Market comment 2022

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The European Central Bank has called an "ad hoc meeting" for Wednesday morning as bond yields surge and investors dump southern European government debt. The meeting could conclude and statement could come around 7 a.m. ET, according to reports. In fact, the yield on Italy's 10-year government bonds reached 4.2%, the highest level since 2013 and up nearly 75 basis points in just five days, before falling back on word of the meeting (compare that to the 2.2% yield on German 10-year bunds). 

Could the ECB create a new bond-buying tool to contain the fallout as it embarks on a series of rate hikes to fight record-high inflation? From the FT, Morgan Stanley outlines three possible outcomes: 

1. More verbal intervention 
   
2. Reinvestment of the Pandemic Emergency Purchase Program: "The ECB could formally decide to activate PEPP reinvestment flexibility and start buying BTPs and Greek bonds. 
   
3. It may also announce a dedicated envelope." An anti-fragmentation tool: "The ECB could decide on a new program and announce its key features today. The program would likely only start some days after the announcement."
   

European Central Bank calls emergency meeting to discuss market turmoil (NYSEARCA:FXE) | Seeking Alpha

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Not there yet..

The S&P 500 on Tuesday ended down 22.1% from its Jan 3 record peak. The average decline for bear markets since 1946 has been 32.7%, according to investment research firm CFRA, which may suggest the current slide may have more room to run.

Some see few signs of a bottom in U.S. stocks, even after steep selloff | Reuters

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The problem with that story is that, rather than spiraling upward, wage growth has actually been slowing in recent months. The chart below shows the annualized rate of growth in the average hourly wage. The calculation is based on three-month averages, where it annualizes the rate of growth between three-month periods


Source: Bureau of Labor Statistics and author’s calculations.

As can be seen, the rate of wage growth has slowed sharply this year.[1] After peaking at an annual rate of 6.1 percent between the three-month periods centered on September and December of last year, it has slowed to an annualized rate of just 4.4 in the three-month periods centered on January and April of this year.

How Do We Get a Wage-Price Spiral When Wage Growth Is Slowing?

• You can't have a wage-price spiral without accelerating wages..
  

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In late summer 2021, during the Delta wave of the coronavirus pandemic, the American Academy of Physical Medicine and Rehabilitation issued a disturbing wake-up call: According to its calculations, more than 11 million Americans were already experiencing long COVID. The academy’s dashboard has been updated daily ever since, and now pegs that number at 25 million. 

Even this may be a major undercount. The dashboard calculation assumes that 30 percent of COVID patients will develop lasting symptoms, then applies that rate to the 85 million confirmed cases on the books. Many infections are not reported, though, and blood antibody tests suggest that 187 million Americans had gotten the virus by February 2022. (Many more have been infected since.) If the same proportion of chronic illness holds, the country should now have at least 56 million long-COVID patients. That’s one for every six Americans.[/url]

[url=https://www.theatlantic.com/health/archive/2022/06/long-covid-chronic-illness-disability/661285/]Long COVID Could Be a ‘Mass Deterioration Event’

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The big three inputs for the consumer price index, the most widely followed inflation measure, are food, energy and shelter. Combined, they make up about 54% of the CPI. More importantly, though, they are the main inputs into perceptions of inflation. Because going to the grocery store and filling up the gas tank are activities people do a lot, they tend to notice price fluctuations in them even more. That's particularly true for gas prices, although they actually make up only a small part of the household budget. "Those are the basics," said Tom Porcelli, chief U.S. economist at RBC Capital Markets. "That's what you have to spend money on. You have to spend money on shelter, you have to spend money on food, and most of us have to spend money on energy. [Inflation] represents a meaningful challenge for consumer spending."

Everyone knows inflation is on fire. This is what's really fueling it

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Fed Chair Jerome Powell’s explanation for the rate change was baffling. He claimed that the number of job openings in the economy pointed to “a real imbalance in wage negotiating” but also said that the labor market had practically nothing to do with inflation. He explained that headline inflation has soared largely because of supply-side issues, such as the war in Ukraine’s impact on the gas market, that the Fed can’t really do anything about. But he also insisted that the Fed had to up the ante on interest-rate hikes to bring down inflation by reducing demand. He insisted that he didn’t want to send the economy into a recession, but the Fed’s own economic forecasts project several consecutive years of rising unemployment—something that generally happens only in a recession.

The full story only barely holds together. In the Fed’s view, inflation is partially caused by the labor market, but also not caused by the labor market; it’s largely a supply-side issue that the Fed can’t fix, but the Fed is going to try desperately to fix it anyway; and we’re hopefully not getting a recession, but we’re probably getting a recession.

The U.S. Economy Is Confusing Everybody

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The Powell Fed now risks the opposite mistake. It is ignoring an accelerating contraction in real money growth: just as it did, lest we forget, before the Lehman crisis in mid-2008. Simon Ward from Janus Henderson says his early warning indicator - the growth of real six-month M1 (annualised) - turned steeply negative in the US early this year. It is much the same picture in the UK, Europe, and the largest emerging economies, bar China. He says the current rate of contraction of "real narrow money" in the G7 bloc has occurred just twice before over the last half century: in 1973 and 1979, both on the cusp of severe recessions. Furthermore, the rate of contraction of ‘broad’ M3-M4 money is even faster today in real terms than during those episodes.

The US recession is here, and central banks are still fighting the last war

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Chips Ahoy!
The law of unintended consequences is being played out again in the US-China tech rivalry with American sanctions against national champions like Huawei fueling the rise of homegrown chip companies. Nineteen of the world’s 20 fastest-growing chip industry firms over the past four quarters, on average, hail from the world’s No. 2 economy, according to data compiled by Bloomberg. That compared with just eight at the same point last year. China-based suppliers of design software, processors and gear vital to chipmaking are expanding revenue at several times the likes of global leaders Taiwan Semiconductor or ASML.

In 2020, the US began restricting sales of technology to companies like SMIC and Hangzhou Hikvision, successfully containing their growth — but also fueling a boom in Chinese chip-making and supply. They are not names you’ve probably heard of: There’s C*Core Technology, whose sales quadrupled, and Cambricon Technologies, which reported a 144% jump in sales growth.

The rise of indigenous names has even caught the attention of some of the pickiest clients. Apple was said to consider Yangtze Memory as its latest supplier of iPhone flash memory.

At the heart of Beijing’s ambitions is the impetus to wean itself off a geopolitical rival and more than $430 billion worth of imported chipsets in 2021. 
“If Beijing develops durable advantages across the semiconductor supply chain, it would generate breakthroughs in foundational technologies that the US cannot match,” former Google chief Eric Schmidt wrote in a Wall Street opinion piece, arguing that America should do more to attract overseas chipmakers to build plants on its territory as a matter of national security.

US Sanctions Helped China Supercharge Its Chipmaking Industry - Bloomberg

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The current work model that rewards extremely long workweeks is outdated, unmanageable, and is a contributing factor to the ongoing gender gap, making it a particularly important issue at a time when many women have left the workforce. Decades of progress made by women in the workplace was reversed in the wake of Covid-19. As of February 2021, just one year into the pandemic, 2.3 million women had dropped out of the labor force. Globally, women lost $800 billion in income. The old-school work model forced women – most often the caretakers – to leave their jobs at a rate almost twice to that of men. And the trend remained throughout the pandemic. In August 2021, 41,000 women left the workforce, while 139,000 men joined in the same month, according to a report from the National Women’s Law Center, which estimated that at this rate it would take near a decade for women to make up the lost jobs.

Nobel winning economist: World of long work hours ripe for revolution

• There is a need for more labor supply and here is one way to address that. And then there is this:
  

At The Leadership Now Project, a group of business leaders and academics pushing corporations to address threats to democracy, CEO and cofounder Daniella Ballou-Aares worries that the DeSantis-Disney dispute in Florida, and the looming battle between some states and corporations over abortion, signify a growing problem that's more common in emerging markets than in this country: the risk of retribution from an unstable government. "Fortunately, the U.S. has been seen as a very low political risk environment where you don't need to prepare for those things," she said. "But unfortunately, what we're seeing now is the U.S. is becoming a higher political risk environment. That is terrible for international capital flowing to this country."

As decision on Roe v. Wade looms, states weigh the economic cost of abortion bans

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Previous research explained that when wage gains lag inflation, workers seek larger raises to make up for that shortfall, a phenomenon likely to fuel a wage-price spiral. But in a recent paper, the five authors — Jose Maria Barrero, Nicholas Bloom, Steven J. Davis, Brent Meyer, and Emil Mihaylov — say U.S. workers are willing to trade off some wage gains for the convenience of working at home, offsetting some of the inflationary pressures on employers. Through surveys, they found that employers the shift to more remote work is moderating employers' wage-setting behavior. The data imply a cumulative wage-growth moderation of 2.0 percentage points over two years, they said. However, the amenity-value of the gains associated with the increase of remote work also reduces labor's share of national income by 1.1 percentage points, they said.

Work-from-home could ease pressure on inflation, according to new research (NYSEARCA:WFH) | Seeking Alpha