Deep Doubts, Deep Wisdom: Are Chinese Equities Finding Footing Due to Policy Support? - Midday Macro – 3/1/2024
Color on Markets, Economy, Policy, and Geopolitics
Deep Doubts, Deep Wisdom: Are Chinese Equities Finding Footing Due to Policy Support?
Midday Macro – 3/1/2024
Market’s Weekly Narrative:
Stocks continued their rally this week, with the Russell outperforming despite today’s better performance from the Nasdaq. Momentum and Growth continued to be the favored factors, while technology, consumer discretionaries, and energy were the best-performing sectors. Sentiment is very bullish, and positioning is stretched, but the melt-up is likely to continue at least until next Friday’s NFP report, given no major foreseen catalyst until then. The buy-the-dip mentality was revived following Nvidia's earnings, and although this week’s economic data was mixed, looking to be weighed on by January’s cold weather in places (housing) and have irregularities in other (personal income), it failed to change hearts and minds regarding risk sentiment in equities. Neither did a barrage of Fed officials noting that the uncertainty of the timing of rate cuts had not improved thanks to the hotter monthly gain in PCE. In fact, it seemed we heard from every policymaker out there, and the message was mainly the same: patience was still warranted. Yes, there was a better balance in the economy supporting the disinflationary trend. Still, the resilient consumer had many officials thinking a below-trend period of growth was needed to get inflation through the “final mile” and back anchored around 2%. This message was lost on stocks, but Treasuries have not fallen back to pre-CPI levels, although yields fell on the week while the curve steepened. Turning further to the recent economic data, price pressures came in as expected, given what was seen in the CPI and PPI reports. However, risk sentiment welcomed revisions lower for December gains. Personal incomes rose, but the outsized gain looked off, while spending was more in line with recent trends. ISM Manufacturing cooled more than expected, offsetting broad rebounds/gains in recent Fed manufacturing surveys. The actual manufacturing activity that occurred, as seen in the durable goods report, was stable, with core capital goods slightly positive while transports dropped sharply. It turns out no one wants to buy planes that have doors that fly off. Housing sales were off in the South, likely due to colder weather. Finally, consumer confidence cooled, with job worries increasing.
Oil had a strong week, with WTI finally back above $80 due to a strong rally today. The demand outlook has improved as global growth looks to be improving, as seen in more positive trade reports and views on China. A slump in U.S. refining activity and disruptions to global trade have tightened diesel supplies in recent weeks, dampening historically high U.S. diesel exports to Europe this month. Natural gas producers are dialing back their drilling plans and pushing for more exports to relieve a domestic glut that is weighing on the market, supporting prices there. Copper was also up on the week, as electrification demand looks to be improving, and China’s stimulus is adding up. Iron ore, however, was lower on the week in China, likely due more to a growing supply glut than demand worries. The agg index was flat on the week. Corn looks to have bottomed in price a little, while wheat and beans remain near recent lows. Finally, the dollar changed little during the week despite some volatility. The 104 level for the $DXY seems to be a magnet, while the Euro and Yen remain rangebound.
Headlines:
Deeper Dive:
This week’s “Deeper Dive” section will focus on China and entering a long position in large-cap equities there. Chinese stocks have been the widow-maker of global equity markets in recent years. However, things may be changing as the continual drip of policy measures out of Beijing (and the local level) is now turning into a river of growth and financial market support. Xi and company have woken up to the fact that their zero-Covid and “Common Prosperity” regulatory and societal crackdown policies have structurally altered consumer sentiment and local and foreign business confidence negatively. Beijing is now attempting to revitalize the “animal spirits” of its form of capitalism by explicitly making it clear it is acceptable to be wealthy and profitable again. At the same time, it is attempting to ensure domestic and foreign firms there is a stable set of rules in which to operate in, a feeling lost with a sudden lurch in policies post-pandemic. To be clear, there is a long way to go. The property market, which accounts for the bulk of Chinese household savings, has not yet stabilized. Foreign investment may never return to past levels, given the continual geopolitical uncertainty with the West, insecurity in protecting IP and foreign workers, and increased opportunities elsewhere. Further, the allure of the Chinese domestic market is much diminished with a weaker consumer and more nationalistic buying tendencies. Put differently, the stick remains while the carrot is smaller. With that said, we still see a tactical opportunity to be long Chinese equities, given the level of official support coming forth. We believe investor sentiment is slowly changing, and the current bounce may turn into a longer-term uptrend as both the economy stabilizes while regulatory financial market support and increased liquidity drive equities higher.
*Since last summer, when Xi visited the PBOC and made growth a priority, there has been a flood of official measures to support the economy and markets
*There has been a disconnect between monetary policy easing and risk asset performance
*Investors are increasing their allocation to Chinese equities, with most of the world heavily underweight
As a recap on how we got here, Xicame to power in 2012 and initially continued market reforms but began to increasingly reverse course in 2017, undoing reform-and-open era policies and allowing SOEs to play a more significant role in the economy. To combat the initial negative effects on growth during the pandemic, China dramatically increased investments in infrastructure and real estate, mainly through SOEs, paid for with growing debt levels. In 2021, China’s growth bounced back, but the resurgence of COVID in 2022 caused the Zero-COVID policy, and along with the “Common Prosperity” regulatory crackdown (aimed to curb the growing wealth gap), growth plummeted, and what little occurred was driven by credit-fueled investments again, not consumption or exports. Beijing also specifically cracked down on property developers, impairing their ability to roll debt and forcing them to sell assets into a market consumers were discouraged from supporting. The property market represents 30% of the Chinese economy and 70% of household wealth. Weakness there started a larger sell-off in Chinese risk assets and a collapse of middle-class wealth.
*Housing price depreciation continues to weigh on consumer confidence through a negative wealth effect
*Too much debt, likely meaning further debt forgiveness or a “bad bank” solution will be utilized eventually to stabilize the sector
As expected, the jobs market began to worsen with the weight of anti-growth policies and a failing property sector, and youth unemployment dramatically rose. This led younger people to consistently have a weaker sentiment than older ones, causing household formation to slow, further hurting consumption, and worsening the demographic problems that had already existed from the past one-child policy. Add in the adverse effects on geopolitical relations with the West due to increased military spending, more hostile activity in the South China Sea, technological advancements, and ongoing trade tensions with the “West.” The strategic competition with the “West” has created a “Wolf Warrior” nationalism mentality in China, which has led to increased anti-foreign consumer sentiment, reducing incentives for foreign firms to invest and gain access to China’s once-fabled domestic consumer market. Beijing has also prioritized decoupling from foreign resources and technological needs in a “Dual Circulation” initiative, recalibrating China’s industrial policy to emphasize state-led growth and self-reliance based on domestic markets.
*China’s middle class has lost much of the momentum it had coming into the pandemic
*“Dual-Circulation” priorities mean state support will be more selective at the industry level
As we highlighted above, these turn of events led household and business sentiment to become much more negative. Declining real estate (and other financial asset) values have caused a negative wealth effect and, when coupled with worsening job prospects, reduced aggregate consumption and credit demand at the household level. The uncertain regulatory environment, rising labor costs, and geopolitical tensions have weighed on both domestic and foreign companies’ outlooks and reduced investment. In the past, China’s central-run economy relied on the flow of new credit to fund investment-driven growth. The financial system grew faster than the real economy because markets assumed Beijing would prioritize growth through this channel and prevent financial instability. This led to a dramatic expansion of China’s shadow banking system, which extended large volumes of credit to property developers and local government infrastructure projects, sidestepping official budgets and debt limits. However, this time around, China’s credit impulse has not risen (unlike typical monetary and fiscal support cycles), indicating China is in a liquidity trap as negative household and business sentiment is causing the hoarding of cash rather than spending/investing it, restraining demand despite more favorable financing conditions.
*Demand for credit is declining despite official efforts to extend it more abundantly
*Both households and businesses, often already highly leveraged, are not seeking new loans
The government will hold its annual Two Sessions meetings next week. The key thing to watch will be the government “work report” on March 5th, where the annual economic targets will be given, as well as the overall policy direction for the year. Weak consumer spending/demand at the household level and lower levels of investment are creating a more pessimistic view of the future, leading to price cuts by firms. Lower prices reduce profits, causing layoffs, which leads to further declines in demand and increased uncertainty, creating a negative feedback loop that feeds a deflationary cycle. Debt also becomes harder to service as payments rise in real terms, worsening the existing debt trap dynamics already in play. Beijing is aware that it needs to break this negative cycle and, as seen by the increased amount and size of recent stimulus measures, looks to be increasingly committed to flooring growth and rebuilding confidence. As a result, we expect the growth target to be maintained at around 5% and for a more supportive fiscal policy stance to be signaled via a larger fiscal deficit to GDP target and likely further rhetoric encouraging investment in both equities and property. Markets will also closely watch for any adjustments to the “proactive fiscal policy” and “prudent monetary policy” terms that have been in place for the past few years. President Xi’s past meeting with the China Securities Regulatory Commission to discuss ways to prop up the stock market following moves to limit short selling as well as continued supportive buying from China’s sovereign wealth funds, insurance and banking firms, and margin debt relief all indicate that Beijing is committed to moving equities higher. As a result, we entered a 20% long position in Chinese equities yesterday through the iShares China Large-Cap ETF $FXI.
*The list of individual measures taken to support the economy and markets in China is adding up to the “bazooka” approach markets want
*Our relatively flat positioning has changed the portfolio’s PnL very little, while the entry into a long Chinese equity position will likely increase the mock portfolio's overall volatility
As always, thank you for reading, and please share our newsletter if you like it and know others who may enjoy it. Please feel free to reach out with any questions or comments. – Michael Ball, CFA, FRM
Policy Talk:
It feels like we have heard from every Fed official over the past two weeks, and the message has generally been very consistent. That message to markets is that no one should think of the Fed as being on autopilot because of 2023 disinflationary progress. While a handful of rate cuts starting in late spring or summer may be the most likely scenario, there's a wider band of possibilities than conventional wisdom may suggest. Many Fed officials still believe economic activity needs to cool for inflation to continue to move towards the 2% target in a timely manner. We highlight a few recent Fed speakers below, going into greater depth with Jefferson and Williams, given their greater perceived importance. We also reviewed the January FOMC Meetings Minutes, given we didn’t write last week. In general, for now, the Fed itself isn’t sounding the alarm on policy being too restrictive despite a broadening belief that supply and demand are moving into a more pre-pandemic level across the economy and labor markets. The minutes of last month’s Fed’s policy meeting showed only “a couple” of participants had “pointed to downside risks to the economy associated with maintaining an overly restrictive stance for too long.” As a result, we still see the risk being fewer cuts than forecasted by the SEPs (and markets) than more, and given our view, February also looks to be setting up for another higher monthly core PCE gain (0.4% MoM), and the markets may move to the extremes of pricing out all cuts in the year over the next few months.
Atlanta Fed President Bostic stressed that he sees rate cuts as still likely this summer, even after core PCE inflations increased at the highest monthly pace in nearly a year. “The last few inflation readings — one came out today — have shown that this is not going to be an inexorable march that gets you immediately to 2%, but that rather there are going to be some bumps along the way,” Bostic said Thursday in a speech at an Atlanta Fed banking conference. He sees the disinflationary trend as still intact but is in no hurry to ease policy yet. Despite being one of the more dovish voices in the past, he has maintained a very steady approach/view to when policy should be eased, with other policymakers moving towards him in the last few months. Bostic’s views were repeated by Chicago Fed President Goolsbee, who also cautioned against reading too much into a single month’s inflation data point, referring to January’s CPI and PCE stronger readings. San Fransico President Daly also echoed other officials in a recent interview on Bloomberg’s Wall Street Week, noting the combination of still resilient consumer spending, strong labor markets, and positive economic momentum means the Fed is in no hurray to ease policy. Daly did note that the Fed wants to avoid keeping rates at their current level until inflation hits 2%. She also added that she was becoming more confident that housing inflation was falling. During an interview, Boston Fed President Collins noted that she believed the Fed would be able to cut rates later in the year, noting her baseline views were similar to what they were in December. “There are things that could cause me to want to move sooner, such as if the labor market were to look a bit more fragile, that would make a difference or if some of the inflation numbers really came together,” Collins said. “Letting a little bit more time come together will be helpful from that standpoint.” She added that she believes the economy will slow in the coming months and that this would be necessary to keep the disinflationary progress going.
Governor Bowman reiterated her view that the current economic environment doesn’t warrant policy easing. She also repeated her criticism of new regulatory requirements increasing capital levels by 19% for the biggest banks in prepared remarks at an event hosted by the Florida Banker Association. The plan has faced fierce pushback from the banking industry and Republicans. Bowman, who was appointed by former President Donald Trump, has been the most vocal public critic of the new capital requirements at the Fed. Cleveland Fed President Mester noted that the recent PCE inflation data showed the Fed has more work to do in an interview with Yahoo Finance. “It doesn’t really change my view that inflation is going to be going down to our 2% goal over time, but it does show you that there’s a little more work for the Fed to do here,” she said. She highlighted a better balance in labor markets as giving her confidence the economy “is evolving in the way we want.” Pushing back on Bowman, Mester repeated her support for regulators’ plans to increase capital requirements for the largest banks significantly. “In my view, at the larger banks, current minimum capital standards are still below the level where an increase would be counterproductive in terms of thwarting productive risk-taking, beneficial innovation, or economic growth,” she said in remarks prepared for a speech at Columbia University at a conference that was backed by the Bank Policy Institute, which has lobbied against the proposal.
Kansas City Fed President Schmid gave his first prepared remarks, also echoing colleagues by saying he saw the focus still on inflation and that he wanted to be patient with the easing policy. "With inflation running above target, labor markets tight, and demand showing considerable momentum, my own view is that there is no need to preemptively adjust the stance of policy," Schmid said, striking a more hawkish tone as he indicated a below trend period of growth might be necessary to get inflation back to target. Schmid added that “Some interest-rate volatility should be tolerated as we continue to shrink our balance sheet,” indicating that shrinking the balance sheet and reducing the Fed's footprint in financial markets should be a priority.
Governor Waller gave prepared remarks titled “What’s the Rush?” at an event in Minneapolis, where he highlighted the data received since he last spoke in January and reinforced his views that the Fed “needs to verify that the progress on inflation we saw in the last half of 2023 will continue and this means there is no rush to begin cutting interest rates to normalize monetary policy.” He saw the most recent report as showing a broad uptick in inflation but also containing some irregularities (notably in shelter), increasing uncertainty over whether inflation is stickier than originally thought. He also noted that the strength in output and employment growth “means that there is no great urgency in easing policy,” which he still expects we will do this year. Waller will be watching whether consumer spending stays robust, given the uptick in confidence and the still historically tight labor market, where he sees moderation stalling. He noted the CPI annual seasonal revisions did not change the picture, unlike 2022. He also sees wage measures as still too elevated to achieve the Fed’s two percent goal, although they are gradually declining. All together, Waller still predominately sees upside risks to inflation, leading him to need to see “a couple” more months of data to be sure January is a fluke.
Vice Chair Jefferson gave prepared remarks at the Peterson Institute titled “Is This Time Different? Recent Monetary Policy Cycle in Retrospect,” where he shared his outlook on the economy, past policy actions, and lessons learned. He highlighted that growth has come in much higher than expected thanks to strong consumer spending, but household balance sheets were weakening, leading him to expect slower growth in 2024. The persistence of the consumer is, however, providing uncertainty in his forecasting, given he is uncertain why it has been so robust. Jefferson sees the imbalance in supply and demand of labor as “improved” but still tight. He doesn’t believe unemployment has to rise for the Fed to reach its inflation target. He sees the disinflationary progress as due to supply-side improvements and the effects of restrictive policy. He noted that January’s “disappointing” CPI reading indicates that the disinflationary process will be “bumpy.” Jefferson moved on to discuss past monetary cycles, focusing on the “multi-stage” nature of cycles. He highlighted that most easing cycles begin because of concerns about slowing growth, but in studying past cycles, he stressed that policymakers need to remain “vigilant and nimble.” He highlighted that in the most recent easing cycles (2001 and 2007), the unemployment rate ramped up quickly, and the economy weakened rapidly shortly after the Fed began to ease policy. He concluded his history recap by noting Volcker's danger speech in 1981, where he highlighted the easing of policy by the Fed in 1967 as being too premature. Regarding the current situation, he noted the Fed’s strong action to move policy quickly and “well” into the restrictive area. He believes that if the economy evolves as he expects, it will be appropriate to “begin dialing” back policy later this year. He did warn that, given what history has shown, it is possible an unanticipated exogenous shock could occur. He ended his speech by identifying three key risks; consumer spending remaining resilient, employment weakening as factors supporting the economy faded, and geopolitical risks remaining elevated, affecting commodity prices, all of which are keeping him cautiously optimistic about the progress made on inflation so far.
“The fact that the unemployment rate and layoffs have remained low in the U.S. economy over the past year amid disinflation suggests that there is a path to restoring price stability without the kind of substantial increase in unemployment that has often accompanied significant tightening cycles.”
“…our out of the six easing cycles had multiple "easing phases," with later phases triggered by events like the 1991 Gulf War, the 9/11 terrorist attack, the Global Financial Crisis, and the pandemic. These events required policymakers to take a different course of policy easing from the course they may have anticipated earlier in the cycle. Specifically, because these events contributed to the contraction of economic activity, policymakers may have accelerated policy easing.”
New York Fed President Williams spoke with Axios and also separately gave prepared remarks titled “There and Back Again” at the Long Island Association Economic Briefing. In his interview with Axios, Williams reiterated that supply and balance in the economy continued to come in better balance, especially in labor markets, which he saw as looking like they did before the pandemic. He sees the disinflationary progress as “broad-based,” even highlighting progress in core services. Williams needs to see the data continue to move in the right direction to give him confidence it's time to pull back on the restrictive policy stance. He is not looking for any one measure or indicator but looks at the totality of the information at hand. He saw valuations in certain financial and real asset markets as elevated. Williams also noted that consumer spending would likely cool due to excess savings falling and increased levels of delinquencies. He highlighted that 2023 was an incredible supply-side story, but moving forward, there would be a more normal level of growth, capping productivity gains and disinflationary progress. Williams described how he saw the execution of stopping QT, first tapering and then stopping at a point where there were ample reserves, a level where there were a significant amount of reserves that would allow interest rates to be controlled through open market operations. He noted that once the ON RRP runs down, the reduction of the balance sheet will translate more one-to-one with reducing reserves. He also spoke to the lessons learned from the 2019 repo market disruptions, saying the Fed wants more of a cushion instead of the minimum level of reserves needed to carry out policy. Also, the Fed now has a backstop in place to add reserves through repo operations and put more of a ceiling on rates. Turning to his views on r*, Williams is open to the idea that it may have moved due to structural changes and reviewed the moves in what the model has predicted since the pandemic started. He noted that higher fiscal deficits, which could move r* higher, were being counterbalanced by weaker demographic drivers. However, greater productivity from AI could move it higher, as was the case in the late ‘90s and early 2000s with the internet. Williams went on to discuss a few more things, and the overall interview with Axios is worth reading. His prepared speech later in the week reviewed where things have been with the economy and how things were evolving. He again highlighted a better balance in labor markets, seeing it returning to normal. He noted high job openings and wage growth levels were still above pre-Covid averages. He saw the disinflationary progress made last year due to the improvement in supply chains, highlighting the Fed MCT inflation model as a gauge of progress. Williams, however, said there was still a “ways to go on the journey back to sustained 2% inflation.” He concluded by saying the “economy was strong, imbalances were diminishing, and inflation had come down.” Still, the FOMC does not expect to cut rates until it has gained greater confidence, keeping it focused on the incoming data.
“We have our measure that we've come up with, but there's trimmed mean from the Dallas Fed and some other measures we can look at to see if underlying inflation is consistent with 2%. And look at all those metrics at the same time. And obviously, looking at where inflation expectations are and are they consistent with our 2% longer-term objective.”
“In my view, it's really about — when we decide to slow the shrinking of the balance sheet — is to make sure that we get a nice, smooth process of continuing to reduce the balance sheet down to the ultimate level that we want to get to and allowing us to monitor and analyze and understand how that reduction in the balance sheet is meeting that test that we set out for ultimately stopping.”
“Clearly, if AI gives us a decade of rapid productivity growth or even more, that would raise in our model the estimates of r-star as we saw in the late '90s and early 2000s — exactly what we found then. So that's a possibility. The deficit is a possibility and, of course, other things are possibilities, but so far none of them are in the data.”
The January FOMC Minutes showed most officials remained focused on inflation and worried about prematurely cutting rates versus keeping policy too restrictive. Chairman Powell announced that the next five-year review of the statement of Long-Run Goals and Monetary Policy would begin in the second half of this year. In reviewing financial markets, financial conditions were seen as easing modestly but remained “about as tight as they were last summer or tighter than when the hiking cycle began.” Market pricing of inflation expectations continued to suggest a return to the two percent target later in the year. The committee noted markets focused increasingly on the slowing of balance sheet runoff. Market surveillance indicated that the supply of reserves remained abundant and expected a further run down in the ON RRP facility. Once the ON RRP is depleted or stabilizes at a low level, BS runoff will increasingly lead to declines in reserves. The staff review of the economic situation indicated “solid” growth, with labor market conditions continuing to be tight but moving into better alignment with easing wage data noted. Inflation was seen as continuing to slow.
The staff saw short-term funding markets as stable, with banks’ total deposit levels unchanged in the fourth quarter, as outflows of core deposits were about offset by inflows of large time deposits. Borrowing rates in credit markets and for loans “decreased moderately.” Credit was seen as “generally” available, but smaller firms saw a tightening. Growth in credit card balances was seen as strong, although standards were seen to tighten. The credit quality of businesses and households was slightly deteriorating but remained broadly solid. The staff saw the stability of the U.S. financial system on balance with notable vulnerabilities. Leverage in the financial system was also characterized as notable, and banks were still seen as vulnerable to increases in longer-term interest rates.
The economic projections for the January meeting were slightly stronger than the December meeting. The lagged effects of tighter policy were still expected to push growth below trend over the next two years. The staff’s uncertainty over projection continued to fall. Still, the risks around inflation were seen “as slightly tilted to the upside.” In contrast, the risks around growth forecasts were skewed to the downside, given worries any stickiness in inflation would tighten financial conditions. FOMC participants saw economic activity expanding at a solid pace; however, stronger exports and inventory restocking, which are seen as volatile, drove the outperformance. The pace of job gains was seen as moderating but remained strong, while inflation had eased but remained elevated. The current restrictive level of policy was seen as restrictive enough to continue downward pressure on economic activity and inflation. However, similar to the staff’s assessment, policymakers saw the economic outlook as uncertain. Despite the disinflationary progress over the last year, “participants observed that they would be carefully assessing incoming data in judging whether inflation was moving down sustainably.”
Participants saw the recent improvement in inflation as reflecting “idiosyncratic movements in a few series.” Still, there was general satisfaction with the progress, with expectations for housing services to fall further, while core-service inflation would benefit from a better balance in labor markets. However, the downward pressure on core goods from improvements in supply chains would likely moderate. The committee’s members continued to see inflation expectations as anchored, with some participants noting contacts in their districts having reduced pricing power and making less frequent price adjustments. Overall, reports on activity from business contacts were uneven across industries and regions. Turning to the banking system, the risks had receded, but participants saw some vulnerabilities due to increased funding costs, reliance on deposits, and unrealized losses from higher rates and CRE exposure. Liquidity in the system was seen as ample.
The solid pace of economic activity and job gains, as well as uncertainty over whether inflation will move back to the 2% target in a timely manner, led all participants to judge it was appropriate to leave policy unchanged. Given the disinflationary progress, policymakers believed the policy rate was likely at its peak for this tightening cycle. Overall, the risks to achieving the committee’s employment and inflation goals were seen as moving into better balance, although they remained highly attentive to inflation risks. Some members noted that price stability progress could stall if demand strengthened, helping the committee more generally agree on the need to stay data-dependent. Participants noted that the continued process of reducing the balance sheet was important to overall policy objectives. In light of the ongoing declines in the ON RRP, participants expect to begin in-depth discussions of balance sheet issues at the next FOMC meeting, which will likely focus on defining what ample reserve levels are. However, some participants noted that balance sheet runoff could continue for some time.
“The staff provided an update on its assessment of the stability of the U.S. financial system and, on balance, characterized the system’s financial vulnerabilities as notable. The staff judged that asset valuation pressures remained notable, as valuations across a range of markets appeared high relative to fundamentals.”
“Risks around the inflation forecast were seen as tilted slightly to the upside; although inflation had come in close to expectations throughout most of 2023, the staff placed some weight on the possibility that further progress in reducing inflation could take longer than expected. The risks around the forecast for real activity were viewed as skewed to the downside, as any substantial setback in reducing inflation might lead to a tightening of financial conditions that would slow the pace of real activity by more than the staff anticipated in their baseline forecast. In addition, the possibility of a larger-than-expected erosion of households’ financial positions was seen as a downside risk to the projection for real activity.
“In light of the policy restraint in place, along with more favorable inflation data amid ongoing improvements in supply conditions, participants viewed the risks to achieving the Committee’s employment and inflation goals as moving into better balance. However, participants noted that the economic outlook was uncertain and that they remained highly attentive to inflation risks.”
“Participants discussed the uncertainty surrounding the economic outlook. As an upside risk to both inflation and economic activity, participants noted that momentum in aggregate demand may be stronger than currently assessed, especially in light of surprisingly resilient consumer spending last year.”
“In light of ongoing reductions in usage of the ON RRP facility, many participants suggested that it would be appropriate to begin in-depth discussions of balance sheet issues at the Committee’s next meeting to guide an eventual decision to slow the pace of runoff.”
U.S. Economic Data:
The headline PCE Price index rose by 0.3% in January, per market expectations, following a downwardly revised 0.1% increase in December. The annual rate slowed to 2.4%, the lowest since February 2021, from 2.6% in the previous month. Core PCE increased by 0.4% MoM, the most since February 2023, in line with market expectations. This moved the annual core PCE rate to 2.8%, slightly lower than 2.9% in December. The cost of food increased by 0.5% MoM (vs. 0.0% MoM in Dec). Energy goods and services declined by -1.4% MoM (vs. -0.3% MoM). The prices for goods declined by -0.2% MoM (vs. -0.2% MoM), with durables higher by 0.2% MoM (vs. -0.5% MoM) but nondurables declining by -0.4% MoM (vs. -0.1%). Services increased by 0.6% MoM (vs. 0.3% MoM).
Key Takeaways: The PCE inflationary data was in line with expectations, given what was already seen in the January CPI and PPI reports. The revision lower in December’s headline PCE surprised markets and somewhat negated the firmer January reading. The three-month annualized core PCE rate increased to 2.6% in January from 1.6% in December and has been running at a 2.5% rate over the last six months on an annualized basis. So, while December showed shorter-run core PCE inflation rates below the Fed's 2% target, these rates rose back above the Fed’s 2% target in January. Also, the Fed's core PCE services prices, excluding housing measures, increased by 0.6% MoM in January, and these prices are up 4.1% over the last three months and 3.4% over the last six months at annualized rates, while on a year-over-year basis up 3.5%. This will not give Fed officials the confidence needed to say that inflation is headed sustainably toward 2% in a timely manner. The Dallas Trimmed-mean PCE inflation rate stayed at 3.2% on an annual basis. However, the one-month annualized jumped up to 5% from 1.8% in December, and the six-month annualized moved higher to 2.9% from 2.5% in the prior month.
*As expected, there was a notable jump higher in the monthly change in PCE prices for both headline and core
*“Supercore” shot higher on the month, causing Fed officials to take pause
*Financial services and recreational goods were two of the larger drivers of the monthly increase
*There was a broadening of sub-components accelerating, as seen in the Dallas Fed Trimmed-Mean reading
Personal spending increased by 0.2% in January in nominal terms, following a 0.7% increase in December and aligning with market expectations. When adjusted for inflation, the real consumer spending level declined by -0.1% MoM. Spending on services increased by 1.0% (vs. 0.7% in Dec) as consumers allocated more funds to housing and utilities, financial services, insurance, and healthcare expenses such as hospital bills. Meanwhile, spending on goods declined by -1.2% (vs. 0.7%), driven by reduced expenditures on motor vehicles and parts, gasoline, and other nondurable goods, particularly prescription drugs. Personal income rose by 1% in January, increasing from a 0.3% MoM increase in December and exceeding market forecasts of a 0.4% MoM gain.Wage income increased by 0.4% MoM (vs. 0.5% MoM), and nonfarm proprietors’ income declined by -0.3% MoM. Personal interest income increased by a more modest 0.1% MoM (vs. 0.7%); however, dividend income jumped by 4.1% MoM (vs. -0.2% MoM). Real personal disposable income was flat on the month. The personal saving rate edged higher to 3.8% in January from 3.7% in December.
Key Takeaways: The income data was a little messy, with a number of notable jumps. There were outsized moves in rental incomes, personal income receipts on assets (due to dividend incomes), and even personal current transfer receipts, all well above their recent monthly ranges. The stronger overall income gain was also heavily influenced by the higher social security payments (as a result of the COLA adjustment). Despite that all occurring, real personal disposable income was flat on the month as wage gains declined slightly while proprietor's income was negative.
*Personal income rose more than expected, although core wage compensation increases were more in line with recent averages
*Spending looked to be affected by the colder weather, with auto sales particularly hurt
*The savings rate continues to trend lower
The Conference Board Consumer Confidence Index fell to 106.7 in February from a revised 110.9 in January. The Present Situation Index declined to 147.2 from 154.9 in January, with consumers’ views of both business conditions and the employment situation becoming less favorable. Further, consumers’ assessment of their personal financial situation became less favorable. The Expectations Index declined to 79.8, down from a revised 81.5 in January, with increased pessimism regarding future business and labor market conditions. Consumers were also a bit less optimistic about their family's financial situation over the next six months, and consumers’ perceived likelihood of a U.S. recession over the next 12 months increased after falling over the previous three months. One-year-ahead inflation expectations declined to 5.2% in February, its lowest level since March 2020.
Key Takeaways: February’s decline in the headline index occurred after three consecutive months of gains. However, as January was revised downward from the preliminary reading of 114.8, the data now suggest that there was not a material breakout to the upside in confidence at the start of 2024. “The decline in consumer confidence in February interrupted a three-month rise, reflecting persistent uncertainty about the US economy,” said Dana Peterson, Chief Economist at The Conference Board. “The drop in confidence was broad-based, affecting all income groups except households earning less than $15,000 and those earning more than $125,000. Confidence deteriorated for consumers under the age of 35 and those 55 and over, whereas it improved slightly for those aged 35 to 54.” Peterson added that respondents were less concerned about food and gas prices but were more concerned with the labor market and the U.S. political situation.
*There was a broad decline in both the present and expectations sub-indexes
*Inflation expectations continued to drop with better views on gas and food costs
*The outlook for the labor market deteriorated and is trending lower
*The perceived probability of a recession increased
Sales of new single-family houses increased by 1.5% to 661K (SAR) in January, missing market expectations of 680K. Sales jumped in the Northeast (72% to an annualized rate of 43K) and the West (38.7% to 190K) while growing at a slower pace in the Midwest (7.7% to 70K). Sales declined in the South (-15.6% to 358K). The median price of a new house sold was $420,700, while the average sales price was $534,400. In the meantime, there were 456K new homes listed for sale during the period, representing about 8.3 months of supply at the latest sales rate.
Key Takeaways: This was the second straight month of higher sales, with the new-home supply increasing the most over a year. The median sales prices also declined for the fifth straight month, indicating that there is a better balance in supply. Overall, the housing market is off to a good start in 2024, with lower mortgage rates boosting homebuilder sentiment and some better-existing home sales momentum.
*Sales in the South fell notably in January, maybe due to colder weather
*There was a large divergence between regions in January
Pending home sales declined by -4.9% in January, the largest decline since August 2023, and missing forecasts of a 1% MoM expansion. Decreases in pending home sales were seen in the South (-7.3% MoM) and the Midwest (-7.6% MoM), offsetting slight increases in the West (0.5% MoM) and the Northeast (0.8% MoM).
Key Takeaways: Weather likely played a role in why sales were so much lower than expected, as this is the second “sales” report where the South showed notable weakness. "The job market is solid, and the country's total wealth reached a record high due to stock market and home price gains," said NAR Chief Economist Lawrence Yun. "This combination of economic conditions is favorable for home buying. However, consumers are showing extra sensitivity to changes in mortgage rates in the current cycle, and that's impacting home sales."
*Cold weather likely weighed on sales activity in the South
The S&P CoreLogic Case-Shiller National Index declined by -0.4% MoM, while the 20-City Composite and 10-City Composite posted -0.3% MoM and -0.2% MoM declines, respectively, in December. The national index’s annual increased to 5.5% from a 5.0% rise in the previous month. The 10-City Composite increased to 7.0%, up from a 6.3% increase in November, while the 20-City Composite posted a year-over-year increase of 6.1%, up from a 5.4%. The average prices of single-family houses with mortgages guaranteed by Fannie Mae and Freddie Mac increased by 0.1% in December, compared to a 0.4% rise in November. Year-on-year, house prices rose by 6.6%, slightly lower than the 6.7% increase in the previous month.
Key Takeaways: Home prices rose by more than average in 2023 despite worries going into the year that higher mortgage rates would cool demand. “The past two years reflect consistent growth slightly above trend, suggesting a more secular shift in home ownership post-pandemic. In the short term, meanwhile, we should be able to measure the impact of higher mortgage rates on home prices. Increased financing costs appeared to precipitate home price declines in the fourth quarter, as 15 markets saw lower values compared to September,” said Brian D. Luke, Head of Commodities, Real & Digital Assets at S&P Dow Jones Indices. He went on to add, “The term' rising tide lifts all boats’ seems appropriate given broad-based performance in the U.S. housing sector. All 20 markets reported yearly gains for the first time this year, with four markets rising over 8%. Portland eked out a positive annual gain after 11 months of declines. Regionally, the Midwest and Northeast both experienced the greatest annual appreciation with 6.7%.”
*Monthly price increases have slowed, and the annual change may be peaking as comparables get harder in the spring/summer period
New orders for durable goods declined by -6.1% in January, more than market expectations of a -4.5% decline, following a -0.3% decrease in December. New orders for durable goods, excluding transportation, decreased by -0.3% MoM, following a revised -0.1% MoM decline in December compared to market forecasts of a 0.2% MoM increase. Excluding defense, new orders declined by -7.3% MoM (vs 0.1% MoM). Orders for non-defense capital goods, excluding aircraft or “core capital goods,” a closely watched proxy for business spending plans, increased by 0.1% MoM after a -0.6% MoM decrease in December. Orders for transportation equipment declined by -16.2% MoM (vs. -0.6% MoM in Dec), driven by reduced demand for nondefense aircraft and parts (-58.9% MoM vs. 1% MoM) and motor vehicles and parts (-0.4% MoM vs. 0.2% MoM). Orders also fell for fabricated metal products (-0.9% MoM vs. 0.2% MoM), primary metals (-1.7% MoM vs. 0.5% MoM), and capital goods (-15% MoM vs. -1.4% MoM). Total shipments declined by -0.9% MoM (vs. -0.6 MoM), while shipments excluding transportation increased by 0.3% MoM (vs. -0.3% MoM). Core capital goods shipments increased by 0.8% MoM (vs. 0.1% MoM). Total unfilled orders increased by 0.2% MoM (vs. 1.3% MoM), and total inventories increased by 0.2% MoM (vs. 0.3% MoM).
Key Takeaways: This marked the most substantial monthly decline in durable goods orders since April 2020, primarily driven by transportation equipment. However, new orders for core capital goods continued to rise while shipments more broadly increased, indicating that momentum in manufacturing is still intact. As a result, this may be a more isolated story, with Boeing reporting on their website that it had received only three orders for commercial aircraft in January, sharply down from 371 in December.
*A large decline in aircraft orders weighed on the overall durable goods report for January
*Core capital goods rose slightly thanks to larger demand for electronics and electrical equipment
*In real terms, durable goods are trending lower, with monthly gains more varied at the core level
The ISM Manufacturing PMI declined to 47.8 in February from 49.1 in the previous month, firmly below market expectations of 49.5. New Orders (49.2 vs. 52.5 in Jan) moved into contraction territory despite a bounce in New Export Orders (51.6 vs. 45.2) back into expansion and a softer decline in Backlog of Orders (46.3 vs. 44.7). Production (48.4 vs 50.4) also contracted from a prior neutral reading. Imports (53 vs. 50.1) expanded at a stronger rate. Supplier Deliveries (50.1 vs. 49.1) moved slightly higher to neutral, while Inventories (45.3 vs. 46.2) and Customer Inventories (45.8 vs. 43.7) continued to contract, although the latter slightly improved. Prices (52.5 vs. 52.9) were little changed, still expansionary. Employment (45.9 vs. 47.1) also contracted at a faster rate.
Key Takeaways: The headline index pointed to a broader contraction in activity than expected but still suggests that manufacturing activity is not so weak as to be indicative of recession in the wider economy. Orders, production, and employment all contracted at a faster pace, but the anecdotal comments in the report were less downbeat than the overall indexes. Prices paid remained above 50 for the second consecutive month and, given the signs of stubbornness in services inflation to fall to levels consistent with 2% inflation, the renewed price pressures in manufacturing support worries that the disinflationary pressure from goods may be over.
*Weaker demand, production, and employment readings drove the overall index lower
*The overall sub-index picture was less negative, and selected comments were more positive
*Headline ISM manufacturing has now been below 50 for 16 consecutive months… One of the most prolonged downturns on record.
The Dallas Fed’s General Business Activity Index for Manufacturing in Texas increased to -11.3 in February from an eight-month low of -27.4 in the prior month. The Company Outlook (-8.5 vs. -18.2 in Jan) improved but remained negative, while Outlook Uncertainty (11 vs. 20.9) declined. Activity and demand measures broadly rebounded. Production (1 vs. -15.4) and New Orders (5.2 vs. -12.5) moved back slightly into expansionary territory and Shipments (0.1 vs. -16.6), while the Growth Rate of Orders (-5.5 vs. -14.4) improved but still contracting. Unfilled Orders (-13.7 vs. -12.9) contracted at a slightly faster pace. Delivery Times (-8 vs. -8.1) were little changed, continuing to shorten, while Inventories (1.1 vs. -2.2) remained near neutral, or “appropriate level.” Inflation measures were mixed, with Prices Paid (15.4 vs. 20.2) falling, but Prices Received (0.8 vs. 0.1) were little changed, remaining near neutral. Labor readings improved, as Employment (5.9 vs. -9.7) moved back into expansion while Hours Worked (-7 vs. -11.8) shortened at a reduced rate. Wages (20.1 vs. 20.8) growth changed little. Finally, current Capital Expenditures (5 vs. 4.7) remained expansionary. Forward readings broadly improved, with the overall general business index moving back into expansionary territory. Demand and activity measures moved higher, as did labor readings. Future capex plans also jumped higher. However, inventory and delivery times contracted further.
Key Takeaways: Similar to other regional Fed PMI readings, manufacturing sentiment in the Texas region notably bounced back in February. Current and forward activity and demand measures expanded at a notable clip during the month. Price readings reversed the recent trend of margin pressures, with prices paid falling while prices received increased. Further, capex and hiring increases and reduced current uncertainty showed firms were becoming more positive about expanding their capacity. Comments were broadly negative, as is usual for the Texas region, with food manufacturing still noting the effects of higher prices, while other industries indicated uncertainty.
*The overall index retraced losses in January but still remains contractionary
*Outlook improved, as did hiring, showing greater confidence in the future
*Overall, there was a broad improvement at the sub-index level
The Richmond Fed’s Fifth District Manufacturing Index increased to -5 in February from -15 in January. Views on Local Business Conditions (1 vs. -8) moved back to positive. Demand and activity measures broadly improved, although all measures remained contractionary. Shipments (-15 vs. -15 in Jan) were unchanged, while New Orders (-5 vs. -16) and Backlog of Orders (-15 vs. -23) both improved. Capacity Utilization (-4 vs. -27) moved closer to neutral. Vendor Lead Times (4 vs. -3) lengthened, while Finished Good Inventories (14 vs. 22) expanded at a reduced rate, and Raw Material Inventories (16 vs. 12) expanded at a slightly higher rate. Investment measures were mixed with Capex (-7 vs. 0) contracting, spending on Equipment and Software (0 vs. 4) neutral, and Services Expenditures (-11 vs. -12) contracting at a slightly slower pace. Labor market measures were mixed, and the Number of Employees (7 vs. -15) bounced back into expansionary territory. Wages (22 vs. 30) expanded at a reduced rate, while the Availability of Skills (-6 vs. -3) was more available. Inflation measures were split, with Prices Paid (3.52 vs. 4.19) cooling further and Prices Received (2.85 vs. 2.80) expanding at a slightly faster pace. Forward readings were similar to current, with demand and activity measures improving. Investment readings declined, as did inventory intentions. Labor market expectations were mixed with higher hiring intentions and future wages rising at a slightly slower pace. Finally, expected price pressures were mixed, with expected prices received rising notably and prices paid lower.
Key Takeaways: There was a broad recovery in both current and expected demand and activity measures. However, investment activity cooled notably, both at the current and expected levels, and despite more positive views on business conditions, the overall tone of the report was not as positive as demand and activity readings would indicate. Declining readings for wage growth and indications that labor availability was improving offset increased hiring intentions, leaving overall labor readings more neutral.
*There was a notable jump higher in the overall index due to demand and activity improving while hiring also rose
*Despite expectations for stronger demand, firms reported less intention to invest
*Broad increases at the subindex level for demand and activity readings, while other areas were more mixed
The Kansas City Fed's Composite index increased to -4 in February from -9 in January. Demand and activity measures broadly improved. Both Production (3 vs. -17 in Jan) and Shipments (6 vs. -20) both material recovered back into expansionary territory. New Orders (-2 vs. -19) also improved but remained contractionary, as did the Backlog of Orders (-13 vs. -24). New Orders for Exports (-7 vs. -8) were little changed and still contracting. Labor readings improved, with both the Number of Employees (8 vs. -2) and Workweek (2 vs. -6) both moving into expansionary territory. Inflationary measures fell, with Prices Received (-2 vs. 7) contracting and Prices Paid (15 vs 24) expanding at a reduced rate. Delivery Times (-12 vs. -1) were notably shortened, while Inventores for Materials (-15 vs. -7) and Finished Goods (-8 vs. -2) were seen as increasingly too low. The overall six-month ahead composite worsened, moving to a more neutral reading. Future demand and activity sub-indexes all fell. Price expectations declined, as did inventory intentions. Though hiring and capex intentions did rise, signaling that businesses still planned to expand despite more subdued views on demand.
Key Takeaways: Regional KC manufacturing activity moved closer to neutral in February, although it remained slightly contractionary. Activity was slightly expansionary, but demand and backlog of work remained contractionary. “Activity for nondurable goods fell, while activity rose slightly for durable goods, with nonmetallic minerals, electrical equipment, and transportation equipment manufacturing driving the increases from last month.” Hiring and price pressures improved both at the current and six-month ahead levels. This month’s special question was about price pressures and profit margins. Changes in profit margins have been mixed, with 37% of firms reporting their margins have decreased slightly, while a third reported no change. Expectations for the year ahead were also mixed, with 30% of firms anticipating a slight increase, 29% a slight decrease, and 28% no change. Most firms reported they are passing through higher costs to customers to maintain their margins, while a third are also reducing worker hours or overtime, and over a quarter are changing supplier relationships to reduce input prices.
*The overall composite was driven closer to neutral due to improvements in demand and activity readings
*The future outlook seems better than the past
The NY Fed’s Business Leaders Survey (Service Sector) General Business Activity Index increased to -7.3 in February from -9.7 in January. Respondent views on the Business Climate (-24.2 vs. -30.3 in Jan) improved but remained overly negative. Hiring moved to a more neutral reading, with the reading for Number of Employees (-0.6 vs. -6.5) rising. Wages (46.7 vs. 41.9) rose further. Inflationary measures were mixed, with Prices Paid (50.6 vs. 45.2) rising and Prices Received (24.5 vs. 24.7) little changed, both still trending lower. Capital Spending (7.9 vs. 4.5) activity increased from the prior month. Forward-looking indicators showed an increase in business activity, with a notable increase in expected business climate, while hiring intentions fell, but the sub-index remained expansionary and near the top of its recent range. Inflation measures cooled, with wages significantly dropping while expected prices paid and received declined. However, all three measures remained well in expansionary territory. Future capital spending rose further, trending higher for a third month.
Key Takeaways: Overall activity remains contractionary due to historically negative current business climate readings, while inflationary pressures subsided but are also historically high, as expected. Forward expectations broadly improved, and increases in current and future capital spending indicated that service sector firms are becoming more confident about future demand and activity. The chief researchers at the NY Fed associated with this survey said they expect further moderation in price measures, given forward measures, noting February’s report was “welcome news.”
*The majority of the general business activity improvement came from better current views on the business climate
*Wage and price measures picked up in February
The Philadelphia Fed’s Nonmanufacturing Business Outlook Survey declined to -8.8 in February from -3.7 in January. The assessment of business activity for an individual respondent’s firm (6.8 vs. 0.8 in Jan) moved to neutral. New Orders (-4.7 vs. 1.9) fell back into contractionary territory, while Unfilled Orders (-9.5 vs. 1) dropped notably. However, Sales/Revenues (7.7 vs. 7.5) were more stable and remained expansionary. Inventories (9.1 vs. 2.5) stocks were seen as increasingly “too high.” Inflationary measures fell, with Prices Received (2 vs. 5.1) and Prices Paid (30.3 vs. 33.8) both declining, however, the latter remained highly expansionary. Labor measures also broadly cooled. Full-Time (9.1 vs. 13.9) and Part-Time (-4 vs. 10.2) Number of Employees declined, with the latter contracting. The Average Workweek (-4.7 vs. 8) moved into contraction, while Wages (34.4 vs. 37.9) cooled slightly but remained highly expansionary. Capital Expenditures for Physical Plants (2.9 vs. 1.1) rose slightly, while Software and IT Equipment (10.7 vs. 21.9) expanded at a reduced rate.
Key Takeaways: There was a broad contraction at the sub-index level, moving the headline index further into negative territory. Despite sales improving, declines in new orders and backlogs, weakening labor readings, and a mixed capex picture, the service sector failed to gain on some recent momentum in January. Firms indicated they still expected a pick-up in growth over the next six months, although the general business activity expectations cooled slightly. The month’s special question asked about price changes. Regarding their own prices, respondents forecasted an increase of 2% versus 3% when last asked in November. Firms reported their own price change over the past year was 0.3%, down from 3% in November. Expectations are for a 4% increase in compensation over the next year, the same as in November. When asked about the overall inflation rate for consumers, firms lowered expectations to 3% from 3.5% in November.
*Both current and future general business activity measures moved lower in February
*Price measures fell, and labor indicators cooled
*Overall, subindexes broadly contracted with the exception of revenues and physical capex activity
The Richmond Fed’s Service Sector Revenue Sub-Index declined notably to -16 in February from 4 in January. Views on Local Business Conditions (-7 vs. -3) worsened, while Demand (0 vs. 5) declined to a neutral reading. Investment measures broadly weakened, with Capital Expenditure (-1 vs. 0), Equipment and Software Spending (4 vs. 12), and Service Expenditures (0 vs. 3) all declining to more neutral readings. Employment readings were mixed, as Employment (4 vs. 3) still expanded, while Wages (20 vs. 33) and Availability of Skills (-3 vs. 3) declined, with the latter contracting. Inflation readings were mixed, with Prices Paid (6.37 vs. 6.28) slightly higher and Prices Received (3.77 vs. 4.14) lower. Future expectations for revenue and demand improved, as did expectations for local business conditions. However, labor measures weakened, and inflation expectations increased.
Key Takeaways: There was broad cooling at the sub-index level for current readings, with revenue notably falling while investment activity also declined. Inflationary measures may have been mixed at the current readings level, but expectations for inflation rose. Further, labor readings worsened, although hiring and wages remained expansionary.
*Revenues notably dropped while other measures broadly weakened
*Labor readings were the notable weaker part of the report, as they declined both at the current and expected level
The Dallas Fed’s Service Sector Survey’s General Business Activity increased to -3.9 in February from -9.3 in January. The reading for Company Outlook (3.8 vs. -4.9) improved but remained negative. Revenue (5.2 vs. -3.6) rebounded into expansion territory. Labor measures were mainly positive. Full-time (3.8 vs. 2.5) and Part-Time (2.8 vs. -0.6) employment expanded. However, Wages and Benefits (15.4 vs. 17) declined slightly, remaining expansionary. Inflation measures were mixed, with Input Prices (34.3 vs. 33.6) rising while Selling Prices (7.7 vs. 8.7). Further, current Capital Expenditures (10.3 vs. 6) increased. Future readings were more mixed. Overall, the general business activity rose notably, as did the company outlook. Revenue and hiring were expected to increase, but prices and investment intentions fell.
Key Takeaways: The overall report showed a notable rebound when looking at both current and future readings. Revenue and employment readings expanded at both levels, notably for hours worked, something that had been signaling future layoffs recently in other PMI readings. Selling prices were the one area that contracted at both current and future readings. Expanding capex readings and a more positive company outlook reading also showed greater confidence in business conditions.
*Revenues moved back into expansionary territory
*Revenue and hiring readings expanded at the current and future level
The Conference Board Leading Economic Index fell by 0.4 percent in January to 102.7, following a 0.2 percent decline in December. The LEI contracted by 3.0 percent over the six-month period between July 2023 and January 2024, a smaller decrease than the 4.1 percent decline over the previous six months. The Coincident Economic Index rose by 0.2 percent in January to 112.1, after a 0.2 percent increase in December 2023. The Lagging Economic Index rose by 0.4 percent to 118.6, reversing a decline of 0.4 percent in December 2023.
Key Takeaways: The LEI still declined in January but at the slowest pace since March 2023. The decline was primarily driven lower by a drop in hours worked in manufacturing and the negative yield spread. “While the declining LEI continues to signal headwinds to economic activity, for the first time in the past two years, six out of its ten components were positive contributors over the past six-month period (ending in January 2024). As a result, the leading index currently does not signal recession ahead. While no longer forecasting a recession in 2024, we do expect real GDP growth to slow to near zero percent over Q2 and Q3,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.
*The LEI is no longer signaling a recession in 2024 despite still trending lower
*The breadth of negative contributors is improving
*The decline below the “recession signal” level in 2022 seems to be a false positive this time around
The Chicago Fed National Activity Index declined to -0.15 in December from a downwardly revised 0.01 in November. All four broad categories of indicators decreased from November, and three categories made negative contributions in December. Production-related indicators contributed –0.06, down slightly from –0.04 in November. Manufacturing production increased 0.1% in December after rising 0.2% in the prior month. Sales, orders, and inventories contributed a –0.04 in December from +0.04 in the prior month. Employment-related indicators contributed –0.06, down from –0.02 in November. The contribution of the personal consumption and housing category declined to +0.01 in December from +0.03 in the prior month. The index’s three-month moving average, CFNAI-MA3, moved down to –0.28 in December from –0.24 in November.
Key Takeaways: Twenty-six of the 85 individual indicators made positive contributions to the CFNAI in January, while 59 made negative contributions. Thirty-one indicators improved from December to January, while 53 indicators deteriorated, and one was unchanged. Of the indicators that improved, 14 still made negative contributions. There was a move lower in the three-month moving average and the broadness of declines among the major categories, both of which indicated the economy cooled in January.
*All four categories declined on the month with
Technicals, Positioning, and Charts:
The Russell outperformed the Nasdaq and S&P on the week. Technology, Consumer Discretionary, and Energy were the best-performing sectors, while Momentum, Small-Cap, and Growth were the best-performing factors. Small-Cap Growth was the best-performing size/value combo of the week.
@Koyfin
S&P optionality strike levels have the Zero-Gamma Level at 5028 while the Call Wall is 5200 and the Put Wall is 5040. Spotgamma sees markets as setting up into a blow-off top scenario, wherein the single stock pump is re-priming, with little on the horizon to break the momentum until next week’s NFP. Then, the next week has a number of events, including CPI on 3/12 and OPEX on 3/15, followed by 3/20 VIX Exp. They think that VIX/Index volatility should continue to drag lower and target VIX testing YTD lows around 12.5 for next week.
@spotgamma
S&P (/ES Futures) technical levels have support at 5093, then 5080, with resistance at 5140, then 5058.
@AdamMancini4
Treasuries are higher on the day, with the 10yr yield lower by 5.5 bps to 4.19%, while the 5s30s curve is steeper by 3.5 bps on the session, moving to 17 bps.
Four Key Macro House Charts:
Growth/Value Ratio: Growth is higher on the week; with Small-Cap Growth the best-performing size/factor on the week.
Chinese Iron Ore Future Price: Iron Ore futures are lower on the week.
5yr-30yr Treasury Spread: The curve is steeper on the week.
EUR/JPY FX Cross: The Euro is little changed on the week.
Other Charts:
GS’s sentiment indicator jumped notably higher into stretched positioning territory this last week.
Total equity flows are ahead of EPS growth so far this year. – DB Research
There is little stress in the market, according to BofA’s financial Stress Index.
Goldman boosted its target for the S&P 500 this year, …
… with robust economic expansion supporting earnings growth.
Globally, elevated allocations to stocks could limit gains.
Index investors in a typical market-cap-weighted US equity index have almost a 50% exposure to tech and tech-related sectors. This makes an index investor all the more exposed to any downside in tech stocks by having both a greater weighting to that sector and smaller weighting to defensive sectors (which typically fall less or sometimes even hold ground during a downturn; hence the term defensive). – Top Down Charts
Also still leading the market to new record highs are the MegaCap-8 stocks that now account for a record 28.2% of the S&P 500's market capitalization (chart). They also account for 18.8% and 10.7% of the forward earnings and forward revenues of the S&P 500. – Yardeni
Returns have been driven mainly by earnings growth since the pandemic despite increased focus on growing P/E ratios, according to Carson Research.
Low-rated borrowers are flocking to the US leveraged loan market to refinance expensive debt at a record pace.
“Government debt levels continue to increase in all G7 countries except Germany, and your finance textbook will tell you that when the stock of risk-free assets grows, it will attract dollars, euros, and yen from other asset classes, including credit and equities, see chart below. The rapid growth in the stock of risk-free assets outstanding has consequences not only for risky assets. The probability is rising of a fiscal accident with significant implications for markets. Such a crisis could start with a sovereign downgrade, a bond auction with weak demand, or a significant increase in the term premium.” – Torsten Slok, Apollo
Money supply still growing - If we look at month-on-month changes in M2, a broad measure of money supply, what happened in the early months of 2020 stands out as an unequaled dose of adrenalin. It’s true that M2 has declined much of the time since the Fed started hiking rates in 2022, and that it’s the change at the margin that normally matters. – John Athur, Bloomberg
The last mile is harder not because of some structural feature in the economy, but because of the Fed turning dovish too soon, triggering a reacceleration in growth and inflation. That is why the Fed will keep rates higher for longer than markets expect. - Torsten Slok, Apollo
The US has narrowed the gap with China in the number of diplomatic posts they both run, according to a new report, highlighting the nations’ race for influence around the world. China has the most such offices of any country, with 274, according to the Global Diplomacy Index released by the Lowy Institute in Sydney. The US has 271 after having eight fewer posts than the Asian nation in 2021. - Bloomberg
Articles by Macro Themes:
Medium-term Themes:
China’s Rebalancing Act:
Cutting: The People’s Bank of China said Tuesday that China’s major banks reduced the five-year loan prime rate, a benchmark for home loans, to a new low of 3.95%, from 4.2% previously. It was the largest cut since the rate was introduced five years ago, and a much bigger reduction than economists had expected. This has been done in an attempt to jumpstart mortgages and the ailing property market. While this is a good sign, traders were probably also hoping for a cut to the 1-year rate, which is why the market traded lower after the announcement. Chinese Banks Slash a Key Lending Rate as Economy Falters – WSJ
Lowest: China reported the smallest amount of annual foreign direct investment since the 1990s last year, amid capital outflow pressure and challenges attracting foreign capital due to tensions with the West. China’s direct investment liabilities, a broad measure of FDI that includes foreign companies’ retained earnings in the country, rose by $33 billion in 2023, down 81.7% from 2022, according to data from the State Administration of Foreign Exchange. This is the smallest annual increase since 1998, according to Wind, a local data provider that cited official figures. - China Reports Smallest Foreign Investment Increase in Over Two Decades – WSJ
Longer-term Themes:
The Singularity is Near (AI Developments) and Cyber Life (More Generally):
Public Function: The Supreme Court sounded dubious Monday of state laws requiring online platforms such as Facebook and YouTube to publish nearly all user content, although several justices suggested that the ability to remove noxious social-media posts should not mean tech companies are free to block personal communications such as Gmail or chat messages. The court heard nearly four hours of argument to determine the constitutionality of a pair of state laws that seek to prevent online platforms from moderating users’ posts. By the end, it seemed clear the court was unwilling to accept either side’s conception of what social media is: an edited publication entitled to full First Amendment freedoms; or a common carrier like a phone company that must transmit information without discriminating among its users. - Supreme Court Questions State Efforts to Regulate Social-Media Content – WSJ
AI Culture Wars: Google was forced to turn off the image-generation capabilities of its latest AI model, Gemini, last week after complaints that it defaulted to depicting women and people of color when asked to create images of historical figures that were generally white and male, including vikings, popes, and German soldiers. Although many believe Google screwed up with Gemini, some people are highlighting the chatbot’s errors in an attempt to politicize the issue of AI bias. “It is actually a bipartisan tech issue,” Deborah Raji, a Mozilla Fellow who studies algorithmic bias and accountability, says. “I’m discouraged and disappointed by the way these political influencers are attempting to manipulate that discourse on social media.” - The AI Culture Wars Are Just Getting Started - Wired
The Demise of Unipolarity: A World of Rising Regional Sphere:
New Facilities: India and Mauritius inaugurated a new airstrip and jetty on the islands of Agalega, boosting military infrastructure in a region marked by increasing piracy attempts and forays by Chinese warships. The new facilities are helpful in “upgrading and reinforcing our maritime security,” Mauritian Prime Minister Pravind Kumar Jugnauth said at Thursday’s inauguration ceremony. He added that the infrastructure is critical for countering terrorism, piracy and the illegal narcotics trade near Agalega. The race to control vast stretches of the Indian Ocean is heating up. The region is critical for global trade. Countries as varied as the US, France, the UK, India and China are deploying more warships than ever before in the waters. - India, Mauritius Inaugurate Island Facilities for Surveillance - Bloomberg
Cold Places (Deep Sea, Artic, and Space Capitalization):
Last-Ditch Weapon: Russia is trying to develop a nuclear space weapon that would destroy satellites by creating a massive energy wave when detonated, potentially crippling a vast swath of the commercial and government satellites that the world below depends on to talk on cell phones, pay bills, and surf the internet, according to three sources familiar with US intelligence about the weapon. The weapon is still under development and is not yet in orbit, Biden administration officials have emphasized publicly. But if used, officials say, it would cross a dangerous rubicon in the history of nuclear weapons and could cause extreme disruptions to everyday life in ways that are difficult to predict. - Russia attempting to develop nuclear space weapon to destroy satellites with massive energy wave, sources familiar with intel say - CNN
CHAPEA: NASA is seeking applicants to participate in its next simulated one-year Mars surface mission to help inform the agency’s plans for human exploration of the Red Planet. The second of three planned ground-based missions called CHAPEA (Crew Health and Performance Exploration Analog) is scheduled to kick off in spring 2025. NASA is looking for healthy, motivated U.S. citizens or permanent residents who are non-smokers, 30-55 years old, and proficient in English for effective communication between crewmates and mission control. Applicants should have a strong desire for unique, rewarding adventures and interest in contributing to NASA’s work to prepare for the first human journey to Mars. - Martians Wanted: NASA Opens Call for Simulated Yearlong Mars Mission - NASA
Capabilities: For decades, privacy experts have been wary of snooping from space. They feared satellites powerful enough to zoom in on individuals, capturing close-ups that might differentiate adults from children or suited sunbathers from those in a state of nature. Now, quite suddenly, analysts say, a startup is building a new class of satellite whose cameras would, for the first time, do just that. “We’re acutely aware of the privacy implications,” Topher Haddad, head of Albedo Space, the company making the new satellites, said in an interview. His company’s technology will image people but not be able to identify them, he said. Albedo, Mr. Haddad added, was nonetheless taking administrative steps to address a wide range of privacy concerns. - When Eyes in the Sky Start Looking Right at You – NYT
Hacking Biology (Medical Innovations):
Crispy: The US Food and Drug Administration has approved the first Crispr-based treatment for a second condition, clearing the gene editing therapy for the blood disorder beta-thalassemia. In December, the agency approved the drug called Casgevy, which treats sickle cell disease. It was a historic milestone, marking the first time US regulators had approved a therapy using Crispr technology. The treatment works by precisely targeting changes in DNA to repair flaws in patients’ genomes. - Vertex, Crispr Get Second FDA Approval for Gene Therapy - Bloomberg
Other Articles of Interest:
Second-Pillar: The enactment of the first “pillar” of the OECD-brokered tax reforms, which would make big tech groups and multinationals pay more tax in the place they do business, has stalled in the US amid opposition from Republicans. Developing countries have meanwhile attempted to shift international tax negotiations from the OECD to the UN, where they would wield more influence, further complicating the talks over implementation. These factors, plus difficulties finalizing the treaty text, are imperiling efforts to meet a June deadline for its signing and have spurred a European push to find a way to revive the agreement when G20 finance ministers meet in São Paulo in Brazil this week. - Global tax deal under threat from US politics and fraying consensus - FT
Total QT: The Bank of England may sell all the UK government bonds bought under quantitative easing to better prepare for a future crisis, a move that would put it at odds with the US Federal Reserve. BOE Deputy Governor Dave Ramsden, who oversees financial markets, said officials may continue running down the QE portfolio, which peaked at £895 billion, even after hitting the “preferred minimum range of reserves.” “The Monetary Policy Committee could unwind the APF fully if it judged necessary for policy reasons, and the level of the PMRR should not affect this judgment,” Ramsden said. “Our approach differs from other central banks, notably the Federal Reserve, which aims to maintain its QE portfolio at a level that will back an ‘ample’ level of reserves.” - BOE May Sell Whole QE Portfolio in Policy Divergence From US Fed - Bloomberg
Partnerships: Chevron warned investors Monday that Exxon Mobil and China’s Cnooc are asserting they have a right to pre-empt the company’s bid for a stake in a prolific oil project off Guyana, an emerging dispute that could derail Chevron’s megadeal for Hess. Chevron said in a regulatory filing that Exxon and Cnooc say they have the right to counter Chevron’s offer for Hess’s stake in the Guyana project, which Exxon operates and is one of the largest oil finds in years. Chevron warned investors it may not complete its purchase of Hess “within the time frame the company anticipates or at all.” Much of the value in Chevron’s $53 billion all-stock acquisition of Hess proposed last year was tied to the smaller New York oil company’s 30% stake in an Exxon-led drilling consortium in Guyanese waters. - Chevron’s $53 Billion Deal for Hess in Jeopardy on Possible Exxon Challenge – WSJ
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