When Little Pent-Up Demand Is Left

When Little Pent-Up Demand Is Left

Morgan Stanley, Sarah Wolfe on behalf of (chief economist) Ellen Zentner:

When Little Pent-Up Demand Is Left

An extraordinary rise in spending on services, combined with a modest recovery in the consumption of goods, led to a decrease in the personal savings rate by a ten-year minimum. Now the recovery of real spending on services is almost complete, which means that the growth of spending on services should slow down, while spending on goods continues to return to its pre-Covid share of income and PCE. Since spending on services accounts for 65% of the share of consumer wallets, the slowdown in growth contributes to lower inflation in the service sector. We expect that a further return (to past levels) of goods consumption, combined with weak growth in the services sector, will allow the Fed to approach the 2% inflation target without causing a recession.

Let’s rewind 2.5 years ago. It’s January 2021, and households are gradually coming out of the hibernation caused by Covid, but the widespread spread of the vaccine is still a few months away. Consumers allocate 5% more funds from their wallet for goods than before Covid, which contributes to record consumption of consumer electronics, household and repair goods, sporting goods and recreational vehicles. Also 2.5 years ago, we made a highly competitive forecast that the spread of the vaccine in the spring of 2021 would lead to a sharp increase in costs for services and payback of goods.

This return has occurred, but paired with greater-than-expected demand, thanks to unprecedented fiscal stimulus, excess savings and a substantial supply shortfall. Thus, we observed not only a shift from goods to services, but also an increase in total spending. The result was a 13 percent increase in goods inflation for almost three years, an acceleration in services inflation and a return to pre-Covid spending habits, which are much larger in real rather than nominal terms. (Figure 1). The biggest gain from Covid was received by stay-at-home products….
..and we have seen the most sustained recovery in discretionary services, including catering, accommodation, public transport and recreational services.

The increase in interest rates led to a decrease in spending on durable goods, which contributed to a slowdown in core goods (2.1% YoY as of April 2023 compared to 9.7% yoy a year ago and we expect that further deflationary pressure will reduce it to -0.2% YoY by December 2023 and to -1.3% YoY by December 2024.). As the supply of labor increases and deferred demand decreases, the pressure on inflation in the service sector begins to weaken. Inflation of basic goods is projected to decline further, and core-core services (core services excluding housing and medical prices) inflation has begun to slow down and as of April 2023 increased by 6.6% YoY, down from a peak of 7.4% in February 2023. The greatest impact on core-core services should occur in the second half of 2023 (5.4% YoY by December 2023 and 4.2% YoY by December 2024).

The growing savings rate leads to a reduction in the overall “pie” of spending, and households have a reduced need and desire to spend on goods and services. This makes it easier for the Fed to achieve the 2% inflation target without causing a recession. There is a potential to reduce the consumption of goods due to reduced needs and rising prices, as well as opportunities to slow down the consumption of services without it becoming negative. Real consumption of services, which increased significantly in 2021 (6.3% YoY) and 2022 (4.5% YoY), is expected to return to pre-Covid levels in the future. @ESG_Stock_Market

Dollar LIQUIDITY what is happening now, everyone is already confused

Dollar LIQUIDITY what is happening now, everyone is already confused

Dollar liquidity measures the ability of the dollar to be used for transactions and activate other forms of financial assets. Currently, this presents a confusing situation for investors. Let’s take a closer look


Curiously, at the end of March the volume of reverse REPOs for non-residents halved


But foreign companies have increased loans, and quite aggressively

But foreign companies have increased loans, and quite aggressively

This could indicate a shortage of dollars outside the U.S. financial system.


Fed’s balance sheet shrank by $17 billion in the week, a steady trend relative to last year The Fed's balance sheet shrank by $17 billion in the week

The blue line is the annual dynamics of the Fed balance sheet, the green and red are the mortgage bonds and treasuries on the Fed balance sheet. As we can see, all indicators are below zero, i.e. below last year.


The Ministry of Finance account decreased by $54 billion, with about $80 billion remaining in the account of the Ministry of Finance, which is a historically low value – this is marked by the blue line on the chart

The red line is non-resident reverse repos, which rose by $12 billion during the week and returned to historic highs.

The red line is non-resident reverse repos, which rose by $12 billion during the week and returned to historic highs.



Excess reserves that are not generating income (blue) are down $34 billion and those that are generating income (red) are up $78 billion,


The growth of reverse repos continues to generate losses for the Fed, with $48 billion in losses already accumulated.


Liquidity in the system decreased by $40 billion (blue line) due to absorption from reverse repos, and also in a sideways trend after the start of the banking crisis


The U.S. stock market (the red one is the S&P500) has gotten off the ground, and the accumulated divergence is quite significant.


According to the Federal Reserve Bank of Chicago, credit conditions have begun to tighten (blue line), but for some reason the dollar is not feeling it and continues to weaken (red line is the annual trend of the dollar) - suggesting that the dollar market is "long-covered" before rising.

According to the Federal Reserve Bank of Chicago, credit conditions have begun to tighten (blue line), but for some reason the dollar is not feeling it and continues to weaken (red line is the annual trend of the dollar) – suggesting that the dollar market is “long-covered” before rising.


U.S. financial system currency balances are unchanged for the week (blue line), remain at the levels of the beginning of the year

The red line is a reversal of the dollar, last week's data, but we know that the dollar has remained under pressure this week, which locally does not fit with the dynamics of the volume of currency balances.

The red line is a reversal of the dollar, last week’s data, but we know that the dollar has remained under pressure this week, which locally does not fit with the dynamics of the volume of currency balances.


1) The picture with the dollar is interesting: increased demand from non-residents in two of the three considered directions, as well as flat dynamics of currency balances and reduced liquidity, combined with tightening credit conditions – suggesting that the current dollar decline is the final one before the start of growth.

2) The Treasury bill also looks curious, and if tax revenues are lower than expected because of lower corporate earnings, everybody will be talking about a liquidity shortage at one of the guarantors of stability in the U.S. financial system.

3) There is also an expressive divergence accumulated between the S&P500 index and the volume of free liquidity in the system, which can be interpreted as potential pressure on the stock market, especially since the cycle of liquidity withdrawal by the Ministry of Finance is ahead, i.e. the liquidity indicator will start to decline steadily.

4) I continue to believe that a new risk-off wave is coming, which will be heavier relative to the spring 2022 wave, which will end in the summer with a move to control the yield curve or lower rates, I am leaning towards the first instrument. @ESG_Stock_Market

World inflation data. Inflation in the US, what has changed? Inflation in Europe #inflation

World inflation data. Inflation in the US, what has changed? Inflation in Europe #inflation

World inflation data. Inflation in the US, what has changed? Powell’s inflation indicator. Inflation in Europe. I’ll give you a couple of tips

1️⃣ US labor market: still hot. The situation with vacancies remained very aggressive, the number of open vacancies even increased and is 1.9 times higher than the number of unemployed, which is a lot. Weekly applications for unemployment benefits remain below 200 thousand. The salary fund is growing by 7.7% YoY – this is a couple of tenths less than it was a quarter earlier, but still significantly higher than what would meet the Fed’s 2% inflation target. The flow of nominal income remains quite aggressive.

2️⃣ Excess savings remain high, but their “eating through” has accelerated. The volume of deposits and money market funds in households is ~ $3.0 trillion, although it has dropped to 95% of disposable income, but it is much higher than the docklike ~80%. This allows American households to save less and spend more – the savings rate of Americans has increased slightly, but still remains at extremely low levels of 4.4%. Although the banking crisis accelerates the processes in the first quarter, but there is still a long way to normalize here – there is something to spend.

3️⃣ The debt burden is low, but it has become more difficult to borrow. The amount of debt of the population relative to their disposable income of 99% is even slightly lower than in previous quarters. The decrease is due to the slowdown in mortgages (the main part of the debt) against the background of increased rates, the growth of nominal incomes and, of course, the write–off of student loans at the expense of the budget – this played a major role. Americans spent 9.7% of their income on debt servicing, which is very, very little by historical standards. There is still enough stock here, although high mortgage rates limit the possibilities of borrowing, but writing off student debts allows you to borrow several hundred billion extra. Mortgage debt has remained at lows since the 1960s and is 28.8% of the value of real estate in the United States.

4️⃣ Wealth Effect: The value of US household assets remains high. The total asset value of American households remains extremely high at 874% of disposable income. This is still above the docklike levels, but the situation varies for different income groups. The situation in the TOP10 is much better, both due to the increase in the value of financial assets and real estate. At BOTTOM90 – mainly due to the growth in the volume and value of real estate, deposits, pension plans and long-term goods. In general, the situation here is not yet conducive to Americans starting to save.

In general, we can say that the growth potential of Americans’ consumer spending remains high 6-8% YoY, which is much higher than what the Fed would like to see. At the same time, the budget incentive has rather increased, both due to the write-off of loans, and due to various kinds of social payments. In general, all this supports a fairly high potential for maintaining the increased growth rates of nominal expenditures, and as a result, inflation. The first “explosions” in the financial market may somewhat accelerate the processes (tightening of financial conditions), but given that history was immediately flooded with money, the impact will be limited.

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

Powell ‘s inflation indicator is stability …

The report on the consumer spending deflator came out slightly better than market expectations, prices rose by 0.3% mom and 5.0% YoY. And even core inflation came out not so bad 0.3% mom and 4.6% YoY – the market was waiting for 4.7% YoY. Commodity inflation against the background of migration of consumption into services is modest and amounted to 0.2% mom and 3.6% YoY. Although the disinflationary effect of prices for used cars continued here (-2.8% mom and -12.3% YoY) – the dynamics is strange, because wholesale prices for them have been rising for several months in a row, and earlier prices were correlated. Prices for short-term goods increased by 0.3% and 5.4% YoY.

The main inflation in services, although not to say that it is huge here, is stable 0.3% mom and 5.7% yoy. Housing is getting more expensive by 0.7% mom and 8.2% yoy, but the Fed is turning a blind eye to it, because there is inertial growth. The most important thing is where J. is looking.Powell and Co. are services inflation excluding housing and energy prices – they added 0.3% mom and 4.7% YoY – stability, in January it was also 4.7% YoY. The increase in these prices for three months amounted to 5.0% in annual terms. In this part of inflation, nothing actually changes, something is accelerating, something is slowing down, but the index has been dead in the range of 4.2-5% annual growth for two years now. With a neutral real rate of about 0.5%, the Fed’s policy is clearly not up to the “restrictive policy” (the real rate is 1-2%)…

​​#eurozone #inflation #ECB #rates #economy #EUR



Inflation in the eurozone in March was 0.9% mom, although annual inflation slowed to 6.9% YoY, this slowdown is mainly due to the high base of last year. The only factor slowing price growth was energy (-2.2% mom and -0.9% YoY), everything else was actively getting more expensive.

Food products produced 1.3% mom and 15.4% YoY. Without energy and food, core inflation is 1.2% mom and a record 5.7% YoY. Although the price growth for goods without energy slowed down a bit (6.6% YoY), but the price growth in services accelerated to 5% YoY. The influence of energy has gone, but inflation has remained.

At the same time, unemployment is at historical lows of 6.6%.
With the economy, everything is not particularly positive – real retail sales in Germany fell by 1.3% mom and collapsed by 7.1% YoY, although nominal sales increased by 2.6% yoy. Real sales were 1.6% lower than three years ago.

Consumption of goods in France fell by 0.8% mom and 4.1% YoY in real terms. First of all, this applies to food (-1.5% mom and -9% yoy). Consumption in France is at the levels of a decade ago, but this is in real terms. Protests against the background of pushing pension reform will add additional negativity to the French economy.

Low unemployment and labor shortage are side by side with a drop in living standards against the background of high inflation – such an entertaining reality. So the real strikes are still ahead here.

​​#Germany #inflation #Eurozone #economy #rates #Crisis

Inflation in Germany is not retreating

Inflation in Germany is not retreating

The growth of consumer prices in March, according to preliminary data, amounted to 0.8% mom and 7.4% yoy. Although annual inflation has slowed down, this is only the effect of the base of last year, when prices jumped by 2.4% mom in a month.

According to the Eurostat methodology, consumer prices in Germany are growing by 1.1% mom and 7.8% YoY. The growth of energy prices has slowed down sharply (+3.5% YoY compared to 19.1% yoy in February) – there are a lot of subsidies. But the growth of food prices accelerated even more (+22.3% YoY versus +21.8% in March). The growth of prices in services accelerated to 4.8% YoY, even though rents in Germany continue to rise by a modest 2% (but much is administratively regulated here).

In Spain, it is also interesting, inflation was 0.4% mom and due to the effect of the base collapsed to 3.3% yoy. But core inflation in Spain was 0.7% mom and 7.5% YoY.

So the ECB, as some Eurobankers say, “still has a lot of work to do”, it is unlikely that monthly prints of 0.7-1% mom correspond to the ECB’s goal. The reaction of the markets rather indicates that they continue to believe in the story that rates will rise and everything will be fine… and there will definitely be no SVB in Europe … well , we ‘ll wait )

#germany #sentiment #recession #crisis #economy

Despite the depressive information background associated with the ECB rate hike, high inflation, the likelihood of a recession and problems in the banking sector, a positive mood prevails in German business circles in March. However, it is worth remembering that the more expectations are inflated, the deeper the disappointments will be

#recession #europe #ecb #rates #economy

recession in Europe has reached 100%

The MacroMicroMe team used the ECB 2019 model to estimate the likelihood of a recession in the EU. This model is based on the real money supply and the state of the yield curve. The results showed that the probability of a recession in Europe has reached 100%, which is an exceptional event over the past 40 years.

And remember: #Fed #rates #qt #prep #finance #economics

The Fed is in the toughest monetary policy tightening cycle since 1983

The Fed is in the toughest monetary policy tightening cycle since 1983: rates are rising faster and have reached historically high values, which is reflected in the red line on the chart.
However, the worst thing is that the financial system is already under stress, and inflationary pressure in the US economy remains stable. The monthly increase in core inflation corresponds to the average rate of the 80s of the last century, which indicates that even such a strict policy of the Fed is not able to effectively combat inflation. Moreover, business activity revived in March, which is a signal of sustained inflation. @ESG_Stock_Market

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



How is the US economy affected by wage inflation?

US economy affected by wage inflation

How is the US economy affected by wage inflation? USA: s/p are growing – inflation too

Income & Expenses. In January, American statisticians again revised income data, as a result, it turned out that disposable incomes are growing by 2.0% mom and 8.5% yoy. The revision for previous periods concerned the growth of nominal s/p in the private sector, which turned out to be more intense than previously thought and amounted to 1% mom and 8.4% yoy, and since December 2019 the growth was 25%. Additionally, in January, the budget threw money (taxes were reduced). Inflation, of course, ate up part of the income, real disposable incomes showed an increase of 1.4% mom and 2.3% YoY.

Consumer spending increased by 1.8% mom and 7.9% YoY in nominal terms, but monthly increases are a consequence of the seasonal calculation curve of retail sales in December/January, the annual dynamics here is more indicative, and it indicates an acceleration in the growth of real spending per capita to 1.9% yoy and this 7.1% higher than the levels of December 2019. The revision of the growth of the s/p also led to a revision of the savings rate, which in January was 4.7%, so there is where to go down if anything.

Inflation. The deflator of consumer spending accelerated sharply to 0.6% mom and 5.4% YoY, core inflation (Core PCE) accelerated to 0.6% mom and 4.7% YoY. Moreover, the price increase was quite widespread across the basket. It is clear that prices in the housing sector are growing quite actively (0.7% mom and 8% yoy), the growth of goods without energy and food is more modest (0.5% mom and 2.8% yoy), food and energy have risen in price (0.4% mom and 11.1% yoy/d). But the most important thing is that the beloved now J.Powell’s price index for services without energy and housing accelerated its growth to 0.6% mom (a record since November 2021) and 4.8% yoy (the maximum since February 2022). Cyclical components of core inflation accelerated growth to 8% YoY, their contribution to overall inflation is about 3 percentage points.

What we have in the end: wages grew faster than expected, the consumer is active, inflation accelerated (especially where it is sensitive for the Fed) stronger than forecasts. The markets, of course, are depressed… expectations of a Fed rate hike rose to 5.25-5.5%. Shares of “hawks” in the Fed sharply up.

​​#USA #income #economy #Crisis #spending #budget #inflation

Loretta Mester:

“The rate should be raised above 5% and kept there for some time. I hope the Fed will be able to return inflation to 2% without destroying the labor market.”

James Bullard:

“A more aggressive rate hike will give the Fed a better chance of reducing inflation.”

Source: cnbc.com


The probability of achieving a soft landing is reduced. We still believe that the Fed is unlikely to return to raising rates by 0.50%, however, such a risk appeared after the release of the latest data on the PCE Price Index.

Minutes of the Fed meeting January 31-February 1, 2023 (FOMC Minutes).
(pub. 22.02.23)
(page 11)

“Almost all officials were in favor of raising the rate by 0.25%. FOMC members who were in favor of raising the rate by 0.50% noted that a more significant increase would bring the rate closer to the levels that, in their opinion, would allow achieving a fairly restrictive position.”

source: federalreserve.gov

For 100 years, the US stock market has entered the overbought zone for the third time

#stocks #usa #sp500 #overbought #stock market #finance

For 100 years, the US stock market has entered the overbought zone for the third time

Over the past 100 years, the American stock market has entered an overbought zone for the third time in relation to the global stock market. This means that the cycle of dominance of American stocks in the global financial market is over. Pay attention to the exhibitor from 2008, it looks epic.
In the West, this schedule is not yet discussed enough, however, with the onset of depression, it will definitely become relevant.
Of course, this does not mean that the American market will not grow, but investors will give priority to other developed and emerging markets.

investors have had a paradigm shift

investors have had a paradigm shift

#rates #bonds #cash #stocks #finance #allocation

This month, investors experienced a paradigm shift in expectations of the peak discount rate in the United States: at the beginning of the month, expectations were 4.5% in March-April, now – 5.4% in August, with a further decline to 3.8% by the end of the year.
The change of mood led to the breakdown of trends in the financial market: the growth of the dollar brought down the prices of precious metals and base currencies, and led to the sale of the US debt market, the stock market is still holding, but the positive there is also over.
At the next stage, the market will increase expectations for the duration of the high-rate cycle, which will also lead to a decrease in risk appetite.

The red line on the chart is the difference between the yield of junk bonds and treasuries; the indicator is steadily decreasing, i.e., according to the market, garbage carries less risk than risk-free government bonds;
The blue line is the world’s lending standards, which are already worse than they were in 2020; that is, it is more difficult to get a loan, and this primarily concerns less reliable borrowers who issue junk bonds.
Actually, the situation was similar in the pre-crisis 2007, but now all the processes are going faster, so this year the global financial system may plunge into depression.

the yield of treasuries is 2.5 times higher than the internal yield of the S&P500

 the yield of treasuries is 2.5 times higher than the internal yield of the S&P500

#finance #dividend #coupon #stocks #bonds

📍Probably the most underestimated chart to date: the yield of treasuries is 2.5 times higher than the internal yield of the S&P500 (you can not count on the income from the exchange rate difference in the rate hike cycle).
Taking into account the current risks, from the point of view of the risk/profit ratio, it is more profitable to sell shares and buy treasuries, and this flow will increase as the prices of American stocks decline – this will put additional pressure on the US stock market.

The company’s reporting for the upcoming week

The company's reporting for the upcoming week

🇺🇸 #USA #reporting season #reporting
in the USA the reporting season continues : corporate reporting for the upcoming week

FactSet: 68% have already exceeded earnings per share expectations this reporting season, which is below the 5-year average of 77% and below the 10-year average of 73%

66% of companies exceeded revenue expectations, which is below the 5-year average of 69%, but above the 10-year average of 63%


Don`t copy text!