SVET Markets Weekly Update (November 28, 2022)

The previous week main macro-economic updates include:

• Durable Goods Orders (for October): increased 1% while analytics expected 0.4%;
• New Home Sales (Oct): 0.632M vs 0.58M;
• Initial Jobless Claims (week 47): 240K vs 228K

Wednesday markets’ rebound after FOMC notes showed some members slight discontent with Powell’s line. It was added by Department of Labor coming out with initial new claims for unemployment benefits’ statistics (filed weekly) which showed a rise to 240K during the previous week, while forecasts were 225K. Significant increases were registered in Illinois and California. Looks like the wave of layoffs in technology companies hit governments files, at last.

Apparently, some players boldly placed their bets on that FOMC will add 50 points to 3.75 at its December 13–14th meeting. Perhaps, too boldly. Not only because Census Bureau reported, at the same time, the Durable Goods Orders’ increase of 1 percent while analytics expected 0.4.

Powell plays two games at once — political as well as economical. However, even after GOP apparent (although, partial) set back on the mid-term elections his game plan can not be changed so drastically. He already talked himself into another 75 points increase regardless what macro-indicators and his associates telling him.

Those indicators are pointing to the recession and continuing inflation (stagflation) — the scenario which will rapidly increase the number of Powell’s haters among his closest allies.

There are now two main camps forming among practicing economists. Those who believes in FOMC impartiality and in flawless efficiency of the gerontocracy see the tunnel going into darkness another two or might be even three years. Until the war ends and inflation reverts we have to stay the course, they say. They see Powell as the reincarnation of Cato the Censor muttering ‘Carthago delenda est’ until lights go off in the universe.

Others think than Powell, far from being the Cato, succumbs to growing pressure from both sides earlier rather than latter. They point to mid-2023 (some even talk about Jan-Feb) as the FOMC’s policy potential reversal point.

Technical indicators (plotted both for NASDAQ and BTC) agree with the latter camp on a timing, showing two strong resistance zone on a monthly graphs: for NASDAQ — one on 8K (Jan-Fed) and another on 5K (Aug-Oct); for BTC — on 10K and on 6K.

However, argues the first camp, even after reaching those resistance levels, markets will not rebound but continue to linger for much longer (2–3 years, according to some corporate funds analytics) or even go lower.

Grand macroeconomic forecasts support this assertion pointing to world’s yearly productive growth drastic (~30 percent) decrease (f.e. according to Morgan Stanley — 3.0 percent for 2022 and 2.2 percent for 2023) with some countries (f.e. UK) going deeply negative (from 4.4 to -1.5) and some halving their growth rate (f.e. Brazil — from 2.8 to 1.2).

Apparently, the whole EU area will be hit hard by the energy deficits (Morgan Stanley analysts expect its GDP going from 3.3 growth rate in 2022 to -0.2 in 2023).

The World’s positives are China (increasing its growth rate from 3.2 to 5.0) and Middle East (3.3 to 3.7). China can count on its gigantic population ever-growing domestic consumption, while ME countries are, obviously, prime beneficiaries of rising oil prices. US is projected to go from 1.9 to 0.5 growth rate within a year.

What elderly politicians will do faced by the economy which grows almost four times slower than usual? Sure, they want to go lethargic as they usually do, but younger and sharper competitors won’t allow them, I assume. So, both budgetary expansions and rate reversals might be back into the agenda sooner rather than later.

However, there is not guarantees issued for outdated systems. The whole world’s political, financial and economic mechanisms are so archaic and dilapidated that it might function wrong on its own wrong functioning surprising both camps at once.

The new week (after holidays) brings to us:

• Wednesday (Nov 30): Employment Change from Automatic Data Processing Inc (ADP), GDP Growth Rate by BEA and Job Openings published by BLS;
• Thursday (Dec 1): Personal Income / Spending (BEA) and ISM Manufacturing PMI;
• Friday (Dec 2): Unemployment Rate and Non Farm Payrolls (BLS)

If we read ADP National Employment Report summary for October (showing jobs for private employers only) it might seem that US private labor market holds on just fine.

(quote: report) Private sector employment increased by 239,000 jobs in October (up from 192K in September, with 198K predicted for November) and annual pay was up 7.7 percent year-over-year (eq).

However, almost all gains (>87 percent) came from the Leisure / hospitality industry (210K jobs) locates on the West (229K) / NorKeast (50K) regions and only for so-called ‘medium establishments’ (from 50 to 250 employees). Basically all businesses, except restaurants, retailers and the travel sector, which are hiring in advance of the holidays, are either freezing hirings or laying off personnel (specially pronounced with corporates). ADP staff pointing on this fact is an understatement.

(quote: chief economist, ADP) While we are seeing early signs of Fed-driven demand destruction, it is affecting only certain sectors of the labor market. (eq)

Here how it goes in details:

Natural resources/mining (11K); Construction (1.0K); Manufacturing (-20K); Trade/transportation/utilities (84K); Information (-17K); Financial activities (-10K); Professional/business services (-14K); Education/healK services (-5.0K); Leisure/hospitality (210K); Other services (-1.0K).

Northeast (50K); Midwest (-23.0K); South: (-17K); West (229K)

Small establishments (25K); Medium establishments (218K); Large establishments (-4.0K)

All in all Powell is keep doing a great job by destroying the capitalist economy.

GDP Growth Rate statistics (as reported by Bureau of Economic Analysis) reflects that quite nicely. During only two years the economic growth (measured quarterly) were cut by a factor of ten (10x) — from +25 annualized percent in Q3 2020 to +2.6 in Q3 2022 (Q4 forecast is +2.8 percent). Still, hypocrites in power are tagging crypto industry ‘the Wild West’ calling for ‘Enron regulations’.

At the same time, all sectors are taking a heavy hit because of the several fullish old man’s outdated ‘financial policies’. The only small increase we have in Q3 GDP is that in the net trade. Exports were up 14.4 percent led by petroleum products while imports sank -6.9 percent. Also a small uptick was registered in so-called ‘nonresidential investments’ (3.7 percent, which is in the transportation equipment, mostly).

On the other hand, ‘residential investments’ sank drastically (-26.4 percent) lead by the housing market, which has been hit by soaring mortgage rates. Additionally, consumer spending keeps slowing down (1.4 percent vs 2.0 in Q2).

Compare to APD’s private sector employment data, Job Openings (JOLTs) information reported by Bureau of Labor Statistics (BLS), shows the number of vacancies (not actual hirings) in the whole economy — including govs jobs. It demonstrates same tendencies.

JOLTs are up to 10.72 million (10.2 million in August) in September. The largest increases being reported in accommodation and food services (+215K)plus transportation (+111K). Elsewhere, the number of new job positions were up less or, mostly, went down.

One of the Powell’s messages to consumers is that they have to cut their spendings at once or else. Him and his collaborators believe that democracy can go hand in hand with the dictatorship in finance, where unelected dudes tell us how to spend our money in the name of the fictional ‘economic stability’, which, according to the hard core, 100-years-long economic statistic, simply does not exist.

Personal spendings, which have always been the main driver of economic growth, is now one of the Powell’s main shooting targets. Those spendings still keep increasing (showing 0.6 percent month-over-month in September with an increase of ~0.4 / 0.7 percent predicted for November) despite soaring inflation rate and borrowing costs.

Practically, increases are seen within all services, with the leading contributors being housing and travel / transportation. On the goods side, only notable decreases were observed in gasoline and other energy goods. (source: Bureau of Economic Analysis)

It clearly demonstrates that even without Powell’s insane rate hike, negatively affecting sectors which have nothing to do with the inflation, market forces of demand / supply would reduce consumer consumption of energy products anyway.

On its creation (December 23, 1913) The Federal Reserve System (Fed) famously ‘was given the mandate by the Congress ‘. Historical records conclusively show (for more than 100 years) that Fed is utterly unable to do its assigned job — to balance the inflation with the unemployment rate.

On the graph which plots two charts (unemployment and inflation) since 1940th we can clearly see it — the spikes in inflation are followed by the highest unemployment. It is the Fed’s handiwork. To prevent temporary prices rises, which must be settled organically by demand / supply forces, FOMC hikes the rate and causes the protractive unemployment. As a result Fed just doubles the peoples hardships.

Inflation vs Unemployment since 1940th

Same is happening in our days. However, the difference is that today Fed rate hike is happening with an unprecedented speed which causes markets to crash long before businesses might adapt to new, crazy high borrowing rates. For example, the joblessness has been in a range of 3.5–3.7 percent since March.

According to the Bureau of Labor Statistics the rate was increased by 0.2 percentage point to 3.7 percent in October (compare to 3.5 in September). The number of unemployed peoples rose by 306th (6.06 million), while the number of employed decreased by 328th (158.6 million). The labor force participation rate edged down to 62.2 percent from 62.3 percent.

It doesn’t mean, of course, that it will stay that way much longer.

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