Category: Market Action

US inflation was down a little this month:

Inflation cooled in July as gas prices and airfares fell, a welcome reprieve for consumers and economic policymakers but not yet a conclusive sign that price increases are turning a corner.

The Consumer Price Index climbed 8.5 percent in the year through July, compared with 9.1 percent the prior month, a bigger slowdown than economists had projected. After stripping out food and fuel costs to get a sense of underlying price pressures, prices climbed by 5.9 percent through July, matching the previous reading.

• On a monthly basis, the price index did not move at all in July. That’s because fuel prices, airfares and used cars declined in price, offsetting increases in rent and food costs.
• Core inflation was also slower than economists had expected on a monthly basis, climbing by 0.3 percent. In June, that figure was 0.7 percent.
• Today’s report is probably welcome news at the White House and the Federal Reserve, both of which have been waiting for inflation to decelerate.
• But it’s easy to overstate how much July’s slowdown matters. Inflation is still abnormally high. The decline owed in large part to gas prices, and they can always jump again.
• There are some real reasons to believe inflation will slow in the months ahead: Supply chain pressures, for instance, show signs of easing.
• But there are also reasons to worry. Wage growth remains rapid. And housing costs, particularly rents, continue to climb, which could keep inflation high for some time.

This was reflected in the New York Fed’s underlying inflation gauge:

• The UIG “full data set” measure for July is currently estimated at 4.7%, a 0.1 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for July is currently estimated at 5.9%, a 0.1 percentage point decrease from the current estimate for the previous month.
• The twelve-month change in the July CPI was +8.5%, a 0.6 percentage point decrease from the previous month.
  • -For July 2022, trend CPI inflation is estimated to be in the 4.7% to 5.9% range, a similar range to June, but with its lower and upper bounds both 0.1% lower.

PerpetualDiscounts now yield 6.03%, equivalent to 7.84% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.73%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 310bp reported August 3.

Well, it seems obvious … but nice to have it confirmed!

Why would you leave money in a checking or savings account while also carrying a credit card balance? Economists call this question the credit card debt puzzle. That’s because simultaneously holding both liquid assets and credit card debt seemingly makes no sense if the interest rates paid on deposit accounts are substantially lower than the interest rates charged on unpaid credit card balances — which they always are. In late 2021, the average rate paid was 0.06%, and the average rate charged was 16.13%.

And yet in 2019, according to a new Federal Reserve Bank of Boston working paper, 42% of the people surveyed carried — or “revolved” — credit card debt while maintaining some liquid assets, typically as a balance in their bank accounts. The paper was written by Boston Fed senior economist and policy advisor Joanna Stavins and Federal Reserve Bank of Atlanta payments risk expert Claire Greene.

The authors look at why consumers make such a choice. As indicated by the paper’s title, “Credit Card Debt Puzzle: Liquid Assets to Pay Bills,” Stavins and Greene show these “borrower-savers” left money in the bank to cover monthly bills and other necessary expenses including mortgage or rent. They find that more than 80% of borrower-savers’ bills (by value) were paid using checks, online bill payments, and other out-of-bank-account payment instruments.

“Even those consumers who carry costly unpaid credit card debt must keep a substantial balance in liquid assets to pay their bills,” the authors write. “Thus, the credit card puzzle is not a puzzle at all.”

There’s also this:

We use the 1979 National Longitudinal Survey of Youth to revisit what is termed the credit card debt puzzle: why consumers simultaneously co-hold high-interest credit card debt and low-interest assets that could be used to pay down this debt. Relative to individuals with no credit card debt but positive liquid assets, borrower-savers have very different perceptions of future credit access risk and use credit cards for precautionary motives. Moreover, changing perceptions about credit access risk are essential for predicting transitions among the two groups. Preferences and the composition of financial portfolios also play a role in these transitions.

… and this:

This article investigates the credit card debt puzzle. Simultaneously holding credit card debt and liquid assets is puzzling given the sizeable difference between interest rates of debt and assets. However, this behavior is common—about 31% of households in the 2016 Survey of Consumer Finances. The cost of co-holding may be justified if consumers anticipate future restrictions in credit or if they need to maintain liquidity. Other existing explanations for co-holding include impulsive spending and low financial literacy. This research reveals a new explanation for the credit card debt puzzle: consumers’ overconfidence of their financial knowledge. Using a Coarsened Exact Matching method, we found that overconfident consumers were 20%-40% more likely to co-hold credit card debt and liquid assets.

… and probably a lot of other material as well!

Huffing and puffing at the Fed appears to have had some impact:

Median one- and three-year-ahead inflation expectations both declined sharply in July, from 6.8 percent and 3.6 percent in June to 6.2 percent and 3.2 percent, respectively. Both decreases were broad-based across income groups, but largest among respondents with annual household incomes under $50,000 and respondents with no more than a high school education. Median five-year ahead inflation expectations, which have been elicited in the monthly SCE core survey on an ad-hoc basis since the beginning of this year, also declined to 2.3 percent from 2.8 percent in June. Expectations about year-ahead price increases for gas and food fell sharply. Home price growth expectations and year-ahead spending growth expectations continued to pull back from recent series highs. Households’ income growth expectations improved.

Assiduous Readers may remember my fascination with pumped storage – a piece of the energy storage puzzle that must be installed before green energy becomes more than a political slogan. A new plant has commenced operation in Switzerland:

Fourteen years after the start of construction work, the Nant de Drance pumped storage power plant will be put into operation on 1 July 2022. Federal Councillor Simonetta Sommaruga and the President of the Cantonal Council of the Valais, Roberto Schmidt, today took the opportunity to visit the power plant and get a first-hand impression. Located 600 m below ground in a cavern between the Emosson and Vieux Emosson reservoirs in the Finhaut municipality of Valais, the Nant de Drance power plant will feature six pump turbines with a capacity of 150 MW each. The highly flexible machines make it possible to switch from pumping at full power to turbining at full power in less than five minutes, i.e. from -900 MW to +900 MW. The volume of water passing through the Nant de Drance turbines, 360 m3 a second, corresponds to the flow of the Rhône at Geneva in summer. The upper reservoir of Vieux Emosson holds 25 million m3 of water, which represents a storage capacity of 20 million kWh. These characteristics allow Nant de Drance to play a crucial role in stabilising the electric grid. In face of the growth of new renewable energies such as wind and photovoltaic whose production is intermittent, this flexibility is required to compensate for the fluctuations on the electric grid and maintain continual equilibrium between production and electricity consumption. Nant de Drance works like a gigantic battery which allows excess electricity to be stored in a short term or to produce the necessary energy when demand exceeds production.

Holy smokes! Jobs, jobs, jobs!

U.S. employers added 528,000 jobs in July, the Labor Department said on Friday, an unexpectedly strong gain that shows the labor market is withstanding the economic impact of higher interest rates, at least so far.

The impressive performance — which brings total employment back to its level of February 2020, just before the pandemic lockdowns — provides new evidence that the United States has not entered a recession.
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The unemployment rate was 3.5 percent, down from 3.6 percent in June, matching its 50-year low on the eve of the pandemic.
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Wage growth climbed more quickly than economists had expected in July, concerning news for the Federal Reserve at a time when officials are watching for signs of a sustained moderation in pay gains that could help to pave the way to lower inflation.

Average hourly earnings climbed by 5.2 percent in the year through July, more than the 4.9 percent forecast in a Bloomberg survey of economists, and its growth was revised higher in June. Pay gains are still moderating slightly compared to very high readings earlier this year — they were up by 5.6 percent in March compared to a year earlier — but the pace of increase remains unusually rapid.

Meanwhile, in the frozen North:

Canadian employment fell for a second consecutive month in July, but the unemployment rate held steady at a historic low, a sign that labour market conditions remain tight.

Employers shed 31,000 positions last month, following a decline of 43,000 in June, Statistics Canada said in a report on Friday. Financial analysts on Bay Street were expecting a stronger return of 15,000 jobs added. Despite the decline, the unemployment rate remained at 4.9 per cent – the lowest in nearly five decades of comparable data – as fewer people sought work.
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Friday’s report showed job losses that were highly concentrated. The number of public-sector employees fell by 51,000. Ontario shed about 27,000 workers. And the losses were entirely in service industries, such as wholesale and retail trade, health care and education.
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Employers were recruiting for about one million positions in May, near all-time highs, according to the most recent Statscan figures. More recently, the volume of job listings on Indeed has faded, though is still substantially higher than before COVID-19.

The New York Fed released its Weekly Economic Index today, estimating annual Real GDP growth as of June 30, 2022, bumping along at +1.62%, but still positive!

Here are some cheerful words from the Bank of England:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 3 August 2022, the MPC voted by a majority of 8-1 to increase Bank Rate by 0.5 percentage points, to 1.75%. One member preferred to increase Bank Rate by 0.25 percentage points, to 1.5%.

Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs. As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term. CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.

GDP growth in the United Kingdom is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.

Domestic inflationary pressures are projected to remain strong over the first half of the forecast period. Firms generally report that they expect to increase their selling prices markedly, reflecting the sharp rises in their costs. The labour market has remained tight, with the unemployment rate at 3.8% in the three months to May and vacancies at historically high levels. As a result, and consistent with the latest Agents’ survey, underlying nominal wage growth is expected to be higher than in the May Report over the first half of the forecast period.

TXPR closed at 617.59, up 1.01% on the day. Volume today was 1.28-million, about the median of the past 21 trading days.

CPD closed at 12.26, up 0.74% on the day. Volume was 51,390, near the median of the past 21 trading days.

ZPR closed at 10.25, up 0.79% on the day. Volume of 191,830 was above the median of the past 21 trading days.

Five-year Canada yields were up significantly to 2.83% today.

PerpetualDiscounts now yield 6.10%, equivalent to 7.93% interest at the standard equivalency factor of 1.3x. Long corporates continue to yield 4.84%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 310bp from the 320bp reported July 27.

Excitement in the bond market today, which I have seen attributed to San Francisco Fed President Mary Daly’s remarks:

The Federal Reserve’s work of bringing down inflation is “nowhere near” almost done, San Francisco Fed President Mary Daly said on Tuesday, adding U.S. central bank officials are “still resolute and completely united” in the task of achieving price stability.

Daly, in an interview streamed on LinkedIn and hosted by a CNBC anchor, said, “We have made a good start, and I feel really pleased with where we’ve gotten to by this point,” but she cautioned there is still “a long way to go” to lower inflation from four-decade highs.

These remarks, in turn, have been attributed to correcting an earlier misinterpretation:

Look at this one-week range for the yield on 2-year US government bonds.

These are substantial moves for a short-dated maturity and caused primarily by Fed Chair Powell’s unscripted “neutral” remark and then the walk-back by other Fed officials.

No wonder people chuckled when told the Fed doesn’t wish to amplify volatility in markets.

And the confusion arose because:

One of Federal Reserve Chair Jerome Powell’s unscripted remarks at his press conference on Wednesday — that interest rates have reached a “neutral level” after the just-announced 75-basis-point interest-rate increase — is sure to prompt much discussion among economists in the weeks and months ahead. Judging from how markets reacted the minute he made this remark, it is clear what conclusions the vast majority of investors want these economists to reach.
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In today’s world, this is translated by markets into the view that the Fed now believes that it has already done the bulk of what is needed to tighten monetary policy to deal with what Powell himself described as inflation that remains “much too high” and is inflicting “considerable hardship” on Americans.

TXPR closed at 611.97, up 1.75% on the day. Volume today was 1.40-million, well above the median of the past 21 trading days. The last two days, while gratifying, were not enough to put the month in the black – TXPR was 616.25 on June 30.

CPD closed at 12.10, up 0.83% on the day. Volume was 74,630, above the median of the past 21 trading days.

ZPR closed at 10.13, up 1.40% on the day. Volume of 227,560 was well above the median of the past 21 trading days.

Five-year Canada yields were unchanged at 2.64% today.

TXPR closed at 601.46, up 1.02% on the day. Volume today was 1.49-million, well above the median of the past 21 trading days.

CPD closed at 12.00, up 1.61% on the day. Volume was 42,290, well below the median of the past 21 trading days.

ZPR closed at 9.99, up 0.91% on the day. Volume of 103,910 was below the median of the past 21 trading days.

Five-year Canada yields were down sharply to 2.64% today. I find this all very peculiar. It seems that the market has decided that since the central banks have huffed and puffed, inflation has been blown down and we can start worrying about new things. Well, it may be true, but I’m not as sanguine as all that – they haven’t even finished hiking their policy rates yet! Another factor, I think, is that fourteen years of financial repression has convinced many players that sub-1% interest rates are completely normal. This is another thing I have difficulty swallowing. We’ll see!

US GDP was down a bit:

A key measure of economic output fell for the second straight quarter, raising fears that the United States could be entering a recession — or perhaps that one had begun.

Gross domestic product, adjusted for inflation, fell 0.2 percent in the second quarter, the equivalent of an 0.9 percent annual rate of decline, the Commerce Department said Thursday.

The 0.2 percent decline followed a contraction of 0.4 percent in the first three months of the year — meaning that by one common but unofficial definition, the U.S. economy has entered a recession a mere two years after it emerged from the last one.

Most economists still don’t think the economy meets the formal definition of a recession, which is based on a broader set of indicators including measures of income, spending and employment. The G.D.P. data itself will also be revised several times in the months ahead.