April 27 – May 3, 2024
Big news. At the regular meeting of the Open Market Committee (FOMC), the US Federal Reserve left the discount rate unchanged (5.25-5.50%).
It is worth recalling that at the end of the previous and beginning of this year there was a lot of talk about the inevitability of the end of high rates and the beginning of their reduction (it was said that in 2024 the rate would be reduced at least 5 times). Then, as new information on inflation emerged, the general consensus on the number of rate cuts was lowered to two. And then… And then there was an assessment of Larry Summers&co and his interview (we recently wrote about him: https://fondmx.pro/en/weekly-wrap/dog-eat-dog/), in which he said that the bet should not decrease and increase…
Our regular readers know that we have long explained that inflation in the US is much higher than official figures (see, for example, here: https://fondmx.pro/en/weekly-wrap/truth-lies-at-the-bottom-of-the-trough/) . Summers confirmed our data, although not completely. In the sense that real inflation is higher than Summers estimated. But the situation itself clearly shows that it is impossible to lower the rate.
Another thing is that it cannot be increased, since the economy is falling quite rapidly. This can be easily seen from the next section of the Review. Let us only note that all the data there is given based on official inflation, that is, they are much better than in reality! And it follows that the rate of decline is quite high.
Our view is that the US economy has been falling at a rate of 6-8% per year for the past two and a half years (which is roughly the same size as the 1930-32 decline, adjusted for government support, which was less then). On paper, this is compensated by the growth in the capitalization of fictitious financial assets and, most likely, this scale will become clear after the collapse of the markets. When it will happen is a separate question; it is impossible to answer it on the basis of macroeconomic data, but all experts say no later than spring 2025.
For now, we can only note that the Fed leadership has serious problems; it is impossible to raise and lower the rate at the same time.
Macroeconomics. Sweden’s GDP -0.1% per quarter, 4th negative in a row:
Рис. 1
And -1.1% per year. Not counting 2 sq. 2020 (Covid) is the worst dynamics since 2012:
Рис. 2
German GDP -0.2% per year, 2nd negative in a row:
Рис. 3
Saudi Arabia’s GDP -1.8% per year, 3rd minus in a row:
Рис. 4
Industrial production in Japan -6.7% per year, the bottom since 2020, and without taking into account Covid – since 2019:
Рис. 5
South Korea’s worst PMI in 8 months: below 50 means stagnation and decline:
Рис. 6
Same in Switzerland:
Рис. 7
Chicago PMI in the depression zone (37.9) and near the 15-year bottom set in November 2022 (37.2):
Рис. 8
The index of manufacturing activity in the Texas Fed zone has remained in the negative for 24 months in a row:
Рис. 9
And the service sector indicator for the same region is 23 months in a row:
Рис. 10
US service sector PMI 49.4, only 0.2 points from the 15-year bottom in December 2022 (excluding Covid):
Рис. 11
Moreover, the key component of the review (business activity) is already at the 15th anniversary:
Рис. 12
Business confidence in the eurozone industry is the worst since 2012 (not counting Covid) amid a decline in orders:
Рис. 13
The growth of profits of industrial companies in China has slowed sharply (January-February +10.2% per year, January-March
already only +4.3%):
Рис. 14
The number of new buildings in Japan is -12.8% per year, the worst dynamics since January 2018 (and before that – since 2014):
Рис. 15
Australia’s construction sector activity is worst since Covid peaks:
Рис. 16
US mortgage rates continue to rise:
Рис. 17
CPI (consumer inflation index) of Turkey +69.8% per year, maximum for 1.5 years:
Рис. 18
PPI (industrial inflation index) of France -7.5% per year, only 0.1% from the record low of 2009:
Рис. 19
Americans are the most pessimistic in almost 2 years:
Рис. 20
The number of open jobs in the US is at its lowest in more than 3 years, although still above pre-Covid levels:
Рис. 21
Labor costs in the US are growing at the fastest rate in almost 2 years (+1.2% per quarter):
Рис. 22
Number of unemployed in the US (6.5 million) maximum in 2.5 years:
Рис. 23
As well as the “broad” unemployment rate U6 (7.4%):
Рис. 24
However, we have repeatedly noted that the level of falsification in US labor statistics is prohibitive and all these distortions (oh, miracle!) are aimed exclusively at improving the situation! But the length of the working week decreased in April, which clearly indicates that the situation in this market is unfavorable:
Рис. 25
The number of unemployed people in Germany has increased for 16 months in a row and for 23 of the last 24 months:
Рис. 26
And already at the 8-year peak (excluding covid):
Рис. 27
The unemployment rate also has a 7-year high:
Рис. 28
Unemployment in New Zealand is the highest in 6 years (not counting Covid):
Рис. 29
The US Federal Reserve not only left monetary policy unchanged, but will also reduce the sale of Treasury bonds from its balance sheet from $60 billion to $25 billion per month from June 1; Fed Chairman Powell said that a rate hike is unlikely, but the prospects for a rate cut are dim due to the lack of progress in reducing inflation. Details in the final section of the Review.
The Norwegian Central Bank did not change anything, but the Argentine Central Bank reduced the rate for the 5th time in the last 5 months – by 10% to 50%.
Main conclusions. Key points from Powell’s speech:
• We do not consider it advisable to abandon contractionary policies until we have sufficient evidence that inflation is moving towards 2%.
• Continued progress towards the target level is not guaranteed and the path forward remains uncertain.
• The Fed did not see progress in reducing inflation in 1Q24, it will take more time to return inflation to the target limit and it is unknown how long this will take.
• The Fed receives a signal that inflation is above the level required to return to the target limit.
• While some short-term inflation expectations have increased in recent months, long-term inflation expectations appear to remain well anchored.
• Powell does not know exactly when the Fed will decide to cut the rate, but gave a personal forecast: “We believe that inflation will decrease during the year.”
• The Committee is prepared to respond to unexpected changes in the labor market and inflation risks. Translated, this means that the Fed could cut rates if employment begins to decline, even in an environment of high inflation.
Brief commentary by Pavel Ryabov:
“The only intrigue was the scale of the balance sheet compression – this was clear at the beginning of the year, but the record market pump in the entire history from November to March pushed back the timing of the QT reduction until May – the markets corrected and the Fed “pulled up” the toggle switch for the future money maker.
Powell sticks to his style – another pigeon vomit flirting with the balance of probabilities (something may or may not happen), but still, what happened this time?
Briefly, the most important thing: further rate increases are not being considered, the window for maintaining current rates is expanding indefinitely, but if something suddenly breaks, the Fed will immediately return to its usual role of unlimited bombardment of liquidity across the market.
Powell tried to imitate toughness, but it didn’t work at all – the pigeon’s guts were rushing out of all the cracks.
If we ignore the protocol part, there was a very interesting question from the audience, which was ignored by all the world’s media: “how did the easing of financial conditions since November affect the acceleration of inflation at the beginning of 2024?”
The question is meaningful, because the permanent camouflaged blueness in Powell’s speeches and the simulated rigidity created, since November, inadequate expectations that the Fed, as usual, will begin to save the markets in any emergency situation (free and unlimited PUT option with protection from bad events), and the rate is about to decrease.
To any substantive question, Powell’s answer is predictable: “We don’t know whether there is a clear link to the weakening of financial conditions since December in the context of accelerating inflation.”
Ok, we’ve passed, but what about the context of maintaining the rigidity of PrEP in the face of QT reduction? If we translate Powell’s play on words and verbal manipulations into human language, it turns out something like this: the decrease in the rate of contraction of the Fed’s balance sheet is not associated with easing monetary policy or with a signal to easing monetary policy, but is a reaction to the liquidity balance and the desire to overcome a potential shock in the money market that may arise with excessive QT volume.
In other words, the compression of QT is directly related to the liquidity balance and the depletion of excess liquidity in the system – an absolutely transparent logic that the Fed for some reason disguises.”
Powell’s performance was less harsh, even in comparison with his past performances – promises to hold the bet as long as possible are clearly interpreted as “until the first failure.”
In conclusion, we can only note that if easing monetary policy (reducing sales of securities from the Fed’s balance sheet) causes a new surge in inflation, then Powell will look very pale. But lowering the rate in an election year is a political decision and Powell will simply “take the cake”, no matter how dearly it costs the economy.
Well, our readers, who have long known all the intricacies, can safely celebrate the May holidays!