From NYC Health Commissioner Dave Chokshi, MD:
And, from Jay Varma, Mayor de Blasio’s public health adviser:
As Varma put it:
Vaccinated and boosted = risk of infection. Everyone else = much higher risk of infection, hospitalization & death. If traffic is moving at 90 mph, I’d rather get in an accident using a seatbelt and airbags than not.
Futures are taking it on the chin.
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On the third page of Jay Powell’s prepared remarks yesterday, he finally touches on inflation’s effect on ordinary Americans:
We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We are committed to our price stability goal. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched. We will be watching carefully to see whether the economy is evolving in line with expectations.
I’m sure that’s a relief to everyone trying to decide between putting food on the table or gas in the car or paying the rent check – all of which have increased by 10-60% over the past year. Pay no attention to your troubles, the Fed will be watching to see if they get any worse.
One of the best questions in the Q&A came from CNBC’s Steve Liesman:
It’s often said that monetary policy has long and variable lags. How does continuing to buy assets now, even though it’s at a slower pace, address the current inflation problem? Won’t the impact of today’s changes not really have any impact for six months or a year down the road on the current inflation problem, and aren’t you actually lengthening that time by continuing to buy assets when it could be not until the long and variable lag after you end purchases sometime in March that you’ll start to have any impact on the inflation problem?
Powell read the prepared answer (actually non-answer) from his notes. Completely ignoring the question posed by Liesman, it possessed all the intellectual merit of a parent exclaiming “because I said so.” Added emphasis is mine.
…why not stop purchasing now? …We’ve learned that in dealing with balance sheet issues…that it’s best to take a careful, methodical approach to make adjustments. Markets can be sensitive to it. And, we thought that this was a doubling of the speed, we’re just two meetings away from finishing the taper, we thought that was the appropriate way to go, so we announced it and that’s what will happen.
In this world where the global financial markets are connected together, financial conditions can change very quickly and my own sense is that they get into conditions that the affect the economy fairly rapidly, longer than the traditional thought of a year or 18 months – shorter than that rather – and when we communicate what we’re going to do, the markets move immediately to that. So, financial conditions are changing to reflect the forecast that we made, which was basically in line with what the markets were expecting.
I was a little surprised he didn’t grab a golf club at that point and say “now watch this drive.”
If you got to the end of that word salad and are still wondering why, in the midst of record breaking inflation, the Fed is continuing to throw hundreds of billions into an already overpriced market, there’s your answer: the market. Everything else, including the suffering of those slammed by inflation, is secondary.
Meanwhile, the real target of the Fed’s policy – the algos – were thrilled by the lack of surprises and, most importantly, by the crushing blow dealt to vol. As we discussed yesterday, VIX broke down below the latest straw man trend line…
…and put in a bearish 10/20 cross. Oh, and it gapped down below the 200-day moving average just for good measure.
All better and new all-time highs (coincidentally just above stops) for ES just in time for OPEX. Just don’t call it a bubble.
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We’ve been writing about the current inflation problem for years. In December 2019 for instance [see: Inflation Games], we noted that CPI was about to top 2% again and that this realization had prompted the Fed’s shift from a 2% target to a range in excess of 2% to make up for past shortfalls.
Without harping on geopolitical considerations [see: Coincidences and Consequences] all over again, it’s obvious that the Fed’s effort to keep interest rates low is dependent on keeping inflation under control which, in turn, is dependent on keeping the annual change in gas prices under control.
That is why the Fed is considering formal changes to the way it evaluates inflation as (not) detailed in the official gobbledygook offered last month. It also explains the various comments made by Fed officials – first suggesting that inflation should target a range rather than a specific level (i.e. 2.0%) and more recently suggesting that inflation should be allowed to “run hot.”
CPI crept up to 2.49% over the next several months. But, the correction in oil/gas we had forecast at the time accelerated into a rout thanks to the COVID crash in March-April 2020. Oil and gas prices plunged below zero, and inflation was officially too low again.
By September 2020 [see: Inflation Tops Estimates] however, it became apparent that the subsequent recovery in oil/gas prices would again contribute to CPI rising back over 2% by early 2021. We reiterated this forecast in December [see: Don’t Ignore Inflation], writing:
…the Fed, for all its heroics in “saving” the economy from the pandemic this year, has backed itself into a corner. What the markets don’t seem to appreciate is the implication of the coming spike in YoY price changes in oil and gas. In my estimation, the 3-4% CPI it implies (so far) represents a very significant risk to markets…”
By March 2021 CPI had reached 2.62% and, according to our research, was headed much higher unless corrective action was taken. In The Big Picture: Oil and Gas we reiterated the dilemma facing the Fed if oil/gas prices continued to rise.
Given that interest rates are close to zero and must remain near zero out of necessity, and the dramatic increase in oil and gas prices since last April’s crash should result in at least a 40%+ YoY increase, and CPI is very positively correlated with YoY increases in gas prices, and interest rates are very positively correlated with CPI, will politicians and central bankers allow oil/gas prices to remain at these levels? I don’t think so.
While our inflation forecast was spot on, this is where our oil/gas forecast began to miss the mark. In the mid-60s at the time, WTI continued to rise until reaching the mid-80s in late October. The 10Y, however, remained in the 1.2-1.7% range. Bottom line, we had greatly underestimated the Fed’s ability to suppress interest rates during a very sharp rise in inflation.
It is a feat rarely achieved except in situations such as 2007-2008 when the equity market crash caused investors to flee stocks for bonds. With multiple rounds of QE at its disposal, the Fed was able to capitalize on the declines the financial crisis had wrought. Like the BoJ and ECB, the Fed had broken the bond market.
With no price discovery to worry about, the Fed was seemingly free to pump equity markets higher without consequence. Until now.
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November PPI came in above estimates at 0.8% for the month and 9.6% for the year – the highest print since data were first calculated in November 2010.
Futures are not amused.
Several downside targets should be tagged this morning.
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The Fed’s experiment of pouring trillions of dollars into the markets is coming to an inglorious end. Even though an accelerated taper will still results in hundreds of billions in additional liquidity over the next several months, the writing is on the wall.
Allianz Chief Economic Advisor Mohamed El-Erian said it well yesterday on CBS’ “Face the Nation.”
“The characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve, and it results in a high probability of a policy mistake. So, the Fed must quickly, starting this week, regain control of the inflation narrative and regain its own credibility. Otherwise, it will become a driver of higher inflation expectations that feed onto themselves.”
I agree wholeheartedly, though we might differ on whether the Fed’s actions to date have been a “mistake.” In my view, they were taken with the certain knowledge that inflation would be driven much higher – an outcome the Fed must have deemed acceptable even though the brunt of it would obviously fall on the poor and middle class.
Higher oil and gas prices, a weaker dollar, ludicrously low interest rates – all contributed to the stock market being where it is today. Without those factors, major indices, commodities and housing prices would be far lower.
Years from now, economists might debate whether inflating another huge asset price bubble was worth it. But, for now at least, the Fed must figure out how to tap the brakes without causing a pileup among all those tailgating investors.
Futures are flat as we approach the open.
But, this week should see substantial moves in equities, currencies, commodities and yields.
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At 6.81%, headline inflation is now the highest it has been since March 1982 (6.78%.) Originally driven by sharply rising oil and gas prices…
…it is now broad-based and anything but transitory, with medical commodities the only category below the Fed’s original 2% target.
Algos responded with the usual VIX smackdown which, not surprisingly, began one minute before the BLS release.
It remains to be seen, once the market opens, whether carbon-based investors will be so enthusiastic about the prospects of a quicker Fed taper.
For history buffs and those with fond memories of price discovery, note that the Mar 1982 CPI of 6.8% saw the 10Y yielding 14.2%, a far cry from today’s 1.5%. It’s a testament to just how broken the bond market is.
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Futures are off moderately as the euphoria over omicron’s supposed demise subsides. Our targets remain the same.
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Pfizer says that 3 doses of its existing COVID-19 vaccine is effective against the omicron variant – great news for 25% of Americans who are fully vaccinated and boosted, good news for the 60% of Americans who are fully vaccinated, and definitely not so good for the 40% of Americans or the 93.7% of people in low-income countries who are not vaccinated.
Futures are up very modestly on the news.
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Now that everyone has jumped on the inflation bandwagon (better late than never) the bond market has thrown them a curve. Rates have plunged in the face of Fed promises to throttle back inflation by raising rates, leaving many economists scratching their heads.
This is nothing new. Fundamentals have increasingly been an unreliable source of information for fixed income traders/investors in recent years. Chart patterns, on the other hand, have trumped the economists all along.
As 2Y10Y approaches our downside target, this seemed like a good time to check in on the bond “market.”
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VIX tagged our 34.84 target on Friday – an important breakout in risk – before tumbling back into the safe zone.
With other factors holding their ground and equities’ 100-DMAs still untagged, it’s not at all clear that the worst is over.
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