Inflation Rate in US now Hits 6% YoY in February despite Used Car Drop

Inflation Rate in US now

❗️US inflation in February was 0.4% mom, 6.0% YoY, core inflation 0.5% mom, 5.5% YoY. And this despite the fact that used cars unexpectedly gave out a drop again – 2.8% m/m…

The banks’ opinions on the Fed’s further actions are divided, some believe that the Fed will cut rates in March… someone that leave unchanged… someone who will raise (1-3 times by 25 bps). The market has calmed down a little and is waiting for a 25 bps rate increase (69% probability) rather than remaining unchanged (31%), and another increase in May … but since July, he has been betting on a reduction in rates. The Fed needs to save face…

According to the current decisions on SVB and Signature, $264 billion of deposits need to be returned, of which about $30 billion and about $234 billion should be given by the Fed as collateral for assets (there are not enough securities on the balance sheets of both banks for collateral). The FDIC itself had $128 billion at the end of 2022, mainly in government bonds (for $126 billion of government bonds at face value). In 2021 and 2022, they managed to consolidate ~ $5 billion a year into the insurance fund. One way or another, the Fed will simply “print” about a quarter of a trillion dollars, which the FDIC will receive at 5% + per annum and distribute to depositors. The $25 billion that the US Treasury will provide is an amount close to the difference between the nominal and market value of collateral assets (a guarantee for the Fed).

At the weekend, J. Yellen refused to comment on the Fed’s further actions, saying on duty about the Fed’s independence and that they would evaluate it in the coming days and weeks. At the same time, she actually admitted that bankruptcies are a consequence of high rates: “The problems of this bank, from reporting about its situation, suggest that because we’re in a higher interest rate environment…”. There is no doubt that Yellen and Powell discussed this issue, but most likely no decisions have been made yet.
It is already obvious to everyone that what is happening is a consequence of the increase in rates, it is not obvious to everyone… but these are only the first signs of the consequences of the rate hike cycle, the losses of the financial system from the rate increase will continue to accumulate. For Powell, the situation is extremely unpleasant, a couple of days ago he went “hawk” (and not only he, but also other representatives of the Fed)… whether something has changed with inflation – not significantly. And just like that, to turn around right away is an epic failure and a blow to trust (which is so not very high). The market is already showing what it thinks – the growth of gold / bitcoin, the fall of the dollar, etc.

If inflation had slowed down on Tuesday, it would have been easier for the Fed to justify a reverse move. But no …

​​#USA #inflation #economy #Fed #debt #rates #dollar

Looking more closely at American inflation…

Externally, the report has no large deviations from expectations, total inflation is 0.4% mom and 6.0% YoY, without energy and food 0.5% mom and 5.5% yoy. But in reality, only one–time stories saved from a sharper price increase: used cars (-2.8% mom disinflation after a rapid takeoff), gas (-8% mom – heat), eggs (-6.7% mom disinflation) and medical insurance (-4.1% mom to the current inflationary reality has a very distant relationship). Together, these factors reduced monthly inflation by ~0.2 percentage points – too much.

Grocery inflation slowed down slightly by 0.4% mom and 9.5% YoY, but remains aggressive. Goods without energy, food and used cars added 0.4% mom and 4.2% YoY, growth decently slowed down from highs amid the migration of consumption from goods to services, but in the last three months the price increase has stabilized around 4-5% YoY. The main drive remains in services (0.5% mom and 7.6% yoy), active growth in housing continues (0.8% mom and 8.1% yoy), although this is an inertial growth, transport has accelerated (1.1% mom and 14.6% yoy), but mainly due to air travel (6.4% m/m).

If we discard various one–time emissions, inflation accelerated in February rather, various inflation indices cleared of volatile components remained at the ceiling of 6-7% YoY and even accelerated at the moment. I would still estimate the steady inflationary momentum as 4.5-5%, the New York Federal Reserve estimates at 4.9%. This means that even a neutral rate is 5-5.5%… and a restrictive policy means the rate is even higher. However, the same New York Fed published data on inflation expectations – annual expectations decreased from 5% to 4.2% than the Fed may try to justify caution. But the inflationary history as a whole speaks for an increase further.

PS: If anyone remembers, a couple of years ago, the Fed approved a new strategy and switched to targeting the average inflation rate (the average for 5 years is already 3.5%, for example), so if you approach it quite formally, then in order to fulfill your goals, Powell should lower inflation below 2% and keep it for a long time



Joe scares the stock market

Joe scares the stock market

Employment has grown quite well

USA: employment has grown well, unemployment – too

The number of people employed in the US non-agricultural sector increased by 311 thousand in February, of which 265 thousand in the private sector and most in the service sector (245 thousand). The negative dynamics were in the IT (-25 thousand) and transport/logistics (-21.5 thousand) sectors, but the leisure, medicine/education/trade industries more than compensated for the reductions. The unemployment rate increased from 3.4% to 3.6%, although the share of employed remained virtually unchanged at 60.2%, but labor force participation increased slightly (62.5%). So far, these are only local changes within the framework of ordinary fluctuations.

The markets were very happy about something else: the growth of hourly wages slowed down to 0.2% mom and 4.6% yoy. But it’s not so simple here, the dismissal of higher-paid workers and the hiring of less well-paid ones can quite objectively affect the average pay. If we look at the salaries of non-managerial production personnel, then in February, on the contrary, the growth accelerated to 0.5% mom and 5.6% YoY. However, at the same time, the average number of hours worked decreased, which somewhat adjusted the total wage fund (-0.1% mom) after its sharp rise in January (+1.2% mom). The annual growth of the wage fund has slowed down to 7.4% YoY, but it is still much higher than the pre-crisis ~4%, and the slowdown is rather due to the base effect. The increase in three months was 1.8%, which is slightly higher than the average observed in the last six months (1.7%), i.e. the short-term trend remains the same.

The report is generally ambiguous, on the one hand, it gives certain hints of a slowdown, but the number of employed is actively growing, and the slowdown in the growth of s/p is largely due to the cuts of higher-paid workers. The data can be interpreted quite broadly, the report is rather neutral for making a decision on the rate, but still allows the Fed not to rush back to the 50 bp step.

Yellen continues to spend

Yellen continues to spend “stash”, but there are still reserves

The Fed paused this week – the securities portfolio has practically not changed, in 4 weeks the reduction of the portfolio of government bonds is $61 billion, but the chronic shortage of MBS is only $15 billion reduction in 4 weeks. If Powell is on pause, then Yellen cannot do this and continued to spend “cash” from accounts, adding new dollars to the system: the deposits of the Ministry of Finance in the Fed decreased by $39 billion to $311 billion in a week, in 4 weeks the Ministry of Finance poured $184 billion into the financial system from its account in the Fed. It can add up to $50-100 billion more in March, but in April it will begin to actively withdraw through taxes (~$250..300 billion) – it will be interesting to see how the markets behave.

The banks returned dollars to the Fed through the reverse repo mechanism, the volume of which increased by almost $60 billion to $2.56 trillion in a week, because, despite the operations of the Ministry of Finance, there was a little less liquidity. Banks use reverse repos with the Fed to hedge – the inversion of the debt curve has intensified again. At the same time, corporate bond spreads were rather declining, although the “rout” of bank stocks on Thursday may indicate that there is a clear underestimation of risks.

Biden’s budget, which is $5.5 trillion in tax exemptions, is extremely negative for the stock market, because it will decently reduce capital inflows to the stock market, but it is unlikely to be missed by Republicans in Congress. Ahead of a stormy showdown with the debt ceiling and the budget… The annual CDS on the US national debt continues to grow (76 points).

The US Treasury will continue to add dollars to the system, but in April it will absorb a lot, which may add headaches to the markets along with a shake-up of banks if the Fed does not smooth the situation.

And what does Joe offer us?

US President Joe Biden has proposed a new budget plan for 2024

What is important for us there?

▫️Increase in corporate tax to 28%. Well, thank you, of course, that it is not up to 35% as it was before 2017, but it is still very unpleasant.

▫️Increase in the tax on baibek from 1% to 4%. They say there is nothing to return the value to shareholders here — invest in the development of business and jobs. It seems logical, but there are businesses that are in a cycle of peak development, and according to all norms of corporate finance, they need to give money to shareholders.

▫️The income tax abroad will be raised from 10.5% to 21%. Companies in the USA export services abroad and earn worldwide. Now they will pay “like at home”.

The tax on the rich will be raised from 8% to 25% with a fortune of $100 million. The richest stratum — 0.01% of all taxpayers — will suffer the most.

Cancellation of benefits for oil and gas companies and Big Pharma. For neftegaz, this means literally “pay taxes”, and for pharmaceutical companies, that many medicines can be made available to Medicare, which will lead to negotiations to reduce their cost.

So far, this is only a Biden Administration proposal, but the market reacted accordingly yesterday.


U.S. Labor Market Remains Hot Despite Drop in Job Openings

U.S. Job Market Remains Overheated

U.S.: labor market remains overheated

U.S. job openings fell by 410,000 in January, but the 2022 data was revised upward to 11.23 million, bringing the total to 10.82 million openings in January. That’s 1.9 times the number of unemployed, up 1.96 times in December after the revision. In the private sector, 9.77 million job openings remain. But still there are hints of the market cooling, for the first time in many months less than 4 million Americans have changed jobs in search of a better life (wage), and the employer-initiated layoffs are more common. True, more Americans are hiring than firing – not much has changed.

The ADP counted a job gain of 240,000 in February, with small businesses cutting and medium and large businesses hiring. Considering the past reports, the ADP data should be treated rather cautiously, they used to count crookedly, after the change of methodology something may improve, but it is too early to say. That said, they now have data on wage changes: growth slowed down a bit but from 7.3% y/y to 7.2% y/y, and with job changes you can expect a gain of 14.3% y/y (was 14.9% y/y). This is still very aggressive and so far the job market remains extremely overheated. Weekly jobless claims <200k and a total of <2 million on benefits is telling.

The head of FRS J. Powell on Wednesday did not bring much joy to the markets, though he tried to smooth the signal a little bit by saying that they have not made a decision yet (25 or 50) and will look at the data… but so far the data is more in favor of a harder reaction… although the labor market report and inflation reports are still to come – they will be decisive. That said, the Fed, based on the data, continues to show that it just doesn’t know where the ceiling will be and is even technically almost guaranteed to overreact.

In Congress, the head of the Fed was very nervous this time with questions like “You’re trying to put people out of work… That’s your job, isn’t it?”… “you want to put 2 million Americans out of work,” etc. Powell, of course, fought back that they were trying to restore price stability… telling them that this time things might be “different”… I recall how “different” it already was when inflation was “temporary”). Unemployment is not yet rising, elections are a year and a half away, and the Fed has already begun to actively “press” politicians… It’s going to get worse…


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