The Fed continued to speak out of both sides of their proverbial mouths this week and the markets have cooled on the FOMO buying after some hawkish comments yesterday. The inspiration for this week's musings is Wham!'s 1984 hit, "Careless Whisper."
The song was co-written by the Wham! duo of George Michael and Andrew Ridgely. The song was recorded as a solo for Michael and ultimately led to the launch of his solo career, but Ridgely got half the royalties from the hit. Contrary to the little known urban legend, the song was not written about an actual dating event in Michael's time in high school. The idea came to Michael while riding the bus to his job as usher at a cinema (hence the reference in the song to the "silver screen"). The song made it to #1 in multiple countries (including the U.S.) and would sell more than 6 million copies.
"I feel so unsure
As I take your hand and lead you to the dance floor
As the music dies, something in your eyes
Calls to mind a silver screen and all its sad goodbyes
I'm never gonna dance again, guilty feet have got no rhythm
Though it's easy to pretend, I know you're not a fool
I should have known better than to cheat a friend
And waste a chance that I'd been given
So I'm never gonna dance again the way I danced with you
Time can never mend
The careless whispers of a good friend
To the heart and mind, ignorance is kind
There's no comfort in the truth, pain is all that you'll find"
Here's what we've seen this week...
Time Can Never Mend, The Careless Whispers Of A Good Friend. Fed Chairman Powell has sent the various Fed governors out this week to give one last round of comments before the "blackout" period ahead of the February 1st FOMC meeting. So far this week, Fed Vice Chair Brainard noted how inflation has "cooled" and that there are "two-sided" risks as the Fed maintains a restrictive stance.
Meanwhile, Fed Vice Chair Williams stated yesterday that the Fed would be data-dependent in determining when to stop raising rates. Fed officials continue to warn of the potential for a "reaccerlation of inflation in the months ahead." Reaccerlation?! The latest CPI & PPI data show a dramatic decline in inflation that seems to be largely ignored (at least in Fed comments).
PPI has now dropped from a peak of 11.3% in June 2022 to 6.2% in December of last year (nearly a 50% decline). That's more representative of a plummet versus just a cooling. As we've noted before, when PPI drops below CPI, CPI was lower 6 months later in 11 of the last 14 periods going back to 1951. On average, CPI dipped to 3.4% following the 6-month period noted previously. As Jamie Dimon noted this week at Davos, he's not worried about a recession this year, but rather, worried about a Fed policy mistake. As we pointed out last week, the Fed is likely focused on the "wealth effect" and not real price increases. The Fed, right now, still runs the "jukebox" that is the U.S. markets. While the picture has nothing to do with the title song "Careless Whisper," I just thought it would look funny to see Powell in George Michael's "Faith" getup.
There's No Comfort In The Truth, Pain Is All That You'll Find. The powers that be are busy lecturing to the world this week at the annual Davos World Economic Forum. While they fly private jets, board helicopters from the airport to the hotel, and eat pounds of steak, they're busy telling the common man to reduce his/her carbon footprint...but, I digress. I did find James Gorman's comments quite humorous this week. The Morgan Stanley CEO while attending the Davos meeting said, "this echo chamber we live in here in Davos where everybody's basically repeating back to each other what they've heard from the last person. Let's be honest."
There hasn't been much information in terms of economies or markets to glean from the meetings in Davos this week, other than the typical lecturing on matters not concerned with finance. However, when it comes to energy, Dimon also spoke up and claimed that oil & gas will be needed for at least another 50+ years and that turning off the spigot now would lead to "calamity and a global depression." We have pointed out on this blog before that we need both electric and fossil energy in order to survive - it's not an either/or situation. Electric Vehicles made up only 10% of global vehicle purchases last year. All of the unhinged rants in Davos won't undo the problems of cost, efficiency, and battery life that accompany electric vehicles. When the technology gets there, great - we can purchase all the EVs we want. In the meantime, gas-powered vehicles are likely to remain the dominant means of transportation. This means, unless the consumer is rolling over, there's not need to run out and sell energy stocks just yet.
To The Heart And Mind, Ignorance Is Kind. The key moving forward is where is the consumer and how much can households absorb in inflation and higher interest rates.
The good news is that implied futures on the February Fed meeting are greater than 99% that the rate hike will be only 25 bps. That would be the lowest rate hike since March of 2022, when the current hiking cycle began. More importantly, futures has increased to 20% for the possibility of no hike in March.
This would be welcome news for the consumer and could potentially mean no recession for 2023, as the consumer makes up two-thirds of the economy. The job market remains resilient, which also helps the consumer. Initial Claims hit a low not seen since September of last year. Continuing Claims continue to come down from a high hit a few weeks ago. We're seeing some numbers that perhaps the Housing Market may be improving or hitting a bottom. Weekly Mortgage Applications saw the largest one-week growth (+27.9%) in more than two years. We will get New Homes and Pending Homes data next week.
New Homes has seen improvement over that last two months, but Pending Homes is the more important metric as it's typically a "leading" indicator of the housing market. All that being said, we're not out of the woods yet. Personal Savings and Credit Cart Debt are moving in the wrong directions. This is why Dimon is so concerned the Fed is pushing rates to high as the average credit card rate in the U.S. just rose to a high of +19%. An end to the hiking cycle in February is the primary factor in determining if the U.S. will achieve a "soft landing" or slip into recession.
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