A CPI Sea Change Coming Soon?
By Victor
Sperandeo with the Curmudgeon
Introduction:
U.S. equity markets rallied sharply on Friday. All indexes were up over 1% with the NASDAQ
100 (i.e., QQQ ETF) +2.74%. [The NASDAQ
composite has increased every week in January and is +6.4% this year]. Fridays market advance was after three days
of declines and in the absence of ANY good economic news.
In particular, existing home sales declined
for the 11th consecutive month and fell to their lowest level since 2014. Retail sales sank 1.1% in
December. Google parent Alphabet
joined a chorus of tech giants announcing massive job cuts (12,000),
amplifying fears that the U.S. may slip into a recession this year. Microsoft
also announced 10,000 layoffs earlier this week. Finally, both the Institute for Supply
Managements services and manufacturing purchasing managers indexes fell
into contraction in December.
So why was the market so strong on Friday? We attempt to answer
that question in this post and speculate on whether that trend might continue.
CPI and Fed Rate Hikes Slowing:
Its becoming apparent that the CPI is decreasing
and, as a result, interest rate increases will be smaller. In recent public statements and interviews,
Fed officials have said slowing the pace of rate increases to a more
traditional quarter percentage point would give them more time to assess the
impact of their increases so far as they determine where to stop.
Fed rate increases are aimed at slowing inflation by
reducing demand, and there is ample evidence that this is exactly what is
going on in the business sector, Fed governor Christopher Waller, an early and
vocal advocate for aggressive rate rises last year, said on Friday. Waller said he would favor a quarter-point
rate rise at the coming FOMC meeting.
Waller also said that rates are already high enough to be slowing the
economy. The remarks could have helped calm rising-rate worries in the equity
market.
Apparently, the Wall Street consensus is now for a 25
bps (rather than 50 bps) rate hike at the Feds Jan 30-Feb 1st
meeting and that realization caused Fridays strong market move. And perhaps a pause after that?
FOMC members will have two more months to evaluate
several widely watched economic indicators, including on hiring and inflation,
before their March 21-22nd meeting. They pay close attention to a detailed
measure of worker compensation called the employment-cost index, which is set
for release on Jan. 31st.
Theres something else that may happen that is
starting to be discussed. As the decline
in the CPI is not happening fast enough for the governments liking, the BLS
will artificially lower the CPI by changing the way its calculated! I believe this will occur in the coming
months and will lower the CPI to 2 to 3% annually.
From the BLS website:
Starting with January 2023 data, the BLS plans to
update weights annually for the Consumer Price Index based on a single calendar
year of data, using consumer expenditure data from 2021. This reflects a change
from prior practice of updating weights biennially using two years of
expenditure data.
From the FFTT Report by Luke Gromen (subscription required):
Beginning with January 2023 data, BLS plans to
adjust the weighting method for Owners Equivalent Rent (OER) in the CPI. The new method will use neighborhood level
information on housing structure types to weight OERs unit sample
observations.
-->The Fed can then use the artificially lower
CPI as cover to pause and/or lower rates. This potential change is so
serious that I recommend those that are short stocks should either be hedged
with long positions or cover their short positions.
Awaiting NBERs Recession Call:
The remaining shoe to drop is the NBERs official
announcement of a recession which manifests itself in lower earnings and higher
unemployment.
There have been 19 U.S. recessions since 1914 -the
year the Fed was created. The median
recession length is 11 months. The
length of those recessions, according to the NBER, are as follows (from lowest
to longest length in months): 2, 6, 7, 8, 8, 8, 8, 10, 10, 11, 11, 13, 13, 14,
16, 16, 18, 18, 43.
Heres a graph of post WWII recessions along with
unemployment rates:
If we assume the current recession started in January 2022, then
we are approaching the 13th month. The NBER has to rule on our recession call,
so it is not official until they do so.
Cartoon of the Week:
Is Uncle Sam now a magician attempting to disguise a
recession as a bunny?
Image Courtesy of Hedgeye
..
Huge Unemployment Conundrum:
Regarding the unemployment numbers, the BLS
monthly employment report always shows increases in the establishment survey,
which the markets deem to be bullish? Of course, weve explained in numerous
Sperandeo/Curmudgeon posts with the BLS using Seasonal Adjustments and the
ghost additions of workers from the Birth/Death Model (BDM).
Its astonishing that the biggest companies are
laying off workers, but I never see an announcement of hiring. Also, the big tech company layoffs are
impacting higher paid professionals while the vacant jobs are for lesser
skilled hourly workers. That results in
a huge discrepancy of lost consumer buying power.
.
Sidebar - Review of BEA Chicanery:
The ploy of changing numbers is one of the U.S.
governments favorite tactics to deceive the public and make themselves look
good. This was effectively used before the 2022 mid-term elections by the BEA.
On September 27th, the Atlanta Feds 3rd
quarter GDP Now estimate was 0.3% and that was after two down quarters (aka a
recession). Just two days later on
September 29th - the BEA changed the past GDP data to a lower base
with other adjustments. Voilΰ, the
estimated GDP for the 3rd quarter went up eight times to +2.3%! We explained
that in this October 3rd expose: Sperandeo/Curmudgeon:
3rd Quarter GDP EST Adjusted Up 800% Overnight!
As of 1/20/23, the Atlanta Fed now estimates that 4th
quarter will be +3.5%! Thereby, government induced adjustments are a
wonderful thing for markets, but most professionals dont see the con. Perhaps, they should be reading our weekly
columns?
.
Victors Conclusions:
If the recession is dated from January 2022, then the
odds favor it being over by this April.
Well just see, but a recession generally has to have unemployment in
the 5% area and were not near that level yet.
As previously stated in past posts, its my view the
current economic decline will be worse than a recession. If so, the Fed should ease aggressively as
they did in March 2020. The markets
would then soar as they have during every previous round of QE.
Manipulating the CPI data and then continue with
reckless government spending financed by printing money (AKA keystroke
entries) will end very badly.
End Quote:
One of the 20th centuries greatest comedians had this
observation on politics.
Politics is the art of looking for trouble, finding
it everywhere, diagnosing it incorrectly and applying the wrong remedies. Groucho
Marx
.
Be well, stay healthy, warm, and dry. Please let us know your interests
for 2023. Till next time
...
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
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.
Copyright © 2023 by the Curmudgeon and Marc Sexton. All rights reserved.
Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).