Volatility, Hawkish or Dovish Which is better

& Other Economic News

for the Week Ending 12-3-2021

The yield curve flattened further as the short end held firm, while the 10-yr yield plunged to 1.35% and the 30-yr to 1.68%. Fed chair Powell’s Senate testimony surprised markets by implying a potentially quicker path for tapering and eventually rate hikes, even in the face of the omicron variant as he restate his position on inflation not being transitory.

U.S. private sector job growth was robust in November, with the ADP report coming in above estimates at 534K, but NFP disappointed with only a 210K rise in payrolls, less than half the growth estimate, despite the unemployment rate falling more than expected to 4.2%. But these numbers should be taken with a grain of salt as many people that were working pre pandemic have left the workforce and are part of the calculations

In other news, U.S. ISM Manufacturing PMI ticked up to 61.1 in November from 60.8 as new orders and production both rose, while the services PMI registered another all-time high of 69.1 as strong demand was boosted by some easing of supply bottlenecks. Consumer confidence fell to a 9-month low on rising prices and pandemic concerns, with the Conference Board’s reading sliding to 109.5 from 111.6. Despite rising mortgage rates pending home sales jumped 7.5% in October as buyers flooded back in

Climate

The focus these days is on inflation and the potential fallout from the new strain of COVID called omicron. Experts acknowledge that it may take a couple of weeks or more to collect and study the data to determine how much of a danger omicron could present to the U.S. and the globe. In his Senate testimony at the end of November, Federal Reserve (“Fed”) Chairman Jerome Powell admitted that inflation will not be transitory and that the Fed will be discussing the potential for accelerated tapering of its monthly bond purchases and timing of any 2022 rate hikes.

Do not be surprised if volatility in the markets rises in the months ahead. With respect to risk taking in general, one of the barometers we favor is M&A activity. The idea is that if CEOs are willing to assume risk in a given climate, shouldn’t investors at least consider it? S&P Global Market Intelligence reported that global mergers and acquisitions (M&A) activity totaled $1.170 trillion in Q3'21, up 13.7% from Q2'21's total and up 32.0% year-over-year, according to its own release. It marked the fourth consecutive quarter in which activity topped the $1 trillion level. Year-to-date through September 2021, global M&A activity totaled $3.284 trillion, up from $1.787 trillion over the same period a year ago. For now, it is risk-on for CEOs

Dovish / Hawkish

There are two terms that have been thrown around the last several weeks and we realized that many of our readers may not fully comprehend what these terms mean in the world of finance/economic so below is an explanation

What does Dovish Mean?

A Dove refers to an economic policy adviser (in the U. S. it is used to describe nominees and members of the Federal Reserve Board of Governors) who advocates for monetary policies involving low-interest rates, since they believe that it encourages economic growth. They argue that an increase in economic growth leads to a high rate of borrowing among the consumers, which encourages spending and promote economic growth

A dove argues that inflation isn’t bad and that it is bound to have few negative effects on the economy. Basically, they believe that monetary policies that keep low-interest rates have a positive effect on the overall economy of a nation.

What Does Hawkish Mean?

A Hawk (can be used in varying contexts. Primarily a Hawk has a specific focus different from others) so we will specify the definition for an “Inflation Hawk”. This is a policymaker who believes that monetary policies should maintain high-interest rates to curb inflation. Hawks are generally not concerned with economic growth but, support an economy operating at a level below its full-employment equilibrium. So, Hawks view inflation as a top priority and high-interest rates as a check for inflation. There are consequences with both of these ideologies as not one is perfect. Source:https://thebusinessprofessor.com/en_US/economic-analysis-monetary-policy/dove-monetary-policy-definition

Dealing with China

If we look at the growth of China as an economic power over the last 50 years, we cannot help but be amazed, to an extent. The amount of development has been astonishing, but if we look closer you have to question how it is possible. The country has multiple ghost cities whose skylines are filled with vacant high-rises, mostly built by Evergrande. In any other country, a company like Evergrande would never get that far, Banks would have ceased development by the 3^rd structure.   

Companies and governments around the world are left trying to figure out how to engage with a country whose economy is approaching America’s in size and whose military is becoming more assertive.( We will see what happens with Taiwan) Data from the International Monetary Fund suggests that the nation will drive much of the world’s growth over the next two years.

China’s Communist Party has long maintained tight control over information, and the effort has intensified under leader Xi Jinping. The country has become increasingly opaque over the past year, even as its presence on the world stage grows. This is leading to an elevated level of mistrust throughout the international community.

A new data-security law has made it harder for foreign companies and investors to get information, including about supplies and financial statements. Several providers of ship locations in Chinese waters stopped sharing information outside the country, making it hard to understand port activity there. Chinese authorities have restricted information on coal use, purged documents related to political dissent cases from an official judicial database, and shut down academic exchanges with other countries.

“China has always been a big black box,”. The diminishing access to information is making it even harder for foreigners to understand what’s happening in the country, and that black box is becoming even blacker. It feels like Xi Jingping is trying to rule the world

Source https://www.wsj.com/articles/china-data-security-law-ships-ports-court-cases-universities-11638803230?mod=hp_lead_pos5

U.S Boycotts Winter Olympics

The Biden administration won’t send U.S. officials to attend the coming 2022 Winter Olympics in Beijing, staging a diplomatic boycott that drew immediate criticism from China.

The decision to withhold official U.S. representation at the Olympics was made several weeks ago, though administration officials waited to make the announcement to allow some time to pass after a phone call last month between President Biden and his Chinese counterpart, Xi Jinping, to stabilize tense relations. While such a boycott would keep U.S. officials from attending the games, the move wouldn’t affect participation by athletes. Source : https://www.wsj.com/articles/u-s-wont-send-officials-to-beijing-winter-olympics-11638801009?mod=hp_lead_pos12



Observations on Data

Total employment is still 2.2 million jobs lower than pre-pandemic levels (February, 2020), but is healing. Other characteristics are still not as good including part-time but wanting full-time, the number of discouraged workers, the length of time of unemployment, and those that couldn’t look for work due to pandemic issues.

The “shortage” scare has pulled holiday shopping demand forward. The National Retail Federation’s (NRF) survey revealed that 61% of shoppers started their holiday shopping early (hence the uptick in October Retail Sales). While November sales were up Y/Y, Black Friday sales were slightly negative Y/Y while Cyber Monday was flat. Again, according to the NRF, in 2021 there were 180 million shoppers in the Thursday-Monday holiday weekend in 2021, compared to 186.4 in 2020 and 189.6 in 2019. WSJ 12/1/21 B3 "Fewer Shop During Long Weekend.” We suspect Retail Sales for December will disappoint. Source Bob Barone P'hD Economist 

https://www.wsj.com/articles/fewer-people-shopped-over-thanksgiving-weekend-than-last-year-11638298736?mod=Searchresults_pos1&page=1

Commodity prices are falling. From their peak: Iron Ore: -57%; Lumber -54%; Soybeans: -26%; Steel -25%; Corn -23%; Natural Gas -22%; Oil -16%; Copper -10%; Aluminum: -16%; Lead -7%.

The Consumer Confidence Indexes are falling (Conference Board: 109.5 November vs. 111.6 October revised down from 113.8) with intentions to buy cars and homes at 50 year lows according to the University of Michigan. This is one of our biggest concerns.

While the media still blames the inflation on shortages and on wage gains, the data says otherwise. The majority of the wage gains have been in the lowest paying sectors which haven’t moved the needle much on unit labor costs. For the non-financial business sector, those unit labor costs have fallen -0.1% Y/Y (up +1.9% in Q2 and +.2% in Q3). But prices charged are up 5.1%, the fastest pace of price growth in 40 years and 5.2 percentage points above the growth in their costs (was 7.3 pct. points in Q2). Such fat profit margins won’t last when demand softens.

Much of retail spending appears to have come from bloated savings, a function of the ‘helicopter” money from earlier in the year. The October savings rate declined to 7.3% from 8.2% in September and 10.6% in July. Had the savings rate stayed at the July level, consumer spending would have been negative. Thus, consumers are spending more than they earn, a condition that can’t last. We are still seeing the impact of the free money.

The data says that the causes of the current “inflation” are, indeed, “transitory’ (despite Powell’s statement that the Fed will no longer use the term).

Market volatility (both equity and fixed income) has risen. We believe it will be with us for the foreseeable future. We are predicting Slower growth in 2022. Are the markets are sending a signal? 

Changing Behaviors

Millennials are finally growing up and embracing one of the cornerstones of adulthood “writing a will”.

Lawyers and financial advisers are hearing more frequently from younger people who want to get their affairs in order should they die unexpectedly. Thirty-two percent of the adults under 35 who wrote a will said it was because of the Covid-19 pandemic, nothing like a good social scare to wake you. This comes from an online LegalZoom. Caring.com, a senior-care referral service, said about 27% of 18- to 34-year-olds had a will in 2021, compared with 18% in 2019.

The largest factor driving the increase in millennials’ will writing is continued uncertainty of whether they or their family will get sick. Also driving interest, say lawyers and financial advisers, are events millennials haven’t experienced before, such as sharply rising inflation. Source:https://www.wsj.com/articles/millennials-feeling-their-mortality-during-covid-19-start-writing-their-wills-11638799200?mod=hp_featst_pos4

The Week Ahead

December kicked off with some fireworks, and the rest of the month looks poised for more volatility as opposed to the seasonal good cheer investors have come to expect. Although the Senate cleared a spending bill late Thursday, the debt ceiling extension still looms at mid-month along with the final FOMC meeting for 2021. This week the main U.S. events include Treasury auctions, which did not go well the last time around, and the JOLTS job openings report on Wednesday. CPI drops on Friday and is expected to cool slightly amid the busy holiday shopping season, while a small uptick in consumer sentiment is anticipated. On the international calendar, China headlines with inflation data and trade balance numbers. Central bank decisions are forthcoming from Australia late Monday and Canada on Wednesday. Both countries reported better than expected GDP data last week. Europe is relatively quiet outside of economic sentiment releases on Tuesday.

This article is provided by Gene Witt of  FourStar Wealth Advisors, LLC (“FourStar” or the “Firm”) for general informational purposes only. This information is not considered to be an offer to buy or sell any securities or investments. Investing involves the risk of loss and investors should be prepared to bear potential losses. Investments should only be made after thorough review with your investment advisor, considering all factors including personal goals, needs and risk tolerance. FourStar is a SEC registered investment adviser that maintains a principal place of business in the State of Illinois. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about FourStar’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov/