One of the key elements we subscribe to when generating economic and market commentary is going where the data takes us - not trying to put a square peg in a round hole and force data into a certain narrative. Our inspiration for this week's musings is the 1981 hit song by the band Styx titled, "Too Much Time On My Hands." Analysts and investors alike spend too much time trying to build a narrative that either doesn't fit reality or hasn't materialized and making bad decisions based on that narrative.
Lead guitarist Tommy Shaw wrote the song for the band to fill the final track on their upcoming album "Paradise Theater" in 1980. The album was Styx's only #1 album in the U.S., but their 4th triple-platinum album. Shaw was driving in his car to the recording studio at the time and the main bassline popped into his head. He quickly assembled the band to record what was in his head before he forgot it. According to Shaw, the lyrics are about a man who spends his days at the local bar concerned about world events. Aided by alcohol, he gets a little crazy as he sees his life slipping away. Instead of getting up off the bar stool and living his life, he drowns his worries in drinks.
"Is it any wonder I've got too much time on my hands
It's ticking away with my sanity
I've got too much time on my hands
It's hard to believe such a calamity
I've got too much time on my hands
And it's ticking away, ticking away from me
Too much time on my hands
It's tick tick tick tick ticking away (Too much time on my hands)
Now I don't know what to do with myself (Too much time on my hands)"
Here's what we've seen so far this week...
What Inflation? At one point in the Styx hit song, the narrator states he has "nothing to do and all day to do it." This seems to match the theme of analysts confused by the latest inflation numbers. Despite good news this week on the inflationary front, analysts are picking and choosing which inflation data to parse to fit a certain narrative. Both March CPI and PPI came in lower than expected this week and the year-over-year reading declined for the 9th consecutive month. In the last 70 years CPI has not declined for 9 consecutive months after peaking without either a pause (flat from month-to-month) or a slight increase from one month to another. What's so different about this time? The obvious answer is COVID.
Retail Sales exploded higher in 2021 as consumers' pockets were full from the "free" money that was pumped into the system during the COVID pandemic. Retail Sales came back down and normalized in 2022. If we compare the graph of CPI/PPI to the graph on Retail Sales, they follow the same pattern.
For those saying "inflation is going to be sticky," 9 consecutive months of declines and a PPI number that is now at +2.7% seems to stand in stark contrast to that assumption. For those saying we're headed for recession because spending has slowed, the numbers in 2022 and so far in 2023 seem to match or slightly exceed those numbers in 2019, before all of the "free" money was floating around.
There are actually some bright spots in the inflation reports that give some hope that consumers may be able to weather the storm that has been higher inflation and higher interest rates. The price of eggs, something that has been written about a lot over the past few months, dropped 10.9% (the largest monthly drop since December, 1987).
Because inflation has been on the decline since July of last year, real wages for consumers are improving. After dropping to -3.8% last year, Real Earnings have risen and are now down -1.6%. This means consumers' dollars are now going further and spending may not feel quite as painful as it has over the past 12-18 months. The economic picture now gets more difficult for the Fed to stay pat on a May rate hike.
What Is The Market Trying To Tell Us? As the patron at the bar in the Styx hit song tells us, "It's ticking away with my sanity," markets have been playing with investors sanity for the better part of 6 months. In actuality, the Fed has been playing with the market, therefore driving investors crazy.
There appear to be some cracks in the wall as Chicago Fed governor Goolsbee noted on Tuesday, "Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious" (concerning rate hikes). Then on Wednesday, San Francisco Fed governor Daly (considered by many to be a hawk) stated, "More hikes may not be needed to slow inflation," after the CPI report showed progress. The reality is that there is no real reason to hike rates again next month. The Fed has more than done their job of bringing inflation down (see above).
This became even more evident in the release this week of the March FOMC minutes which stated, "Several participants noted that, in their policy deliberations, they considered whether it would be appropriate to hold the target range steady at this meeting." If we go back to the March 22nd press conference, Powell stated that credit conditions tightening could also replace further Fed rate hikes. Well, that seems to be coming to fruition post-banking crisis. Loan volume dropped considerably during the banking crisis.
Now the ball is in the Fed's court. The market is giving us signals, despite articles about recession, that the worst may be over. The VIX has now closed lower than the previous low of 17.87 on March 1st. Money Market flows continue to drop post-banking crisis and have slowed close to levels before the crisis occurred. The Fed's own data concerning the Discount Window (the Fed's lending facility to help banks meet short term liquidity needs) dropped by $2.1 billion last week.
In addition, the new Bank Term Funding Program saw $8.2 billion less in access last week. These are good trends to indicate that the worst of the banking crisis is behind us. What about bank earnings you ask? Today was expected to be an onslaught of disappointing bank earnings. Yet, not only was there no bad surprises, all four major banks that released earnings this morning beat estimates. So, it would appear the world is not ending, just yet.
Begging For A Recession. There are trusted sources that I often visit to get meaningful data that is hard to find. I noticed lately, however, that even these seemingly reliable sources are pushing a certain narrative - almost begging for a recession. I wonder if some of the writers on the site are sitting at a bar next to our Styx narrator when he says, "It's hard to believe such a calamity."
We would disagree with that premise at this point. Does that mean a recession is impossible - no. However, there is enough evidence to suggest a recession is not imminent. The Atlanta Federal Reserve is projecting +2.2% GDP growth for the 1st quarter. While not robust, it certainly indicates growth. The Retail Sales number this morning disappointed. Month-over-month sales declined 1% versus as expected decline of 0.4%. While disappointing, it shouldn't come as a shock that the banking crisis probably stopped a lot of consumers in their tracks in March. In addition, March is tax time and consumers tend to wait until after their tax refunds to make some larger purchases.
We'll have to wait and see if March's disappointment becomes a trend. On the positive side, the year-over-year Retail Sales number was higher +2.9%. As we pointed out above, still healthy relative to pre-COVID data. If we dig into the weeds a little bit, the contributors to the Chicago Fed's Adjusted Nation Financial Conditions Index showed that of the 105 indicators being tracked in the index, 70 loosened during the past week suggesting improving conditions. On top of that, 82% of the indicators are "looser than average" which is why the index is in the negative territory (loose) at -0.13. The main takeaway should be that investors need to panic less over headlines and remain focused on the data. Headlines are influenced by people with bias. Data tends to speak for itself.
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