly been we do not believe you.

But the comments from Daly, Evans and Mester moved futures markets, with expectations for where the Fed’s benchmark policy rate will stand in December rising from 3.27 per cent on Monday to 3.39 per cent on Tuesday.

Yes bond yields rose but by much, much less than the amounts they had fallen by.

Oh and it was the central banks that created this although the Financial Times fails to mention it.

Investors also cautioned that liquidity in the Treasury market — the ease with which traders can buy and sell — is poor, with many market participants on holiday this month. A deterioration in liquidity can lead to big swings in the price of securities.

Not the holiday season as they did not create that! The fact is that everywhere QE has gone liquidity has worsened with the extreme case being Japan where at times it has been non-existent.

So when you see more open mouth operations today you now understand why….