The Bond Vigilantes Are Fighting The Fed

After today’s PPI, we won’t be surprised if Fed officials plant a story in The Wall Street Journal over the weekend titled something like “Fed Officials Might Vote To Pause Rate Cutting Following Hot Inflation Data.” The current consensus seems to be that the Fed will cut the federal funds rate (FFR) by 25bps on December 18. But it might be a “hawkish cut” with the FOMC’s Statement and Summary of Economic Projections signaling a pause in rate cutting early next year.

If so, then Fed Chair Jerome Powell will amplify that signal at his December 18 presser. He certainly sounded somewhat less dovish on November 14 when he said, “The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” (…)

The Fed cut the FFR by 75bps since September 18. Two days before that happened, the 10-year US Treasury bond yield was 3.62% (chart). It has increased 70bps since then to 4.32% today. We anticipated that the Bond Vigilantes might fight the Fed because the economy is strong and inflation might stop moderating north of 2.0% because the Fed is easing too much, too soon. Another rate cut next week might push the bond yield higher, again.

The 10-year bond yield was up another 6bps today after the latest auction of 30-year Treasuries found lukewarm demand following the release of November’s hot PPI report. Consider the following:

There were large upward revisions to previous months and November’s 0.4% m/m increase boosted PPI final demand to up 3.0% y/y (chart). That’s its highest since February 2023, and a stark difference from September’s originally reported 1.8% y/y increase. PPI services rose 3.9% y/y, another multi-month high. Revisions were so substantial that August’s PPI services actually rose 5.8% y/y after being initially reported as up 2.6% y/y. (…)

The labor market still looks solid, in our opinion. Today’s unemployment claims report showed initial jobless claims rose 18,000 to 242,000 in the week ended December 7. That was likely due to Thanksgiving Day falling later in November this year, as it matches the increase seen the prior week a year ago. Continuing claims rose 15,000 t0 1.871 million for the week ended November 30. It’s taking slightly longer for unemployed workers to find jobs, but we do not see major concerns in the labor market.

This “data dependent” Fed last summer ditched the inflation fight to focus on the labor market with a particular emphasis on the unemployment rate which had been rising from 3.4% in April 2023 to 4.3% (actually 4.253%) in January while core PCE inflation receded from 4.8% to 2.7%.

Three rate cuts later, the data is not collaborating: the u-rate is back to 4.3% (actually 4.246%) and inflation has stabilized just under 3.0%, still far from the 2.0% goal, and threatens malign stubbornness.

Meanwhile, consumer demand, 70% of GDP, remains very buoyant (see yesterday’s Consumer Watch and below) but corporations seem to be riding the productivity wave. Both the manufacturing and servicing PMIs recently indicated that employment is not keeping pace with strengthening order books.

The recent unseasonal rise in unemployment claims has been blamed on strikes, hurricanes and Thanksgiving (?) but Indeed Job Postings, after stabilizing in summer, have resumed their downtrend through December 6, something Ed Yardeni has not spotted yet.

A strong and strengthening economy, rising unemployment and stubborn inflation in spite of solid productivity gains are really complicating the Fed’s assessment.

The bond market is keeping it simple: strong demand, a lenient Fed and stubborn inflation risk, with tariffs coming next year, suggest caution on duration.

CONSUMER WATCH

Following on Bank of America’s yesterday spending update, Placer.ai confirms a shopping-minded consumer:

• Malls traffic was up 4.6% in November.
• Simon Property Group also reported that traffic was up 5.9% YoY on Black Friday followed by +6.3% on Saturday and +8.2% on Sunday.
• SPG’s retailer sales productivity on a TTM basis was $737 in 3Q24, 8.4% above the $680/sq. ft reported in 3Q19.

Some service providers have little problems raising prices:

YouTube TV will raise prices by $10 a month (+13.7%) starting in January, bringing it up to $82.99.

Data: Axios research. Chart: Axios Visuals

YouTube TV’s price now rivals what a traditional cable package costs, per industry trade group CTAM.

ECB Prepared for Quarter-Point Rate Cuts at Next Two Meetings

European Central Bank policymakers expect to cut interest rates by another quarter point in January and probably also in March as inflation stabilizes at the 2% target and economic growth remains sluggish, according to officials familiar with their thinking.

A gradual approach to lowering borrowing costs is the most appropriate path forward provided the economy develops in line with current expectations, the people said, asking not to be identified discussing private conversations.

A larger, half-point reduction remains an option in case of emergency, they said. But they stressed that such a step risks conveying an unintended sense of urgency. (…)

They highlighted that preferences might change once there’s more clarity over Donald Trump’s policies after he takes office again in January. (…)

The ECB cut for the fourth time this year on Thursday, taking the deposit rate to 3%. Economists surveyed by Bloomberg before the decision expected consecutive steps at every one of the Governing Council’s four policy decisions through June. That would leave the benchmark at 2%. Markets price a more aggressive outcome.

• Europe’s Rates Head Lower in Readiness for Another Trump Era

Europe’s central banks are taking a determined dovish turn to aid economies bracing for more disruption from Donald Trump’s second stint in the White House.

Decisions by policymakers in Frankfurt and Bern on Thursday to cut interest rates left little doubt over the prospect of possible future easing to cushion the effect of unknowns ranging from trade tensions to geopolitically stoked currency volatility.

Most drastic was the Swiss National Bank’s surprise half-point reduction to 0.5%, further undoing constriction to reach a level last seen in September 2022, when officials ended almost eight years of subzero monetary policy. (…)

Angst about the regime change in the White House is apparent elsewhere too. Canada’s central bank, cognizant of the danger of higher trade tariffs from its southern neighbor, cut by a half-point on Wednesday.

Brazilian policymakers, fresh from currency gyrations amid fiscal turmoil and Trump’s threat to BRICS members not to challenge the dollar’s dominance, later raised their own rate by 100 basis points. (…)

The ECB, meanwhile, changed the language of its statement to show it no longer wants to restrict the economy, also unveiling wholesale cuts to its 2024-2026 growth projections. Officials now see the euro-zone economy expanding just 1.1% in 2025, down from 1.3%, with Lagarde adding that risks to the outlook are “to the downside.” (…)

• German Economy Will Hardly Grow in 2025, Bundesbank Says Bundesbank lowers forecasts significantly from June outlook

Gross domestic product will fall by 0.2% in 2024, it said Friday — slashing a June prediction for 0.3% growth. Output will expand by just 0.2% in 2025, rather than the 1.1% seen earlier, and could even fall if US trade tariffs materialize.

“The German economy is not only struggling with persistent economic headwinds, but also with structural problems,” Bundesbank President Joachim Nagel said, highlighting the industrial sector in particular. “The labor market, too, is now responding noticeably to the protracted weakness of economic activity.”

The forecasts worsen an already gloomy outlook for Europe’s biggest economy as long-standing struggles among its industrial and car giants are compounded by political turmoil before snap elections in February and the dangers posed by Donald Trump’s return.

The Bundesbank expects the economy to stagnate this winter and only begin to slowly recover during next year. For 2026 and 2027, it forecasts growth of 0.8% and 0.9%.

Risks are to the downside, however, specifically from Trump’s policies. Germany’s “strong reliance on exports makes it particularly vulnerable to the decline in foreign demand resulting from the global trade losses triggered by the restrictive trade policy,” the Bundesbank said.

Overall, economic output in 2027 could be 1.3%-1.4% below the baseline scenario due to a US policy shift, the report said. According to different models, a trade conflict could even cause German GDP to stagnate or shrink again in 2025.

Nagel has warned in the past that Trump’s levies could cause another GDP contraction in 2025. (…)

• UK economy unexpectedly shrinks by 0.1%

Canadian households are coping with their debt loads surprisingly well

For the first time since the Bank of Canada began raising interest rates in 2022, total interest payments made by households declined on a quarterly basis as the bank’s recent string of rate cuts delivered much-needed relief to borrowers.

At the same time, household indebtedness relative to incomes dropped again in the third quarter, continuing a trend that began at the start of 2023.

It all suggests Canadians have managed their finances reasonably well, despite concerns going into the rate-hike cycle about their heavy debt loads. (…)

Meanwhile, debt loads became more manageable. For every dollar of disposable income Canadian households earned, they held $1.73 in credit market debt, which includes consumer credit, and mortgage and non-mortgage loans. Except for the early months of the pandemic, that’s the lowest the debt-to-income ratio has been since the end of 2015.

Rising incomes have been key to the improvement in household finances. Disposable income grew 2.3 per cent in the third quarter, and that helped push the household saving rate to a three-year high of 7.1 per cent, Statscan said.

While the higher savings rate also reflects a pullback by Canadians from discretionary spending – a fact that explains some of Canada’s sluggish economic growth – those savings are a potential buffer for homebuyers who took out mortgages during the height of the pandemic when interest rates were close to zero and face much higher payments as their mortgages reset over the next two years.

There are still reasons to be cautious. While rate cuts have helped most borrowers, rising incomes have disproportionately benefited the top 40 per cent of earners, leaving lower and middle-income households still strained in that respect. But economists are optimistic household finances in general have turned a corner. (…)

MEMORIES…

This chart reminds me of how miserable I was in 1999. Even a “garp” (growth at a reasonable price) investor like me was feeling the pinch. I had been outperforming for 11 consecutive years but I quickly became labeled as out-of-date during the dot.com years… until 2000 and 2001. Maybe that can help lift some spirits….

The S&P 500 tech mega-cap concentration makes it difficult to outperform the index.

Source: @DayHagan_Invest

November CPI: Going Nowhere Fast

November’s CPI report delivered more evidence that progress in lowering inflation has stalled. Consumer prices rose 0.3%, pushing the 12-month change up to 2.7%. While a pickup in prices for food and gasoline contributed to the headline’s strength, excluding food and energy price growth also remained firm.

The core index advanced 0.3% for a fourth consecutive month.

Deflation among core goods showed further signs of petering out, prices rose 0.3%, which was the largest gain in a year and half. While much of the recent pickup can be traced to vehicle prices (used autos +2.0% and new vehicles +0.6%), the remaining core goods prices also edged higher over the month and are now little changed over the past year.

This mild reflation in core goods prices has offset the gradual, ongoing slowdown in core services inflation that has taken place in recent months.

Disinflation among core services remained painstaking slow despite a notable moderation in primary shelter inflation. Core services prices rose 0.3%. Both rent of primary residences and owners’ equivalent rent registered their smallest monthly increase in three and a half years, but expectations for the downward trend in this component to kick into faster gear has been widely anticipated. (…) However, price growth for medical care services, the second largest component of the core index behind shelter, rose 0.4%. Meantime, recreation services were up 0.7%, which also limited the overall deceleration in services prices.

Source: U.S. Department of Labor and Wells Fargo Economics

Core CPI inflation has been stuck between 3.2% and 3.3% since June. The lack of further progress comes as key categories are no longer rowing in the same direction, and fewer categories are seeing outright deflation.

Food and energy inflation is no longer subsiding after commodity prices have been range-bound for more than a year now. (…)

  

Source: U.S. Department of Labor and Wells Fargo Economics

Here’s Goldman Sachs’ 6m annual change chart:

The Powell “supercore” measure (services ex-energy/rent) also was +0.34% MoM for back-to-back months, though the YoY pace, while still lofty at +4.3%, did recede a touch from +4.4% in October.

John Authers offers some interesting charts:

Within services, both the Fed’s recently targeted “supercore” (services excluding shelter), and shelter itself have ticked up on a year-on-year basis. Shelter price rises fell over the last year but remain at about 5%, while the supercore bottomed a year ago. It remains above 4%.

There is more irritating news from specialist statistical metrics. The Cleveland Fed’s trimmed mean, excluding the greatest outliers in either direction, ticked up and remains just above 3%. Its measure of median inflation, and the Atlanta Fed’s on sticky prices that are hard to reduce, edged down but are only just below 4%. The mission is still not accomplished:

Blitz also offers his diffusion index of the proportion of CPI components where the three-month rolling average inflation is higher than the 12-month rolling average. It shows with minimal ambiguity that disinflation is over:

This is helping:

OPEC+ Supply Delay Won’t Prevent Oil Glut Next Year, IEA Says Group’s revised plans would leave 1.4 million-barrel surplus

(…) Even if OPEC+ cancels next year’s hikes entirely, there’ll still be an overhang of 950,000 barrels a day. (…) Global oil consumption will grow by 1.1 million barrels a day in 2025, or roughly 1%, according to the Paris-based IEA, which advises major economies. But it projects that supplies outside OPEC+ will expand by roughly 36% more, led by the US, Brazil, Canada and Guyana. (…)

The alliance has also struggled to ensure members abide by their agreed production limits. In November, they collectively exceeded quotas by a substantial 680,000 barrels a day, driven by the United Arab Emirates, Iraq and Russia, according to the IEA. (…)

OPEC’s secretariat in Vienna has retreated from its strongly bullish forecasts over the past few months, moving closer to the IEA’s more subdued outlook. OPEC has slashed projections for demand growth in 2024 by 27% in five consecutive monthly downgrades, with a reduction in its latest assessment on Wednesday the biggest so far.

But this is not:

CONSUMER WATCH

  Spending update: Resilient to the end

Consumers continued to demonstrate their resiliency, with no sign of waning in November and over the first few weeks of holiday spending. Bank of America aggregated credit and debit card spending per household was up 0.6% year-over-year (YoY) in November, after a 1.0% YoY increase the month before. On a seasonally adjusted (SA) basis, spending rose 0.1% month-over-month (MoM), rebounding from a 0.1% MoM decrease in October; the three-month seasonally adjusted annualized growth rate of spending was 2.3%. (…)

Importantly, this momentum carries across all income cohorts. Higher-income households’ spending in November continued to grow at a faster rate than for their middle- and lower-income counterparts, although this gap has narrowed in the past few months.

Wage growth is still a tailwind for the consumer. After-tax wage growth, based on Bank of America deposit data, for both lower- and higher-income households has cooled slightly since August, while middle-income wage growth is steadier. But, overall, after-tax wage growth remains solid for 2024.

Continued momentum in travel has been a theme of 2024 and this dynamic was on display again with record travel figures for the Thanksgiving holiday week (Monday through Sunday). The number of people passing through TSA checkpoints, a proxy for air travel, during Thanksgiving week was up 3% YoY over an already strong 2023 Thanksgiving week. Meanwhile, Bank of America card data shows that total gas transactions were up nearly 2% YoY, suggesting more consumers were also taking road trips. While gas purchases were up, spending was down 4% YoY on falling prices, providing a boost to consumers’ wallets.

(…) consumers are taking these [gas] savings and putting them towards experiences, with spending growth for services including restaurants up nearly 3% YoY in November relative to 2023.

And it’s not just the Thanksgiving holiday week that gave travel a boost. In fact, leading up to the Thanksgiving week, Bank of America customers spent 50% more YoY in Toronto when Taylor Swift’s Eras Tour was in town. Remarkably, this beat the spending lift from her summer concerts in Europe by 10 percentage points. (…)

Holiday spending was also up significantly in the two weeks around Thanksgiving (the Monday before Thanksgiving through the Saturday the week afterward) this year. Spending per household on holiday items rose a healthy 6.1% YoY compared to last year’s holiday period. While higher- and middle-income households outpaced, lower-income households still increased their spending by a strong 5.5% YoY.

Additionally, it appears consumers are increasingly looking online, either because of the convenience, or in search of bargains and deals (see: Is online spending creating new holiday hotspots?). Bank of America card data shows that online retail spending excluding gas, grocery, and restaurants during the two weeks around the Thanksgiving holiday was up 6.5% YoY, more than double the rate in 2023.

  

Will consumers’ impressive holiday spending give way to a more frugal New Year? We aren’t convinced. Alongside robust after-tax wage growth providing spending firepower, in our view, consumers do still have some capacity to tap ‘dry powder’ in the form of both savings and borrowing. This means they have resources to spend faster than their wages are growing.

One consideration here is the degree to which consumers continue to have elevated deposits. In Bank of America aggregated customer deposit data, savings and checking balances do still appear to be above 2019 levels, though have been falling gradually over time. These balances tend to have a seasonal pattern, for example increasing around April each year as tax refunds are received. The YoY decline indicates the drop is easing – likely in part because inflationary pressures have also eased. (…)

  

And, perhaps most fundamentally, after-tax wages have risen significantly since 2019, especially for lower-income households. This has allowed for a rise in both credit card and debit card spending, so that the share of total spending currently via credit card is not considerably higher than similar periods in earlier years. And the overall debt position of households as a percentage of income is not showing signs of deterioration. (…)

  

Per the Atlanta Fed, wages are up 4.3% YoY in November, down from 4.6% in August. Job switchers: +4.6%, unchanged since August.

The squeeze from inflation on “essentials” is easing amid steady wage growth:

And the “wealth defect” is still very much alive. The bond market is worried:

Especially with the Fed still cutting rates…

China Signals More Fiscal Stimulus, Rate Cuts to Boost Economy

China signaled further stimulus measures including raising its budget deficit in 2025 at a key economic meeting that sets policy priorities for the coming year.

Top officials led by President Xi Jinping also vowed to deliver rate cuts and lower the reserve requirement for banks during a two-day huddle of the Central Economic Work Conference in Beijing, according to China Central Television.

The latest pledges follow a commitment made at the December huddle of the decision-making Politburo earlier this week to pump more stimulus into the economy. It included the first shift in China’s monetary policy stance in 14 years to a “moderately loose” strategy, and signaled determination to support demand.

• Digging deep into the multiplier effect, many places have started a new round of consumer voucher distribution

Beijing will issue no less than 30,000 ice and snow consumption coupons, Changzhou, Jiangsu will issue 1 million yuan of 2024 “Su Xin Consumption·Welcoming the New Year’s Day” consumption coupons, and Xi’an will start a new round of consumption coupons… With the arrival of the year-end consumption peak season, many places have launched a new round of consumption voucher distribution activities to increase support for consumption areas such as catering, culture and tourism.

At 10 a.m. on December 7, the first batch of the third round of “Lepin Shanghai” catering consumption vouchers was issued on time, with four vouchers all offering a 30% discount. The vouchers were sold out in seconds. The first round of 40 million “Eat in Guangzhou” catering consumption vouchers issued on December 4 were all claimed within 15 minutes. (…)

Chen Qiang, manager of Haidilao Hotpot Shanghai Bund Store, said that judging from the data, the role of consumption vouchers in stimulating consumption has been steadily increasing. “Take our store as an example. The number of guests received on weekends has increased by 3 to 5 percentage points compared with the same period last year. About 15% of customers have shown and used consumption vouchers, which is about 5 percentage points higher than before.” Meituan data shows that driven by the “Enjoy Pudong” consumption vouchers, the amount of dine-in consumption in Pudong New Area in November increased by 19.8% month-on-month compared with October, and the average number of dine-in consumers per day increased by 10.8% month-on-month.

“The issuance of consumption vouchers can produce a ‘multiplier’ effect and drive economic activities on a larger scale. As a short-term stimulus measure, consumption vouchers will quickly boost consumer confidence, activate market demand, and at the same time drive the recovery and development of related industries. In particular, the current precise distribution of consumption vouchers in different fields and batches in various places will help guide consumption direction and optimize consumption structure.” said Zeng Fu’e, professor at the School of Economics and Management of Wuhan University. (…)

Voucher programs can help kickstart consumption but often only act as short term boosters if consumer confidence is not improving.

China Comes Out Swinging as Trump Trade War Looms Recent moves on Nvidia, critical minerals and drones signal the sort of retaliatory measures Beijing could use to hit back against U.S.

During Donald Trump’s first administration, China learned that it couldn’t match the much larger U.S. economy tit-for-tat when it came to tariffs, and quickly found other ways to try to inflict pain—often by borrowing from his playbook.

Now, as Trump’s second stint in office approaches, Beijing is brandishing an expanded arsenal of countermeasures that it is likely to draw upon as the president-elect threatens across-the-board tariffs and levies of as high as 60% on Chinese-made goods.

In recent days, Beijing has launched a regulatory probe into U.S. semiconductor champion Nvidia, threatened to blacklist a prominent American apparel maker, blocked the export of critical minerals to the U.S. and squeezed the supply chain for drones, offering clues into how non-tariff measures are likely to dominate China’s tool kit.

Because the U.S. buys so much more from China than the other way around—roughly three times as much—Beijing simply can’t hit back dollar for dollar when it comes to tariffs. Doing so would also risk exacerbating the myriad woes in China’s economy.

Instead, as with any fight against a larger foe, it pays to find unique points of leverage to exploit—with many of its efforts to inflict pain on the U.S. coming from Washington’s own strategies. (…)

Beijing’s warning to PVH [owner of the Calvin Klein and Tommy Hilfiger brands] came a day after the U.S. proposed a ban on the use of Chinese and Russian components in connected vehicles on U.S. roads. If placed on the list, PVH could be banned from selling to and buying from China—locking the company out of a fast-growing market that accounted for 6% of its global revenue last year. (…)

China continues to dominate the global supply of batteries and motors that small aircraft such as quadcopters and first-person-view drones need to fly. China supplies more than 90% of the magnets used in the motors that power missiles, ships, drones and satellites. Circuit boards are delivered faster and cheaper from China.

A Mavic drone from Chinese producer DJI—the world’s largest small-drone manufacturer and one designated as a national-security threat by the U.S. government—costs up to $4,000, while a comparable drone made elsewhere using non-Chinese components can cost up to $15,000, according to Yurii Poita, an analyst at Ukraine’s Center for Army, Conversion and Disarmament Studies.