Resilient to Robust Growth: The Fed's Path Forward Gets Trickier Despite Disinflationary Progress - Midday Macro – 1/26/2024
Color on Markets, Economy, Policy, and Geopolitics
Resilient to Robust Growth: The Fed's Path Forward Gets Trickier Despite Disinflationary Progress
Midday Macro – 1/26/2024
Market’s Weekly Narrative and Headlines:
Equities are ending the day and week little changed with the Russell outperforming the S&P and Nasdaq on the week. The energy sector was the best performing, lifted by oil rising on higher geopolitical risk (and disrupted production), followed by communication and financials. Momentum was the best-performing factor, which supports the decline in market breadth. Factset has the overall performance of S&P earnings as “subpar,” with positive surprise below average, mainly due to the financial sector. Overall, 25% of the companies in the S&P 500 have reported actual results, and of these companies, 69% have reported EPS above estimates, which is below the 5-year average of 77% and below the 10-year average of 74%. On the data front, this was a week of better-than-expected results. GDP growth beat, consumer spending beat, core durable goods beat, S&P PMIs beat. The Richmond Fed’s manufacturing and service index was split, with the service sector trending higher but manufacturing missing expectations. This all followed the release of the Conference Board’s Leading Economic Index on Monday, which continued to rebound, approaching non-recessionary territory. However, the Chicago Fed’s National Activity Index dropped back to a negative reading. In the end, rate hike expectations for March fell, but risk sentiment generally improved. Treasuries were also little changed on the week, with a slight steepening of the curve and 10-year yields bouncing around in a 10bp range.
Oil had a strong week, with continued worries over the Middle East increasingly moving prices higher, as another cargo ship was hit today by a rocket out of Yemen. The extreme freeze that hit much of America last week also reduced production. Refineries are expected to enter a heavier-than-usual maintenance period, leading to RBOB and diesel outperforming WTI this week as stocks are expected to be drawn down materially. Traders are also questioning Russian exports due to infrastructure “problems” and reduced production capacity. Finally, China seemed to be back in buying, which supported demand sentiment. Speaking of China, more stimulus measures were announced, the biggest being a federally backed stock purchasing fund and a reduction in the reserve requirement ratio. Beijing also softened its tone on how long kids can play video games, something that had led to fears of a new “common prosperity” crackdown on Shanghai tech. This supported copper on the week, which recovered recent softness, although other industrial metals were mixed on the week. The overall agg index was slightly lower, as corn trended lower on the week while wheat was better bid. Soybeans were also weaker, but weather uncertainty in South America has increased volatility there. Finally, the trade-weighted dollar was slightly higher on the week, with the $DXY ending near 103.5. The Euro weakened slightly as Lagarde failed to convince markets the ECB would stay the course given slowing growth in the EZ.
Deeper Dive:
This week’s GDP and PCE price data certainly emboldened the “soft landing” narrative. The odds of a recession continue to decline, with the expected timing moving further out for those still expecting one. As a result, risk sentiment continues to support equities and credit markets, although it has cooled. Treasuries and the dollar look to be establishing a new range. On the one hand, the more pro-risk sentiment should be Treasury and dollar negative. Yet continued dovish Fed expectations, heightened geopolitical risks, and rates falling faster elsewhere keep both supportively bid. The coming auction supply schedule will likely determine if this changes. Otherwise, it is unclear what catalyst could change this dichotomy. Next week’s January FOMC results should show little change in the Fed’s official statement, given what we have heard from recent policymakers post the December FOMC meeting, with the only wildcard being whether a more firm timetable is laid out for ending QT. As a result, given the cooling momentum and completion of some technical patterns in both equities and rates, as well as a resetting in positioning/skew and a reversal of seasonals, we expect some further consolidation in both equities and rates.
*PCE price data this week continued to show methodical disinflationary progress at the core level
*Both retail and institutional manager sentiment looks to be trending lower
*Positioning looks to be stretched and overweight, with a heavy tech, and to a lesser degree cyclicals, bias
*The stronger GDP report and today’s personal income and spending data moved March implied odd of a March rate cut closer to 50/50
With full disclosure (and well documented in our weekly newsletter), we have been overly bearish risk assets more generally for a while, not being in the “March cut camp” and continuing to believe demand will weaken, worsening pricing power for firms while cost pressures remaining more sticky, pressuring profit margins on the aggregate. This has been already occurring unevenly across industries, with discretionary goods hardest hit throughout 2023. We believe the service sector will increasingly now experience this. However, as this week’s data has shown, the resilience of this economy is real, and the consumer is far from tapped out. We were wrong about fourth-quarter growth, and although cold weather has weighed on January consumer activity, momentum is still positive for Q1. This leaves us with low conviction on where markets go next and creates a challenging backdrop for policymakers who have to properly navigate these conflicting macro currents of greater disinflationary progress but stronger than expected growth while also effectively communicating the path of policy. As a result, it makes sense that markets should experience some heightened level of uncertainty heading into the March FOMC meeting, making for a more range-bound, choppy trading environment after what has been a technically sound break out in equities and a nice retracement in rates.
*2024 is expected to have declines in global corporate earnings due to slowing revenue growth and falling margins
*The consumer’s balance sheet is still historically solid and will allow for some price pressures to be passed on by firms even as demand falls
*Spending is off to a weaker start this year due to cold weather that affected much of the nation
Unfortunately, we still can’t shake the feeling that growth needs to slow for the Fed to get back to 2% sustainably. Although much has been made about the recent uptick in shipping costs renewing supply-side cost pressures, we do not believe it will materially alter cost-push dynamics. However, with that said, we see the improvement in logistical costs and better availability of materials and labor that supported much of 2023’s disinflationary pulse as now effectively done. Better-than-expected final sales to domestic purchasers, which have been more broadly driven across consumer and business and goods and services, means input costs may remain more sticky. Yes, pricing power is weaker for final demand, but overall cost pressures, especially for labor, remain sticky all the same. This is supported by business PMI surveys, which continue to indicate that cost pressures are still increasing, especially for wages, albeit at a slower rate (although some have reaccelerated recently). At the same time, readings from regional Fed surveys and NFIB small business survey show the “need for skilled labor” has not materially improved, and although the Fed has noted progress in the balance of labor demand and supply, even going as far as to say that wage growth is in line with its 2% target objective, the fact is it is not. Yes, the expectation is for hiring to cool, and Fed officials are hoping to skate to where they think the puck will go with their forecasts, but until outright layoffs increasingly occur due to reduced capacity needs, firms will retain hard-found workers, and to do so means real wage increases, which, all else equal, should maintain upward pressure on inflation. Add in increased workers' productivity due to past capex investments, and labor bargaining power is not yet diminishing enough for the Fed to declare victory, especially on core service inflation, which they have closely tied to wage pressures. There is simply a mismatch occurring between where labor markets actually are versus where they are expected to be and it will delay the Fed’s ability to cut rates as much as currently priced in by markets despite the outright progress in core PCE readings. The Fed, of course, does not have to wait, given the disinflationary progress made in the three and six-month annualized average readings. However, we want to incorporate the totality of the data into how policymakers may consider when to cut, admittedly something Powell himself seems to have moved away from recently after stressing in the fall. Still, the 1970s Arthur Burns Fed janitor story that was repeated ad nauseam early last year during the 75 bp hike period is still applicable in our opinion, meaning the current Fed policymakers don’t want to be “those guys” and will remain patient based on stronger growth and still historically tight labor despite outright disinflationary progress.
*The NY Fed’s Global Supply Chain Pressure Index has only moved up to a flat reading, still far below levels seen in 2021 that added notable supply-side inflationary pressures
*Wages and utilization remain on the tighter side while there's been greater progress on employer behavior
*Pricing plans by small business are still trending higher
*Markets are well ahead of what policymakers are saying is the likely amount of rate cuts in 2024
Does this even ultimately matter for risk assets? More so at current levels with an equity and credit market seemingly priced for perfection as any hawkish change in the Fed's start and pace of cuts will weigh on the current overly positive risk sentiment and momentum, something that may already be occurring. It’s certainly harder to come up with a reason to be bearish after this week’s growth and inflation data. Technically, the S&P completed an inverse head and shoulder breakout that was supported by a cup and handle formation. The January OPEX also removed a lot of positive gamma from the market, reducing the gravity higher and putting 0dte flows back in the driver's seat in many ways. As a result, we see equities as stretched, with earnings now driving sentiment and more of a wild card due to the better-than-expected growth in Q4 but still increasing margin pressures to come, pitting Q4 results against 2024 guidance. We also see Treasury price action as capped and floored, with nominal treasury yields more range-bound as higher supply in February, with large auction sizes battling against Fed rate cut expectations and potentially greater geopolitical risk worries. This leads us to believe real rates will remain stickier than expected. Circling back to equities, higher real rates should ultimately push back on the recent loosening of financial conditions and weigh on further multiple expansions, which had driven much of last year's equity returns. As a result, our bias is to be defensive at current cross-asset levels into the seasonally weaker part of the year. We maintain our equity shorts (moving up our $SPY stop) and oil long, with our mock portfolio having a low gross exposure due to our more significant level of uncertainty.
*Goldman’s sentiment indicator has fallen back to more neutral levels in the last few weeks
*Loosening in financial conditions has slowed in the last two weeks and remains tight in the Fed’s eyes
*Goldman’s Geopolitical Risk Index continues to trend higher
*The S&P has been stuck in a tight range recently due to technicals playing out and gamma gravity
*Our S&P short position is driving the mock portfolio’s recent poor PnL as we were too early to enter it, but we believe it is not time to close it for the reasons we discussed above. Meanwhile, the gains in oil this week have allowed us to move up our stop there and lock in gains. Elsewhere, we remain slightly positive in our Russell short position due to better timing of entry but are close to being stopped out of our Argentina equity short as the election exuberance has yet to fade
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:
The Fed is in its January FOMC meeting blackout period.
The Atlanta Fed’s Research Department published a report called “Is The Last Mile More Arduous?” which has generated some buzz among the policy-watching community. It suggested that there was no particular reason that the last decline in inflation before getting back to target should require any more aggressive measures than earlier in the cycle.
“With inflation approaching its target—albeit in a bumpy fashion—and with relatively strong growth in employment and real GDP, it does not seem prudent to tighten policy due to concerns about the last mile being more arduous. Such tightening would needlessly increase the risk of a hard landing for the economy.”
U.S. Economic Data:
Real gross domestic product increased at an annualized 3.3% in Q4 2023, a more significant increase than the forecasts of a 2% rise and following a 4.9% rate in Q3, according to the advance estimate. Consumer spending increased by 2.8% (vs. 3.1% in Q3). There were substantial increases in spending on goods, increasing 3.8% (vs. 4.9%), with durables higher by 4.6% (vs. 6.7%) and nondurables higher by 3.4% (vs. 3.9%). Consumption of services increased by 2.4% (vs. 2.2%), led by food services, accommodations, and health care. Gross private domestic investment cooled to 2.1% (vs. 10%), with fixed investment higher by 1.7% (vs. 2.6%). Non-residential investment increased by 1.9% (vs. 1.4%), mainly due to more robust spending on equipment (1% vs. -4.4%) and intellectual property (2.1% vs. 1.8%). Residential investment increased by 1.1% (vs. 6.7%). Inventories were relatively flat on the quarter, contributing 0.07 percentage points to the total, following the 1.27 percentage points it added in Q3. Exports increased by 6.3% (vs. 5.4%), while Imports increased by 1.9% (vs. 4.2%), making the net exports higher by 1.4% on the quarter at an annualized rate. Government spending slowed to a still strong rate of 3.3% (vs. 5.8%). GDP grew by 2.5% in 2023, compared to 1.9% in 2022 and the Fed's estimates of 2.6%.
Key Takeaways: This was a better-than-expected report, especially when considering where fixed investment and inventories ended up. The fourth quarter saw an almost equally strong level of consumer spending, largely due to strong (more in-person) late shopping during the holiday period, as seen in the increase in durable goods purchases. However, the combined spending on transportation, food services, and recreation was the highest since the second quarter of 2022, showing that service activity didn’t materially moderate. The adjusted final domestic sales (ex-inventories, gov't, and trade), a key gauge of underlying demand, rose at an impressive 2.6% annualized rate, more than expected given the macro and domestic policy headwinds. Residential investment cooled from its robust Q3 level but remained expansionary, a key lynchpin for growth more generally. In summary, beyond the solid spending by consumers, which contributed 1.91 percentage points, business investment added 0.26 points, while net exports and business inventories unexpectedly added to Q4 GDP, making this a broader growth story for the fourth quarter than what was expected.
*Consumption remained unchanged while other areas broadly cooled but remained positive
The key measure of final sales to domestic purchasers continues to trend higher on an annual basis
*The Core PCE deflator came in at 2% again
*There were no negative contributors this month at the sub-category level
The Personal Consumption Expenditure Price Index increased 0.2% in December, in line with market expectations and following a -0.1% drop in November. This monthly change moved the annual rate to 2.59% from 2.64% in November. The core PCE price index also increased by 0.2% MoM, in line with market expectations and increasing slightly from the 0.1% MoM increase in November. This moved the annual rate lower to 2.9% from 3% in November. Food prices increased by 0.1% MoM (vs. -0.1% MoM in Nov), and energy increased by 0.3% MoM (vs. -2.7% MoM). The prices for services increased by 0.3% MoM, the same as in November. The prices for goods decreased by -0.2% MoM (vs. -0.7% MoM), with durable goods declining by -0.4% MoM, the same as in November, and nondurable goods declining by -0.1% MoM (vs. -0.9% MoM).
Key Takeaways: The December PCE inflation report was in line with expectations and showed disinflationary progress was almost methodically continuing at the annual rate level. The Fed will be pleased with the results. Their preferred measure of inflation (core PCE) moved to a two-handle at 2.9% YoY, continuing a steady march lower over the entirety of 2023. The three-month annualized pace of core inflation fell to 1.5%, and the six-month annualized pace remained at 1.9%, both now below the Fed’s 2% average inflation target. Powell has referenced the six-month annualized core PCE inflation rate and will be pleased to see that progress continues there. Core services PCE prices excluding housing, or “supercore,” another focus for the Fed, rose 0.3% MoM in December, moving the annual rate to 3.3% versus 3.5% on this basis in the prior month, with the three- and six-month annualized supercore rates running at 2.2% and 2.8%, respectively. However, it was still the first increase in PCE prices in three months at the headline and core levels, with prices of goods decreasing at a slower rate. Further, “energy goods and services” were also positive after two months of notable declines. Although we are sympathetic to the “mission accomplished camp” in markets due to the progress in three and six-month annualized averages, we still see the Fed as being patient based on this report, all else being equal. Finally, the January 2023 report saw headline and core PCE increase by 0.6% MoM and 0.5% MoM, respectively, which means next month's January report will have a very favorable comparison factor working for it.
*Both headline and core PCE annual rates continue to trend convincingly lower
*Both headline and core monthly changes slightly reaccelerated in December due to reduced drag from goods and a positive energy cost pulse
*Three and six-month annualized rates are now at the Fed’s target
*Supercore PCE continues to trend lower, although “housing and utilities” remain sticky
Personal income increased by 0.3% in December, aligning with market expectations and following a 0.4% advance in November. Compensation of employees rose by 0.4% MoM, a slight ease from the 0.5% MoM gain in November, driven by an increase in both wages and salaries (0.4% MoM vs 0.5% MoM) and supplements to wages and salaries (0.3% MoM vs 0.4% MoM). Personal income receipts on assets increased by 0.3% MoM due to personal interest income rising by the notable 0.8% MoM rate, maintaining the same pace as in the previous two months. Gains in proprietors’ income (0% vs. 0.4%) and rental income (0.2% vs. 0.2%) were flat and unchanged, respectively. Nominal personal spending increased by 0.7% in December, following an upwardly revised 0.4% increase in November and beating market forecasts of a 0.4% rise. Real PCE, which is adjusted for inflation, rose 0.5% in December, matching the revised reading of 0.5% in November amid higher spending on goods (1.1% MoM vs. 0.6% MoM) and services (0.3% MoM vs. 0.4% MoM). Personal savings were $766.7 billion in December, and the personal saving rate (personal saving as a percentage of disposable personal income) was 3.7%, dropping from 4.1% in November.
Key Takeaways: When adjusted for inflation, overall consumer spending increased 0.5% in December after a similar rise in the prior month. The solid increase in real consumer spending puts consumption on a higher growth trajectory heading into the first quarter. Spending on services was lifted by financial service charges, fees, and commissions, as well as healthcare and gambling. Americans also stepped up purchases of new light trucks and spent more on prescription medication, clothing and footwear, and recreational goods and vehicles. This bodes well for the Fed's belief that they are orchestrating a soft landing. Further, personal income grew at a very stable rate for the second half of 2023, supporting labor market data seen elsewhere. The consumer income stream is still in solid shape. When coupled with December’s personal income data with a 2.5% increase in real disposable personal income seen in the Q4 GDP report, it bodes well that consumption will continue at a healthy rate, especially with a decline in savings rate. On a more minor note, the increase in interest income has been impressive and makes sense, helping support consumption more generally.
*Monthly increases in personal income have been very stable while expenditures accelerated in December
*When adjusted for inflation, real personal spending was 0.5% MoM for the second month in a row
*The effects of the pandemic are still weighing on both spending and income versus prepandemic trend
New orders for durable goods were unchanged in December, increasing $0.1 billion to $295.6 billion, following a 5.5% increase in Novemberand missing market expectations of a 1.1% increase. Excluding transportation, new orders increased by 0.6% MoM (vs. 0.5% MoM in Nov), and excluding defense, new orders increased by 0.5% MoM (vs. 6.9% MoM). New orders for capital goods, excluding aircraft, or core capital goods, rose 0.3% MoM (1% MoM).Transportation equipment orders declined by -0.9% MoM after jumping by 15.3% in November. Motor vehicle and parts orders gained 0.4% (vs. 3% MoM). Total Shipments declined by -0.3% MoM (vs. 1% MoM), although core capital goods shipments increased by 0.3% MoM (vs. 1% MoM). Total Unfilled Orders increased by 1.3% MoM, the same as in November, while Total Inventories increased by 0.4% MoM (vs. 0.1% MoM).
Key Takeaways: There was some payback in December's new order activity, given the strength seen in November, with weaker-than-expected results in transports leading to the headline total missing forecasts. It looks like new orders for autos and parts have normalized after the UAW strike disruption. Civilian aircraft orders rose slightly, which is odd given Boeing's website reported receiving a higher level of orders than what looks to be captured. Further, there were broad increases in new orders for electrical equipment, appliances and components, primary metals, machinery, as well as computers and electronic products. Core capital goods, the closely watched proxy for business investment plans, rose 0.3% MoM after rising by an upwardly revised 1% in November.
*Total new orders of durable goods were little changed on the month due to weaker than expected increases in transportation equipment
The Richmond Fed’s Manufacturing Index declined to -15 in January from -11 in December, worse than forecasts of -7. Demand and activity moved further into contractionary territory except for Shipments (-15 vs. -17 in Dec), with New Orders (-18 vs. -14), the Backlog of Orders (-23 vs. -17), and Capacity Utilization (-27 vs. -8) declining at a faster rate, especially utilization. Local Business Conditions (-8 vs. -12) were seen as less bad, and Vendor Lead Times (-3 vs. 1) shortened, while Finished Goods Inventories (22 vs. 15) expanded at a faster rate, although the growth in Raw Material Inventories (12 vs. 15) slowed slightly. Labor measures were skewed negatively, with the Number of Employees (-15 vs. -1) contracting notably, while Wages (30 vs. 22) rose at a faster pace. The Availability of Skills Needed (-3 vs. 0) remained near neutral. Price trends changed little, with Prices Paid (4.19 vs. 4.24) slightly lower and Prices Received (2.8 vs. 2.79) unchanged. Capital Expenditures (22 vs. 15) and Equipment & Software Spending (4 vs. -1) expanded. However, Service Expenditures (-12 vs. -2) contracted at a greater rate. Expectations were more positive, with demand and activity measures broadly more expansionary. Labor readings showed increased hiring intentions but also higher expected wages. There was a notable decline in the expected prices received sub-index reading. All three measures of future investment intentions contracted, but capex and equipment and software spending remained expansionary.
Key Takeaways: This report was notably weaker at the current conditions level. Overall activity is now trending lower while price pressures have moved sideways, with wages even rising. The overall pessimism in local business conditions and decline in business investment spending indicates that firms are hunkering down and not trying to expand capacity. This is further supported by a notable contractionary reading in current hiring. As often seen, despite this broad negative current picture, expectation readings broadly expanded, indicating that although firms in the fifth district are reducing current activity, they aren’t growing overly pessimistic about the future.
*Demand and activity sub-index readings cooled while employment dropped, too
*A tale of two cities between current conditions and expectations
The Richmond Fed’s Service Sector Revenue Index increased to 4 in January from 0 in December. The subindex for Demand (5 vs. 2) also expanded at a greater pace. However, Local Business Conditions (-3 vs. 0) worsened. Capital Expenditures moved to neutral while Equipment & Software Spending (12 vs. 9) and Services Expenditures (3 vs.0) expanded. Employment readings were mixed, with the Number of Employees (3 vs. 5) moving closer to neutral while Wages (33 vs. 30) expanded at a faster pace. Availability of Skills Needed (3 vs. 3) was unchanged. Inflation measures showed an increase in both Prices Paid (6.28 vs. 5.71) and Prices Received (4.14 vs. 3.75), rising at a faster pace. Expectations for revenues were unchanged at expansionary, however, expected business conditions moved into negative territory, and demand fell notably. Business investment readings broadly improved, while hiring remained unchanged and expansionary. Expected price readings were little changed.
Key Takeaways: The service sector in the Richmond Fed’s district looks to be trending more positively. Revenues are trending higher again after weakness in the fall, while employment has been more neutral, although wages continue to rise at the current reading level. Prices are trending lower, although there was a pick-up in the January readings. Overall, despite the uptick in inflationary pressures, this report was positive for the soft-landing camp.
*There has been a rolling recovery in revenues and deamnd while local buisness conditions are still negative
*There was little difference between the current condition and expectations readings
Technicals, Positioning, and Charts:
The Russell outperformed the S&P and Nasdaq on the week. Energy, Communication, and Financials were the best-performing sectors, while Momentum Small-Cap, and Value were the best-performing factors. Small-cap Core was the best-performing size/value combo of the week.
@Koyfin
S&P optionality strike levels have the Zero-Gamma Level at 4829 while the Call Wall is 4900 and the Put Wall is 4500. The 4900 call wall has a large level of resistance, but there is a missing downside resistance level. This generates a positive gamma that has created this sticky trading range, which likely continues today and into Tuesday (pre-FOMC). As this gamma-grip tightens, realized volatility declines. Spottgamma sees their SPY 5-day realized vol down to 6.5%, and 1-month at 9%. This slump in realized vol drags down implied volatility, inviting vol sellers, which further pins down the S&P price. With the passing of FOMC, Spotgamma sees a decent directional play form into Feb 16th OPEX. The 5,000 strike is the apparent upside target, with major downside levels at 4,800 & 4,700. Should Powell upset the bullish flows, we think there would be a bigger relative move in IV's (ex: VIX jumping to 20).
@spotgamma
S&P technical levels have support at 4900, then 4765, with resistance at 4925, then 4945. After a six-day rally, the S&P is consolidating and forming a triangle. 4895-4925=the range. As long as we keep holding 4895, this sets up a breakout to 4936, 4942, and 4960. We get a dip if 4895 fails with 4878 1st stop.
@AdamMancini4
Treasuries are lower on the day, with the 10yr yield higher to 4.16%, while the 5s30s curve is flatter by 4 bps on the session, moving to 33 bps.
Four Key Macro House Charts:
Growth/Value Ratio: Value is slightly higher on the week; with Small-Cap Core the best-performing size/factor on the week.
Chinese Iron Ore Future Price: Iron Ore futures are flat on the week.
5yr-30yr Treasury Spread: The curve is steeper on the week.
EUR/JPY FX Cross: The Euro is stronger on the week.
Other Charts:
Flows turned positive for equities this past week (to +$4.85bn from -$6.81bn) – BofA, @MikeZaccardi
Zero-day option usage jumped at the start of the year.
Earning revisions have fallen the most for small caps, while the Nasdaq has been rising slightly.
Do consensus EPS estimates for 2024 and 2025 reflect an overly optimistic outlook? The current expectations are well above trend. - @Isablnet_sa, @JPMorgan
January and February have historically been the weakest period for guidance (light blue = earnings seasons) – BofA
A range of valuation metrics shows multiples are rising but still significantly cheaper than at the beginning of 2022.
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The dividend yield for the S&P 500 has moved lower on the recent rally, as has it for the Nikkei, while FTSE and Euro Stocks are trending higher.
The Conference Board’s Leading Economic Index has been negative for 21 months, and although it has recently based and is trending higher, it still signals a recession.
The Cleveland Fed produces a quarterly index of moves in rents for new tenants; however, in the last quarter of 2023, it showed a year-on-year drop of 5%, the biggest fall since the index was started.
Articles by Macro Themes:
Medium-term Themes:
Half the World (2024 Election News):
Freaking Out: Top Democrats in this state that will help decide the presidential race are sounding alarms about recent polls showing Biden trailing Donald Trump, the Republican presidential front-runner, by nearly double-digits. Michigan Rep. Elissa Slotkin, who is seeking to succeed retiring Democratic Sen. Debbie Stabenow in the state’s Senate race, has expressed concerns that Biden’s bad poll numbers could hurt her race and other down-ballot contests, according to people who have spoken with her. Early surveys in other battleground states, including Arizona, Georgia, North Carolina, and Nevada, have shown Biden trailing Trump. A recent Pennsylvania poll showed Biden with a slight lead over the former president. - Biden Has a Michigan Problem, Endangering His Re-Election – WSJ
China’s Rebalancing Act:
Short-term, Boost?: A rare mix of positive news including a stabilization fund in the works and Premier Li Qiang’s order to calm markets sent equity benchmarks rallying on Tuesday. However, China’s history of botched market rescue efforts, the grim state of its economy, and uncertainties over Beijing’s long-term policy roadmap are keeping investors skeptical about the sustainability of these gains. “Xi Jinping’s people are almost certainly telling him that the rout in the equity market is a stability risk,” said George Magnus, a research associate at Oxford University’s China Centre. “Investors aren’t just abandoning Chinese stocks for normal reasons of valuation, but because the whole economic policy and political environment has atrophied. Getting confidence back probably requires major changes in both.” - China’s Bold Stock-Market Rescue Plan Leaves Investors Skeptical - Bloomberg
Longer-term Themes:
The Singularity is Near (AI Developments) and Cyber Life (More Generally):
Numbers Game: Last week the AI world was buzzing over a new paper in Nature from Google DeepMind, in which the lab managed to create an AI system that can solve complex geometry problems. Named AlphaGeometry, the system combines a language model with a type of AI called a symbolic engine, which uses symbols and logical rules to make deductions. Math is really, really hard for AI models. Complex math, such as geometry, requires sophisticated reasoning skills, and many AI researchers believe that the ability to crack it could herald more powerful and intelligent systems. - Why does AI being good at math matter? – MIT Tech Review
UN Worries: Government delegations will gather at the end of January for the concluding session on the UN Cybercrime Treaty. The outcome of these negotiations could dictate national cyber policies for years to come. There remains significant disagreement on the scope of the future treaty, including what crimes it should cover. The draft text of the UN Cybercrime treaty gives sweeping, privacy-invasive powers to law enforcement agencies without robust human rights limitations and safeguards. There are still opportunities for states to reaffirm these proposals during the informal negotiations that will take place in the coming weeks and at the concluding session. It is an uphill battle and the signs are not encouraging. Keep an eye on this. - The Draft UN Cybercrime Treaty Is Overbroad and Falls Short On Human Rights Protection – Just Security
Highly Sensitive: The Biden administration is preparing an executive order that seeks to prevent unspecified foreign adversaries from accessing troves of highly sensitive personal data about Americans and people connected to the U.S. government. The U.S. Attorney General and Department of Homeland Security will issue new restrictions on transactions involving data that, if obtained, could threaten national security. The draft order focuses on ways that foreign adversaries are gaining access to Americans’ personal data, from genetic information to location data, through legal means such as data brokers, third-party vendor agreements, employment agreements, or investment agreements. The White House reportedly sees the exploitation of such data by other countries as an “unusual and extraordinary threat” to national security and foreign policy. - Biden Aims to Stop Countries From Exploiting Americans’ Data for Blackmail, Espionage
The Demise of Unipolarity: A World of Rising Regional Sphere:
Buddies: Iran’s Supreme Leader, Ali Khamenei, gave his official approval to a new 20-year comprehensive cooperation deal between the Islamic Republic of Iran and Russia. The 20-year deal ‘The Treaty on the Basis of Mutual Relations and Principles of Cooperation between Iran and Russia’ will replace the 10-year-deal signed in March 2001 (extended twice by five years) and has been expanded not only in duration but also in scope and scale, particularly in the defense and energy sectors. In several respects, the new deal additionally complements key elements of the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement.’ - Russia And Iran Finalize 20-Year Deal That Will Change The Middle East Forever – Oilprice.com
Food: Security, Innovations, and Climate Change Implications:
Reduced Output: Climate change fueled the remarkable 2023 drought that drained major rivers, fueled huge wildfires, and threatened the livelihoods of millions of people in the Amazon rainforest. Deforestation of the Amazon, the world’s largest and most biodiverse rainforest, has decreased rainfall and weakened the ability of trees and soil to retain moisture, researchers found. That made drought more acute and caused the forest to be less resilient to environmental destruction and events like wildfires. A severe drought would have still occurred if humans hadn’t so profoundly changed the climate. But the burning of fossil fuels gave it the ranking of “exceptional,” the highest category in the U.S. Drought Monitor classification system, according to the study published by the World Weather Attribution initiative, an international collaboration among scientists that focuses on rapid analysis of extreme weather events. - Climate Change Drove Drought in the Amazon - NYT
Automated Warfare:
Drone Carrier: To add to merchant shipping’s long list of concerns surrounding the security situation in the Middle East, Iran is readying to launch its first drone carrier, the Shahdid Mahdavi, a converted boxship previously called Sarvin. The Fars news agency report noted: “This range of new defense and combat innovations for the construction of heavy vessels, in line with the mass development of light vessels, and equipping them with various arrays can maintain Iran’s authority over the Persian Gulf and the Gulf of Oman always in the face of transregional enemies.” Iranian hardware and intelligence has been assisting the Houthis in Yemen in their targeting of merchant vessels over the past three months, with the Houthis demanding Israel end its war in Gaza. Around 35 merchant ships have been targeted by drones and missiles, while one car carrier, the Galaxy Leader, was hijacked with its crew and remains in Yemeni waters. - Iranian boxship converted into drone carrier readies for duty – Splash247
Other Articles of Interest:
More Out than In: The four biggest U.S. banks reported higher credit card spending in 2023 compared with the previous year. In aggregate, credit card loans at the four banks grew faster than spending in 2023. The unpaid balances also surpassed 2019 levels for the first time, showing that consumers are putting more purchases on cards and taking longer to pay off their bills than they were before the pandemic. In fact, since 2020, credit card spending has steadily increased at three of the four. Delinquency rates have also been on a steady rise since 2021. Customers aren’t paying off their charges as quickly as they used to. Credit card loans, or unpaid balances on accounts, jumped 14% at JPMorgan compared with a year earlier and 9% at Bank of America. - Credit Card Debt Is Up—and It’s Taking Longer to Pay Down – WSJ
Powerful Chips Needed: China’s imports of chipmaking machines jumped last year as firms ramped up investment in an attempt to get around US-led efforts to hobble the nation’s semiconductor industry. Imports of the machinery used to make computer chips rose 14% in 2023 to almost $40 billion, the second largest amount by value on record in data going back to 2015. The increase came despite a 5.5% drop in total imports last year, underscoring the importance that the Chinese government and the nation’s chip industry have placed on becoming self-sufficient. Chinese chip companies are rapidly investing in new semiconductor factories to try and advance the nation’s capabilities and get around export controls imposed by the US and its allies. - China Buys Near-Record $40 Billion of Chip Gear to Beat US Curbs - Bloomberg
Bigger Role: Analysts say the growing public profile of the MSS is part of President Xi Jinping’s increasing focus on security, as China’s most powerful leader since Mao Zedong seeks to tighten his hold on the country. Founded in 1983 during a shake-up of earlier agencies, the MSS is a civilian secret police service that the US has described as a combination of the FBI and the CIA. Its reach extends throughout Chinese society, from a central ministry to provincial and municipal branches. “This greater publicity reflects an increase in the MSS’s political status — not just its comfort with speaking publicly but actually the political backing to make statements on behalf of the government,” said Alex Joske, a consultant at McGrathNicol and the author of Spies and Lies, a book about the MSS. - China’s feared spy agency steps out of the shadows - FT
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