All week it felt like we were in a holding pattern waiting for Fed Chairman Powell’s comments at the Jackson Hole meeting that kicked off today. A collective holding of breath so to speak. He didn’t say much new, as we cover below, but it was enough to trigger a sell-off on Friday and push most of the indexes into the red for the week.
In terms of economic data, there were a couple key reports. First, the Fed’s favored measure of inflation softened a bit in July. Prices were off slightly month-over-month, but are still up significantly year-over-year. This is pretty much as expected after the CPI release a couple weeks ago.
Secondly, new home sales continued to slow and inventory levels are soaring nationwide. Sales fell 12.6% in July month-over-month and are down roughly a third from a year ago.
Inventory levels are up, particularly for those homes under construction (blue line below). Part of what is driving this number higher is the buyers getting cold feet and backing out of existing contracts.
Remember, this is for new homes. Historically, there’s been a pretty close correlation between new and existing homes as you can see below. We should expect much higher existing home inventories in the months to come if this relationship continues to hold.
Powell Keeps it Short but Sweet
But as we mentioned at the beginning, the focus of the week were Powell’s comments on Friday.
At the end of the day he didn’t say anything really new. He simply pushed back against the idea that the Fed would be easing policy next year. Key comments included:
– “…the historical record cautions strongly against prematurely loosening policy.”
– “Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions.”
– “…estimates of longer-run neutral are not a place to stop or pause.”
– “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”
Finally, the key quote:
“The successful Volker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.”
Of course, what else was he going to say? But it sends a pretty strong signal that even if growth falters, we shouldn’t expect rate cuts in 2023, at least based on what we know now.
Europe’s Power Crisis
We won’t bury the lead on this one – European governments are going to have to bailout power consumers this year and next. There’s no other way around it.
The chart below shows French and German electricity prices for delivery one year from now. They were up 25% on Friday. Not this week…not this month…just on Friday!!
We also shouldn’t forget that most oil transactions are priced in dollars (expect maybe for the Russian crude being sold to Turkey and China). As a result, the weak euro has pushed up the euro cost of oil to all-time highs. That would be like oil trading at $170 or $180 in the U.S.
It doesn’t take a genius to think this isn’t sustainable. Now granted, the electricity chart shows the pricing in the forward markets. Trading liquidity is probably thin and this means prices can overshoot. But we are already starting to see meaningful retail price hikes:
Again, this isn’t sustainable. What democratically elected politician wouldn’t step in to help voters?
There is almost certainly more where this came from. Government fiscal spending is going soar this year and next in Europe.
The good news is that Europe isn’t facing a shortage of energy. As you can see below, natural gas storage levels are generally at or above targets. It’s going to be an expensive winter in Europe, but at least the lights and heat should stay on.
Charts We Found Interesting
1. Powell is talking a hawkish game…but the market is pricing in a big inflation slowdown.
2. There aren’t many new homes under 300K anymore.
3. Tuition inflation since 1978. It’s not clear that loan forgiveness fixes this.
4. The global population is on track to hit 8bn sometime this year. Two things striking in the chart below: 1) global population was only 2 billion in 1950 (no wonder you could find parking then!!), and 2) based on one forecast we may be under 8bn by 2100.
5. Why the lower population estimate? #1 – plummeting birth rates in China.
6. #2 – What happens with fertility rates in Africa? Depending on your assumption, Sub-Saharan Africa’s population could be between 3bn and 6bn by 2100.
7. Will the last person leaving Hong Kong please turn out the lights?
8. No more gasoline car sales in California by 2035? Today the electric/hybrid share of new sales is 30%.
Have a good weekend.
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