The Fed knocked out inflation but prohibits claiming victory. Consumer prices fell 0.1% in December and wholesale prices fell 0.5%. Wholesale inflation – annualized six-month average – totaled 25% in June. At the end of 2022 it was pulverized: -5.5%. It was not magic. It was the heavy artillery. Above all, Jay Powell’s four 75-base-point shots. The markets sensed this – since October when first stocks and then bonds reversed their fortunes – but the war is not over and the Fed will take no prisoners. Pursue the annihilation of the rebelliousness of prices until they are returned to the pen of 2% stability. He has already rectified his inertia, but he still has to retrace the subtle pitfalls of the last mile.
Currencies frolic healthy, free from the pressure of the super dollar. Neither the yen needs interventions despite the fierce bets against the Bank of Japan. The Fed will raise short rates, but long rates are free. They do not rise even with balance pruning (QT), which operates on autopilot. And they walk 80 bps below their nervous “ceiling” of the cycle. But Wall Street is a hostage to the maneuver that the Fed has pending. Until the nominal wages are aligned – the central bank needs to reduce the current 5%/6% to no more than 4% – a counteroffensive from core inflation is a latent danger. And you will want to remove it. It is that given the relative scarcity of work, real wages will increase. The bear market will not be evicted until the operation is completed without causing further collateral damage.
Where is the recession? It is not known. The big banks did not see it happen. However, they are contemplating a slight stumble before the year is out. The Stock Market, it was commented, predicted it from the beginning of 2022. The “technical” recession of the first semester was a fleeting wink but it was cancelled. However, the last week brought shocking news. Retail sales fell 1.2% in December. And after reviewing the figures, another drop of 1% emerged in November. It is the deepest downturn since the pandemic. Could it be that the recession is now? The manufacturing industry accused the same one-two almost like a tracing. And the regional reports, including those for services, reflected a contraction throughout the second semester. But while output, demand and income suffer hardships and ups and downs, the strength of job creation keeps the economy on its feet. Tech companies compete to announce big layoffs but unemployment benefits last week plunged to 190,000, their lowest level since September. It is worth noting that the entire 2009/2020 expansion was deployed vigorously on a step always above 200,000.
Thus, the Fed will not change its plans. The Stock Exchange knows it. That Governor Waller, on Friday, anticipated his preference for a 25 bps rate hike on February 1 had a positive effect. And a week of declining sentiment ended with a strong rebound, led by the Nasdaq. The fact that the central bank persists in the adjustment will not be so detrimental when it is thought that it will be necessary to accommodate the reinsertion of China to full activity. Monetary policy will have to take care that this is not a resurrection of inflation, just a change in relative prices. In that intelligence that 2023 may be better than 2022 is not in dispute. “It’s not as bad as we feared two months ago,” conceded Kristalina Georgieva, the IMF’s managing director, in Davos. Of course, the bull market can wait. If the recession turns into a mild setback, it would be said that, strictly speaking, the upward trend started in October, although its official consecration is delayed. In short, there will be no change in the cycle without a lasting defeat of inflation. And it is well worth extending the vigil if it facilitates the impeccable finish of the task.
The benefits have already started to flow. The sharp drop in wholesale inflation, below consumer inflation, is the platform for rebuilding business profit margins, after a long journey of continuous erosion. If the prices are slowed down by the zeal of the Fed, it is not necessary to strengthen the foundations. Sooner or later they may be invoiced. The verve of bitcoin -which takes advantage of its location off the systemic radar- does not stop emphasizing it.
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