Santa Claus is comming to town!

December 15-21, 2024

Big news. The Federal Reserve’s key interest rate has been cut by 1/4 percentage point to 4.25-4.5% per annum, with only a 2% reduction expected in 2025 instead of the previously expected 4%; the inflation forecast has also been raised. The Fed’s accompanying letter notes:

“▪️Economic activity continues to grow at a steady pace.

▪️Labour market conditions have improved since the start of the year.

▪️Unemployment has increased but remains low.

▪️Inflation has approached the 2% target.”

These words have little to do with reality, even if we proceed from the official values ​​of macro indicators (see the next section of the Review). The inflation data from the previous review give reason to believe that the Fed’s decision was contrary to the expectations of the “Trump team”, but here we need to closely monitor the further actions of the monetary authorities. The analysis of the press conference of the head of the Fed is traditionally posted in the last section of the Review.

Macroeconomics. Chinese data is again not very encouraging. Fixed investment continues to slow, growth is the worst in history, not counting Covid:

Industrial production picked up slightly but remained sluggish (+5.4% y/y):

Retail sales volume is slowing (+3.0% per year):

The decline in housing prices eased slightly (-5.7% per year), but remained close to the 2015 anti-record (-6.1%):

Let’s remember that China’s statistics are heavily distorted towards improvement, and taking into account domestic subsidies, we can confidently say that the Chinese economy has serious problems. But their absolute scale is extremely difficult to assess. We can only state that they are growing.

New Zealand’s GDP is -1.0% per quarter after -1.1% in the previous quarter. Both indicators are the worst since 1991 (not counting Covid):

And -1.5% per year, 15-year bottom (again, minus the Covid slump):

US Industrial Production -0.1% MoM, 3rd Consecutive Loss:

And -0.9% per year, the 3rd consecutive monthly loss and the weakest indicator in 10 months:

Capacity utilization is 76.8% – not counting Covid, this is the minimum in more than 7 years:

Let me remind you that even if we take the scale of inflation “according to Summers” (see https://fondmx.pro/en/weekly-wrap/no-signs-of-improvement-found/), then since the fall of 2021, the US economy has been in decline. According to our estimates, inflation is even higher (10-12% per year) than Summers and the real decline is about 0.5% per month. According to the economic mechanism, it exactly corresponds to the recession of 1930-32, which led to the “Great” depression of the 30s of the last century, the only difference is that then the structural decline was deflationary, and now it is inflationary.

Industrial sales in Italy -5.3% per year, 19th monthly minus in a row:

UK industrial orders balance -40%, excluding Covid, a 15-year low:

UK car output in November worst for month in 46 years:

PMI (expert index of the state of the industry; its value below 50 means stagnation and decline) of the French industry is 41.9. Without taking into account the Covid slump, this is the bottom since the spring of 2009:

Business climate in Germany (IFO survey) at its lowest since June 2009 (not counting Covid):

Economic sentiment (ZEW survey) has improved, but the assessment of the current situation almost repeated the Covid lows; before that, such figures were only seen in the summer of 2003, and the 2009 low is higher than the current one:

Business climate in France worst in 10 years (excluding Covid):

Business in Italy is at its most pessimistic since the summer of 2013 (excluding the Covid dip):

Philadelphia Fed Regional Activity Index in the US at 20-month low:

The number of homes being started in the US is down 14.8% per year, the last time such a decline was seen was 14 years ago:

Nigeria CPI +34.6% p/p – highest since spring 1996:

France’s PPI is +3.2% per month – not counting Covid fluctuations, this is a record for all 30 years of statistics:

Please note, there is no Covid here.

The number of employees in Britain is -35.4 thousand per month, the worst dynamics in 10 years of observations (excluding Covid):

Canada’s average weekly wage is +5.3% per year, excluding the Covid surge, and has only been slightly higher (+5.5%) once in the 33 years of data collection (in September 2005):

And this is already showing inflation.

Retail sales volume in Mexico -1.2% per year, 6th consecutive monthly minus:

Moody’s has downgraded France’s rating.
 
The US Federal Reserve cut the rate by 0.25% to 4.25-4.50%; the Swedish Central Bank cut the rate by 0.25% to 2.50%, as did the Central Bank of Mexico (by 0.25% to 10.00%).

The Bank of Japan has not changed its rate, but continues to threaten to raise it in the near future; one of its board members is already voting for tightening. The Chinese central bank has the same policy, but there are more and more hints of further reductions in the reserve requirement.

The Bank of England has kept the current rate, but three board members are already calling for a reduction. The Bank of Norway has also kept the rate unchanged – but its first reduction is expected in March.

The Bank of Indonesia has not changed anything in its monetary policy.

Main conclusions. Press conference of Fed Chairman Jerome Powell, main points:

“▪️We are focused on two targets – the labor market and inflation.

▪️The labor market remains stable + cooling.

▪️Economic activity is growing at a moderate pace.

▪️Consumer spending remains flat.

▪️The labor market is NOT a source of inflationary pressure.

▪️The risks to the Fed’s dual mandate are balanced.

▪️Today we lowered our Fed rate forecast, moving to a more restrained pace of cuts.

▪️Fed chairmen’s forecasts for next year have changed due to higher inflation.

▪️We can be more cautious as we consider additional adjustments to the Fed’s monetary policy.

▪️The Fed’s monetary policy has become less restrictive.

▪️We can lower the rate more slowly if inflation does not steadily move towards 2%.

▪️The risks of a worsening situation in the labor market have decreased.

▪️The Fed’s actions depend on US macro data.

▪️The most significant risks and uncertainty are concentrated around inflation.

▪️The driving force behind slower rate cuts is strong economic growth and low unemployment

▪️Today’s rate forecasts DO NOT address the current economic situation

▪️Everything depends on the macro data forecasts for next year

▪️We have already reached the point where we need to slow the pace of rate cuts

▪️Inflation returned to its previous level in November after higher figures

▪️We want to see progress in the fight against inflation, but we need a more resilient labor market

▪️Higher inflation is likely the most important reason for the new forecasts

▪️Reducing core inflation to 2.5% next year would be significant progress

▪️It is too early to consider the impact of Donald Trump’s new trade tariffs on the US economy

▪️We do not yet know which trade tariffs the new president will raise and by what amount countries

▪️Housing inflation steadily declining

▪️Goods inflation overall back to pre-pandemic levels

▪️US economy strong, NO reason for recession

Jerome Powell Fed Speeches Part 3:

▪️It may take another year or two to reach the 2% inflation target.

▪️Geopolitical risks are still present.

▪️I expect good economic growth in 2025.

▪️The Fed is unlikely to raise rates next year.”

Powell specifically noted that Bitcoin would not be on the Fed’s balance sheet, which caused a collapse in the market:

At the same time, shares of companies that rely on crypto are also getting cheaper:

〽️🔻Tesla -7.5% in today’s trading

〽️🔻MicroStrategy -8%

〽️🔻Coinbase – 10%

〽️🔻Bitcoin -4.63%  100 600$

〽️🔻SP500 -2.95%

〽️🔻Nasdaq -3.06%

〽️🔻Dow Jones -2.58%

Today we will give Pavel Ryabov’s commentary on Powell’s press conference:

“This is already the third consecutive reduction (0.5 p.p. in September, 0.25 p.p. in November and 0.25 p.p. in December), a total reduction of 1 p.p. to levels last seen in January 2023. The rate’s further course is uncertain.

There were no revelations at the press conference, no new input parameters capable of significantly reconfiguring the monetary policy or alternative interpretations of current events (outside the Fed’s previously formed narrative).

In principle, everything was the same as usual: assessing the balance of risks, taking into account incoming data and the Fed’s timely response to challenges, but nuances are important, since direct instructions or forecasts are never given at a press conference, the wording is always as vague as possible, and you need to be able to read between the lines.

▪️Admitting the lack of short-term progress in reducing inflation, although every time Powell tried to promote this thesis, he was forced to refer to retrospect, trying to convince the public of what medium-term progress they managed to achieve in reducing inflation. In other words, a significant decline in inflation over two years, but no obvious disinflationary trends over the past six months.

▪️The current monetary policy is approaching the neutral rate level, which can be interpreted as an inevitable reduction in the pace of monetary policy easing. The neutral rate is the monetary policy conditions when there is neither explicit stimulation nor explicit restrictions on the economy, when supply and demand are balanced, the economy is growing steadily without overheating or risks of recession.

It is impossible to identify the neutral rate, since different models give conflicting estimates and too many factors influence, but according to the Fed’s estimates, the neutral rate is in the range of 2.5-3%, but the movement towards it should be slow.

In the context of the neutral rate, Powell stated that “as we approach the neutral rate, the Fed intends to move more cautiously to avoid overburdening the economy or slowing inflation more than necessary.” Powell emphasizes that the current rate is close to the neutral level, and further changes will depend on the dynamics of inflation.

▪️Indirectly acknowledging the need to take a pause in rate cuts. Powell spoke very enthusiastically about the economy in colorful epithets, trying to emphasize the strength and resilience of the US economy, especially in comparison with other countries.

Acknowledging the “strength of the US economy” in the context of the monetary policy trajectory amid the lack of progress in stabilizing inflation means that the Fed is taking a pause in rate cuts at the next meetings until new data comes in.

In the speech, the phrase “extent and timing” indicates the Fed’s willingness to temporarily pause in rate cuts to assess the effect of the measures already taken.

“Two-sided risks (inflation overheating and economic slowdown) require a cautious approach,” which confirms the moderate tone.

Powell said that the Fed assesses the risks to achieving the employment and inflation goals as balanced. This shows that he is ready to act in both directions: both towards tightening and easing, depending on the data.

“After a significant rate cut of 100 basis points, the Fed intends to move more slowly.”

There were a lot of questions about inflation and also a lot of explanations from Powell regarding the calculation methodology.

Powell’s theses boiled down to the fact that the problem of inflation lies in housing, high rents, the calculation methodology of financial services, high wages especially in the service sector and the echo of post-Covid structural imbalances, well, and volatile components.

There were provocative questions about the elections and tariffs. Powell, in his usual manner, evaded, but according to indirect signs, one can note: increased uncertainty in inflation forecasts due to fiscal and tariff parameters.

The election factor clearly played in favor of tightening the Fed’s rhetoric, but Powell tried to soften the political aspect, but everything was clear in tone. The Fed is playing conditionally against Trump’s team, considering the Republican wing to be a factor in inflation.

How to interpret Powell’s speech?

There are two important conclusions to be drawn from the speech: monetary easing is on hold and the Fed is playing against the Trump team, considering the Republican wing to be a pro-inflationary factor.

What does it mean that monetary easing is on hold? Powell did not say this directly, but he never says anything directly (the basics of the Fed’s communication policy with the market), but the tone and emphasis are important.

If you read between the lines, Powell was trying to convey the main idea: the Fed is not satisfied with the progress in inflation (almost the entire speech was devoted to the problem of inflation), and a “strong economy” and stable financial conditions allow us to buy time to assess new factors and parameters.

In other words, a continuation of the lousy inflation data that we have had for the last three months will lead to a pause in monetary easing until economic or financial factors intervene.

Recession risks, market collapses, liquidity shocks and squeezes, labor market degradation – these are the things that will force the Fed to act (to ease monetary policy and/or pump liquidity into the market), even in the face of bad inflation data, but while “everything is fine, the economy is great, and it will get even better,” you can wait a little.

Accordingly, the Fed takes a break until irritating factors appear and/or until inflation data improves.

Why is the Fed taking a break? Powell and company want to evaluate the crazy initiatives of the madman Trump and, after the invoice appears, sew the new configuration into economic models and modify the decision-making system as new economic, financial data and fiscal, tariff parameters arrive.

It is these intentions that are clearly classified as a “balancing game against Trump”, since the pro-inflationary policy of the new administration requires the compensating disinflationary influence of the Fed.

The Fed’s forecast has undergone the strongest modification in the last two years towards tightening.

🔘First, the inflation forecast for 2025 has been increased from 2.1 to 2.5%, and core inflation from 2.2 to 2.5%. The inflation rate for 2025 has never been estimated so high! Forecasts for 2025 in Mar.23 – 2.1%, Jun.23 – 2.1%, Sep.23 – 2.2%, in Dec.23 – 2.1%, in Mar.24 – 2.2%, in Jun.24 – 2.3%, in Sep.24 – 2.1%.

🔘Secondly, the forecast for the key rate has sharply tightened by 0.5 percentage points at once, now the rate is estimated at 3.9% at the end of 2025, which implies only TWO (!) reductions next year by 0.25 percentage points.

Here is the evolution of the Fed’s rate forecasts for 2025: Mar ’23 – 3.1%, Jun ’23 – 3.4%, Sep ’23 – 3.9%, Dec ’23 – 3.6%, Mar ’24 – 3.9%, Jun ’24 – 4.1%, Sep ’24 – 3.4%.

This was one of the sharpest reversals of the Fed in the last two years (the transition from easing to sharp tightening).

As a result, the market’s forecast for keeping the rate at the January meeting has been raised from 81.6% to 93.6% and expectations in March have shifted sharply from 40% to 58% in favor of keeping the rate.

The market now expects no more than one rate cut in 2025! The Fed’s rate forecast for December next year suggests a 60% probability of keeping it at 4.5% or cutting it to 4.25%.

Against the backdrop of structural imbalances in the economy, provoking inflationary processes, it seems that everyone is beginning to understand what chaos Trump can lead the economy to in terms of escalating budget problems and accelerating inflation (the reaction of the debt market is very indicative).

The market has seen one of the strongest collapses in two years.”

And a continuation of the decline in the markets following the Fed meeting: “A rout in the markets after the Fed decision

There are several interesting records. The Dow Jones index has been falling for 10 days in a row, and the accumulated collapse is almost 6%.

This is a very rare series, in 100 years of such a performance (10 or more negative days in a row) there were only 8 (eight!) times according to my own calculations:

02/01/1984 (11 days and a decline of 4.5%), 10/04/1974 (10 days and a collapse of 12.9%), 10/27/1971 (11 days and 5.9%), 01/24/1968 (12 days and 4.6%), 07/23/1963 (10 days and 3.7%), 07/25/1960 (11 days and 6.1%), 10/16/1941 (10 days and 2.6%) and 08/13/1941 (12 days and 2.6%).

The record streak is 12 days, never before in history, so there is something to strive for.

It is fair to talk about the most depressive series in 50 years, because in 1984 they fell modestly – only 4.5%. However, taking into account the seasonality, this is one of the strongest defeats in history and the worst reaction to the Fed’s decision.

And here curious readers will ask, “what the hell is going on”, because just a couple of days ago (December 16), the American markets stormed historical maximums in a brazen pattern of “tight coughing up of isthai”, when the most idiotic growth is against logic, a sense of proportion/balance and fundamental factors and indicators in the conditions of the strongest pump in the history of trading.

Indeed, NASDAQ updated the maximum, and the S&P500 was in a few fractions of a percent (0.2% from the historical maximum), and here are statistics on the strongest market plunge to the “bottom” in 50 years. Something does not add up here?

The growth was associated with the “farewell shorts” of a very limited group of highly capitalized companies: Tesla (doubled since November 5) and Broadcom (grew 1.5 times) were especially zealous in their idiocy, Apple, Amazon, Meta, Microsoft and Google were also in a “detached from reality” state, while Nvidia had been giving off the spirit of idiocy for more than a month.

The capitalization of this group (8 companies) is so high (at the moment over 18.7 trillion), and the growth was so spectacular that only 8 companies literally formed the capitalization of the S&P 500 against the market.

Yes, there were other names: Salesforce, Netflix, ServiceNow, Palantir, who are quite significant and who have grown strongly in the last 2-3 weeks, but the main distortions were caused by the TOP-8, or rather even the TOP-7, since Nvidia is no longer pulling.

As for the rest of the market, there has been almost continuous negative dynamics since the end of November.

If we take the memorable day of the defeat (August 5) as a starting point, oil and gas companies are already down 3% from the lows of August 5, and metallurgy, primary chemistry and mining are about the same, the healthcare sector has been knocked down 6.5% below August 5 (already below the levels of the beginning of the year), the real estate sector has touched the lows of August 5, utilities are only 2.8% higher.

So far, industrial companies are in strong positive territory (more than 10%), finance is up an incredible 17%, the consumer sector excluding the TOPs is only +6-8%, and who is in the lead? The technology sector, which is 25-30% higher than the lows of August 5.

There is a reversal on a broad front. Now only 6% of companies from the S&P500 are above the 20-day moving average (the worst performance since April 2024), only 15% of companies are above the 50-day moving average (the worst performance since October 2023) and 37% of companies are above the 100-day moving average (the worst performance since November 2023).

The S&P 500 has crashed by almost 3% – the same as on August 5, 2024, and before that, a comparable or stronger fall was only on September 13, 2022.

Trading volumes are incredibly high – this is the most active day since November 6, but the concentration of turnover was in the last two hours, making December 18 one of the most active days in trading history by the amount of turnover in the last two hours.

No joke, Tesla alone has turned over almost $70 billion in turnover in a day, and the accumulated losses of shorts amount to almost $20 billion since the beginning of November 2024 (stocks, excluding derivatives).

The bubble is being punctured, the truth is inevitable. Surprisingly, someone (the entire panicked market) was stunned by the information that the inflation data is disgusting (earlier emphasized this point), and Trump’s policy creates pro-inflationary risks. Hmm, really?

There is a lot of interesting things ahead … “

Usually we do not give such lengthy comments, but sometimes it is worth showing a broad assessment of stock prospects, especially in the run-up to the appearance of a new administration in the White House in Washington. Moreover, we, together with our readers, understand the unstable position of the global dollar system.

But in conclusion of the review, it is necessary to note one important circumstance: almost all financial experts, both Trump supporters and his opponents, believe that in the spring, at the latest by the end of the summer, the recession will stop and the American and world economies will move to sustainable growth. That is, distorting reality, as in Powell’s statements, they, as they say, “call for growth” and are confident that it will come very soon.

We shouted “Hello, Santa Claus! Come to us!” back in kindergarten and have long understood that such methods are very limited in effectiveness. And in this case, they will not work, the crisis will continue for many more years (at least five, if the recession accelerates, and most likely, about 8 years). As a result, liberal experts and monetary authorities of Western countries will be severely disappointed.

Well, our readers can use this information for their own selfish purposes, which allows us to wish them a fun pre-holiday weekend and a successful (albeit shortened for some) work week!