What’s good for the back is bad for the head

December 10-16, 2022

Big news. The main news is, of course, the rate hike by the US Federal Reserve. By 0.5%. The discussion of American experts, discussed by us in two previous reviews, showed the desire of the Fed leadership to slow down the process of tightening monetary policy. Moreover, we explained that the reason for this is that the world economy, like the US economy, is falling, and in the face of a clear economic deterioration, it becomes scary to raise the rate. There is already a negative experience of the early 30s.

But the inflation rate is still well above the targets. And if we take into account that it is systematically underestimated within the framework of current statistical methods, then the picture looks even more unpleasant. And in this situation, the Fed leadership chose an intermediate option: they raised the rate, but not as much as they could. Actually, it was this option that was voiced as a result of discussions, but the publication of these discussions without a description of the real economic situation (see the next section of this review) does not seem entirely correct.

It will be possible to talk about what the inflation picture will be like at the end of the year only in mid-January. But let’s not forget that the monetary authorities know this (or, at least, they can build fairly plausible hypotheses), so we can assume that the situation in the financial sector of the American economy is also not very good. Well, we will discuss the comments of the head of the Fed Powell in the last section of the Review.

Macroeconomics. First of all, we note that the crisis is actively continuing in China. Investments in fixed assets +5.3% per year – annual minimum:

China Fixed Asset Investment Рис.1

industrial production +2.2% per year – semi-annual bottom:

China Industrial Production Рис.2

retail sales -5.9% per year – also the worst dynamics in half a year:

China Retail Sales YoY Рис.3

unemployment 5.7% – half-year peak:

China Unemployment Rate Рис.4

housing prices in the 70 largest cities of the country -1.6% per year – an anti-record for more than 7 years:

China Newly Built House Prices YoY Change Рис.5

UK GDP estimate from NIESR -0.3% per month – 6th negative in a row:

U.K. NIESR Monthly Gross Domestic Product (GDP) Tracker Рис.6

The economic activity index in Brazil has been declining or standing still for 3 consecutive months:

Brazil IBC-Br Economic Activity Index Рис.7

US industrial production -0.2% per month – 2nd negative in a row and 3rd in the last 4 months:

United States Industrial Production MoM Рис.8

Industrial output in India unexpectedly flew into an annual minus (-4.0% per year), the worst in 26 months:

India Industrial Production Рис.9

The decline in manufacturing industries is especially strong (-5.6% per year):

India Manufacturing Production Рис.10

Industrial production in Britain keeps in the red for 13 months in a row:

United Kingdom Industrial Production Рис.11

Output in the Italian industry -1.0% per month – the 2nd minus in a row and the 4th in the last six months:

Italy Industrial Production MoM Рис.12

And -1.6% per year – also the 2nd negative in a row and the 4th in the last 5 months:

Italy Industrial Production Рис.13

In Japan, industrial production -3.2% per month – the 2nd negative in a row:

Japan Industrial Production MoM Рис.14

n the Eurozone -2.0% per month – the worst dynamics in 14 months:

Euro Area Industrial Production MoM Рис.15

Production in the extractive industry of South Africa -10.4% per year – the 9th negative in a row:

South Africa Mining Production Рис.16

Business sentiment in Japan’s industry has been deteriorating for 3 of the last 4 quarters:

Japan Business Survey Index Large Manufacturing Firms Рис.17

And the review of the Central Bank Tankan (similar in essence) is minimal for 7 quarters:

Japan Business Confidence Рис.18

Business confidence in Brazil weakest in 29 months:

Brazil Business Confidence Рис.19

And in Australia, it went negative for the first time in the last year:

Australia Business Confidence Рис.20

Preliminary assessment of the PMI (expert index of the state of the industry; its value below 50 means stagnation and recession) of the Japanese industry in the recession zone and at the bottom for 26 months (48.8):

Japan Manufacturing PMI Рис.21

In New Zealand, at least since April 2020 (47.4):

New Zealand Manufacturing PMI Рис.22

In Britain – from May 2020 (44.7):

United Kingdom Manufacturing PMI Рис.23

In the US – the same since May 2020 amid employment problems (46.2):

United States Manufacturing PMI Рис.24

Note that in the US, information has appeared about the understatement of unemployment data: https://www.thegatewaypundit.com/2022/12/shocking-philly-fed-admits-bidens-bureau-labor-statistics-overstated-us-job-growth -2022-least-1-1-million/ .

It is difficult to verify how much they correspond to reality, but we have written more than once that labor statistics are significantly distorted towards improvement.

The service sector in the US is also clearly not shining (44.4):

United States Services PMI Рис.25

New York Fed index in minus 4 of the last 5 months:

United States NY Empire State Manufacturing Index Рис.26

And the Philadelphia Fed index has been negative for the last 4 months:

United States Philadelphia Fed Manufacturing Index Рис.27

Moreover, his new orders are the worst since the covid collapse of 2020, and before that – since 2009:

United States Philly Fed New Orders Рис.28

French CPI (Consumer Price Index) +6.2% per year – the highest since 1985:

France Inflation Rate Рис.29

CPI Italy +11.8% per year – also the peak since 1985:

Italy Inflation Rate Рис.30

CPI Argentina +92.4% per year – the highest since 1991:

Argentina Inflation Rate Рис.31

Food prices in New Zealand +10.7% per year – the highest since 1990:

New Zealand Food Inflation Рис.32

New home prices in Canada (-0.2% per month) have been declining for 3 consecutive months:

Canada New Housing Price Index MoM Рис.33

US retail sales -0.6% m/m, worst year ever:

U.S. Retail Sales Рис.34

Retail UK -0.4% per month – over the past 15 months there were only 2 pluses:

United Kingdom Retail Sales MoM Рис.35

And -5.9% per year — the 8th monthly loss in a row:

United Kingdom Retail Sales YoY Рис.36

The number of registered unemployed in Britain increased by the most in 21 months:

United Kingdom Claimant Count Change Рис.37

And the unemployment rate is rising:

United Kingdom Unemployment Rate Рис.38

In South Korea, the unemployment rate is at its peak in 10 months:

South Korea Unemployment Rate Рис.39

The number of recipients of unemployment benefits in the United States in a maximum of 10 months:

United States Continuing Jobless Claims Рис.40

The US Federal Reserve raised the rate by 0.50% to 4.25-4.50%, raised its forecasts for peak interest rates and inflation, and lowered its estimate of GDP next year.

The Central Bank of Saudi Arabia increased the interest rate by 0.5% to 5.0% (it always copies the Fed, since the rial is pegged to the dollar).

The Central Bank of Switzerland raised the rate by 0.5% to 1.0%. The Bank of England raised the interest rate by 0.5% to 3.5%, but 2 out of 9 board members have already voted for the unchanged rate.

The ECB raised the interest rate by 0.5% to 2.5%, waiting for a recession. The Central Bank of Mexico raised the rate by 0.5% to 10.5%.

Main conclusions.

Following the Fed meeting, Powell said that:

– does not see the possibility of lowering rates until we are sure that inflation is declining in a sustainable way;

– expects housing inflation to ease sometime next year. Non-housing service inflation will take a long time to fall;

– considers it right not to slow down the pace of rate increases. We think that, moving so fast, we should move to a slower pace of rate hikes, which will allow us to better balance risks;

– by now we expected faster progress in terms of inflation;

– China is facing a very difficult situation when it comes to lifting restrictions. It is difficult to say how the end of the zero COVID policy in China will affect US inflation;

– We are not thinking about changing our inflation target. Failure to raise rates sufficiently will cause the most pain;

– if reports of a decrease in inflation continue, the likelihood of an increase in unemployment will decrease significantly;

– the full impact of the tightening is yet to be felt;

– we expect that further rate hikes will be necessary to become sufficiently restrictive;

– The US economy has slowed significantly since last year. Higher interest rates affect fixed investment;

– The labor market remains tight. Although the number of vacancies has decreased compared to the beginning of the year, the market remains unbalanced;

– meanwhile the monthly rate of inflation slowed down in October and November. But inflationary risks remain skewed upwards;

– financial conditions fluctuate in the short term, but it is important that they reflect policy restraint over time;

– our forecasts are not a plan, there is no certainty in the economy;

-The Fed is taking drastic measures to curb demand. Our decisions will be based on the totality of incoming data.

In fact, Powell confirmed our forecasts from previous months. Inflation is falling, but slower than he would like (because he does not take into account the structural component), the recession in the US economy is intensifying (by and large, this is the first time), the Fed’s forecasts do not look very good so far. The latter is obvious – if you do not have a model for the development of the situation, the forecast cannot be successful.

Thus, there is only one question: what needs to happen for the Fed to stop raising rates? Collapse of financial markets? It is inevitable in the face of increasing debt service costs, but whether it will happen tomorrow or in a few months is a question. The deterioration of the economic environment for Powell, apparently, will not be sufficient reason for easing monetary policy.

Actually, one important psychological moment is taking place today, instead of inflation, the economic downturn itself becomes the main event. Recall that this is not a “recession”, since the world is not experiencing a cyclical recession, but a structural one, and it has been going on for more than a year. But so far it has been masked by understated inflation (let me remind you that if inflation is underestimated by a few percent, this automatically increases economic growth by about the same amount).

It seems to us that the real recession of the US economy in 2022 will be somewhere around 7-8%, but it is impossible to calculate this for sure, there are no relevant statistics. As for the euro area, inflation starts to fall a little in it, which is natural, since the economy is shrinking, which entails a drop in demand. However, the accumulated price upside potential is quite high, look at the electricity bill in France for a small bakery:

Рис. 41

At the same time, changes in the policy of the FRS in the US lead to the fact that the structure of borrowings is changing. The issuance of bonds is sharply reduced, which is natural, market participants begin to treat them quite suspiciously. But loans, on the contrary, begin to grow (banks are not very afraid of defaults, since money is still cheap for them.

Рис. 42

In any case, the New Year holidays are approaching, in connection with which business activity is falling and, apparently, we will learn some serious news after the start of the new year. And we, before the start of the last working week of this year, wish all our readers to have a good rest for the weekend and successfully prepare for the holidays!


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