That ups the risk that inflation lingers longer, which is a major hurdle for the Fed. We cannot obtain or sustain full employment without achieving price stability. That is not where we are.
Here is my employment write up.
kpmg.com/us/en/articl...
That will stoke debate in March. The situation in the Middle East will futher stoke inflation.
Consumers who saw expansions to tax cuts and are seeing larger refunds show up in their bank accounts will be allocating more of those funds to necessities than discretionary spending.
Retail sales were weak in January. That largely reflected unusually bad winter weather. Many consumer shifted their spending online.
The Federal Reserve’s dual mandate to foster price stability & full emp is in tension.
The weakness in the labor market is occurring at the same time that the more accurate of inflation measures at the moment, the PCE index, is accelerating again. That is prior to the effects of higher oil prices & the jump in utility bills.
More sectors shed jobs that’s created them.
The unemployment rate ticked up to 4.4%, but the U6 measure came down a bit to 7.9% from
8.1% last month. Temporary layoffs were up, which likely reflected in part collateral damage due to a major healthcare strike.
When the labor market is dependent on a one-legged stool, it falters when a shock occurs.
That is what we saw in the February employment report. A
major strike in the healthcare sector knocked the one leg the labor market was standing on out from under it. The red ink was broad based.
Now add in sticky service sector inflation & a jump in tax refunds hitting consumer bank accounts soon. Risk is not good. Could suffer a more lingering bout of inflation.
The new Fed Chair will likely be tested on their resolve to keep inflation in check.
Same time, prices at the gas pump tend to rise 2.5 cents for every $1 increase in the price of oil.
WTI was up $20 pb since start of yr last I saw. That translates to as the pump of 50 cents a gallon since Jan 1.
Exporters often charge more to customers abroad before those at home. Those shifts tend to lag shifts in the PCE inflation index, which the Federal Reserve targets, by about 6 months. Lags have been elongated but the rise suggests there is more tariff-related inflation in the pipeline.
My colleague posted the import & export prices.
What is important to note is that core goods export prices soared. That is despite dollar depreciation.
Why are export prices rising and why is it important to watch?
They are rising because tariff on imported inputs went up.
The problem is guilt by association & the stress when a private lender is flooded with redemption requests, regardless of the portfolio’s performance.
Will leave the analysis of how the shifts we are enduring may or may not affect the plumbing of financial markets to those those smarter than I.
The IMF has warned that private debt markets are large enough to amplify a downturn. Unclear whether it would cause a downturn itself but the spillover effects could be significant.
The shifts we are witnessing bear watching. Not all private debt is equal and there are vigilant lenders.
PIK or payment in kind, which allows borrowers to pay existing debt with more debt is ⬆️.
We do not know how these debt instruments will perform in a recession. A recent Bloomberg article suggested that about a third are software companies, which have been roiled by advancements in AI.
Losses That ups the risk of abrupt changes in valuations that shock investors.
Rapid growth in private debt was a regulatory arbitrage, as these investments do not face the same level of scrutiny as other forms of debt.
They tend to be more price sensitive than institutional investors.
Redemption requests are ⬆️, further straining cash flow. These are gated investments, meaning that early withdrawals can be capped or denied.
Asset valuations are often stale. can be rapid - like a straw on a camel’s back.
The BDCs require less bank capital than other loans, which is another issue to watch. They are more profitable until they are not.
The democratization of access to alternative investments has supercharged the funds going into private debt offerings via retail investors.
Some est put global private debt markets in the $3 -$4 trillion range, with the US accounting for 60%-70% of that total.
Banks issue debt in this market via Business Development Corporations.
These debt markets are opaque. We do not know many of the loan terms, covenants, valuations & performance of borrowers. That limits the ability of investors & regulators to see and value their performance. We do not even know the actual size.
Private debt markets have been struggling for some time. These are nonbank lenders, largely in the private equity space, although they do rely upon bank credit.
This is one of many fragilities in the financial market and the economy more broadly.
The reasons span host of issues & is worrisome.
That leaves Gov Miran, who has resigned from his post at the White House and holding the vacant board seat for the nominees to replace Powell as Chair as the sole dissent in March. Slight chance of dissent by Gov Bowman, but she held back after arguing for another cut in January.
If that holds, we will likely see dissents against a pause drop to one - @federalreserve.gov Gov Waller argued earlier in the week he was a coin toss away from supporting a pause, dependent on the PCE and employment data. This data could keep him on the sidelines of a dissent in March.
That is one aspect of the Federal Reserve’s decision to pause at its meeting in March. Another one will be the employment report due out next week.
The Chicago Fed unemployment rate now forecasts came in at a little below 4.3% in February, the same as January.
…the fact that many of its components are automated in terms of prices collected and not subject to the staffing shortages and disruptions that plagued the Bureau of Labor Statics.
The PCE measure of inflation, which incorporates inputs from both the PPI and the CPI is now poised to come in hot.
…hit a record high.
That means more price hikes than were recorded by the CPI were made. Staffing shortages and the disruptions due to the six week government shutdown last year, meant that we lost most of the CPI for Oct and some for Nov.
The PPI is currently more accurate than the CPI due…
Red hot wholesale price index in January. My colleague Meagan Martin-Schoenberger posted it to her linked in page. Hottest core goods (ex energy & food) since early 2022 when inflation soared.
Profit margins, with exception of vehicles, which have absorbed tariffs via margin losses & layoffs…
Me, Charlie & Dan Clifton
Note: In my prep call for the meeting, Dan had said he would address that the State of the Union could be used to air the president’s discontent with the elections & talk more about his grievances on that.
That is a very large concern for different groups - across partisan affiliation. This is not a new issue but it is one that has gotten worse since the turn of the millennium, which leaves doubts about rule of law, a key tenant of the economy.
My questions were not refreshing during the program but a lot people asked me about interference in the elections.
