By Victor Sperandeo with the Curmudgeon
Markets React to Invisible Fed Rate Increases:
For some reason the banks are talking down the stock and bond markets with many incredible predictions of Fed interest rate increases. As we noted in last weeks column, some banks are even projecting seven rate rises this year.
Fridays stronger than expected BLS jobs number* (+467,000 in January) and upward revision of November and December jobs added knocked Intermediate Treasury Note prices down (yields up) to new two-year lows (yields at highs). The 10-year T Note yield closed at a daily high of 1.92% - a two year high.
The 5-year Treasury yield ended at 1.78% on Friday. It was 35 bps on 1/4/21 and yielded 1.23% on 12/14/21- the day before the Fed announced the plan to increase rates in March. Thereby, the 5-year T Note yield increased 55 bps on the belief that the Fed will increase rates in about three months.
All this damage from doing nothing but threaten? Thats a WOW!
*Note on the BLS Non-Farm Payroll Report for January 2022:
For the BLS to report +467,000 seasonally adjusted jobs is 100% subjective a guess! That number is constantly adjusted throughout the first half of the year. An alternative measure of employment, based on a survey of households, fell by more than a quarter-million. And economists warned that measurement issues and other quirks made the January jobs data difficult to interpret.
The average seasonally adjusted monthly increase in the last 10 years for January was +258,000. This month is the largest increase in January jobs estimates in 10 years, except for last year (+520,000). That was after -9,244,000 jobs were lost in 2020. Indeed, total non-farm employment has increased by 19.1 million since April 2020 but is down by 2.9 million, or 1.9%, from its pre-pandemic level in February 2020.
This projecting of Fed rate increases in the future (without any corroboration) is new because its building momentum for anticipated rate hikes months before the widely expected 25 bps Fed Funds rate increase in March. Some Fed bank presidents (i.e., Minneapolis, San Francisco, Philadelphia) even suggested the possibility of 50 bps rate increases to combat inflation but none of that is even close to a guarantee!
Meanwhile, the Fed is still buying U.S. government and mortgage debt for their own account ($8.873 Trillion of assets) with printed money (aka keystroke entries). It remains to be seen if that will stop after the March 2022 FOMC meeting.
Economy is Slowing but Inflation Remains High:
Despite the manipulated jobs numbers, the economy is slowing. The widely followed Atlanta Fed GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the 1st quarter of 2022 is 0.1% as of February 1st - unchanged from January 28 after rounding.
Also, the University of Michigans Final January 2022 Index of Consumer Sentiment dropped to a New Ten-Year Low, with January 2021 holding the distinction of being the trough for both the decade and since the start of the pandemic. Its Index of Consumer Sentiment was at 67.2 which was a year over year drop of -14.9%. The Current Economic Conditions Index came in at 72.0 for a year over year decline of -17.0%.
NOTE: CONSUMER SPENDING COMPRISES ~ 70% of U.S. GDP as the retail and service industries are critical components of the U.S. economy. Obviously, consumer sentiment is a leading indicator of consumer spending.
Meanwhile, inflation is increasing:
CPI monthly increases in 2021:
Huge UK vs U.S. Economic Forecast Disparity:
Last week the Bank of England said that UK families are about to suffer the biggest fall in living standards since comparable records began three decades ago. Its new forecasts say that disposable incomes (post-tax labor income, after inflation) will shrink by 2% this year, and by another 0.5% in 2023.
Thats another WOW! Look at the huge discrepancy between the U.S. and the UK economic forecasts - a recession in the UK vs up to seven rate increases in the U.S. where no recession is forecast?
Those are 180 degrees different or poles apart. How this plays out is anyones guess?
It seems odd to me that I seem to be the only one pointing out the real facts about U.S. jobs and the real economy. To wit, I offer this quote:
Stay healthy, enjoy life, success, good luck, and best wishes. Till next time....
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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