Report 'SVET Markets Weekly Update (August 22, 2022)' by rate3 at 23 Aug 2022

SVET Markets Weekly Update (August 22, 2022) Source

Week 34 brings to markets the monthly updates of four macroeconomic indicators closely watched by market analytics: on the state of the US consumers and businesses long-term expenditures in July, both produced by the US Census Bureau (CB) — the New Home Sales released Tuesday, August 23 at 10.00 AM EST and the Durable Goods Orders published Wednesday, August 24 at 8:30 AM EST.

It is supplemented by the US Bureau of Economic Analysis (BEA) publicizing on its home page two other notable macro-parameters updates: the GDP Growth Rate made public on Thursday, August 25 at 8:30 AM EST and Personal Income / Spending reports to be issued Friday, August 26 at 8:30 AM EST.

The preceding week’s US real estate industry reporting, including the National Association of Realtors’ Existing-home sales indicator falling 5.9% in July (see previous posts), has left a little space in most analytics minds for doubts about that US home purchasers have taken most of the damage (through the drastically increased — up to 6% on average — mortgage rate) from FED restrictive monetary policy.

Accordingly, market prognosticators now expect that 590th new homes sales registered by CB in June are to be reduced to about 570th in July. Previous readings of the New Home Sales reports were as following: 831th in January 2022, 790th in February (-4.93%), 707th in March (-10.51%), 604th in April (-14.57%), 642th in May (+6.29%), 590th in June (-8.10%). So, as we can see, in June’s numbers there’s a hint on the decrease rate deceleration, from which most forecasters must have been deducing the new home sales further ‘slower’ slowing (by -3.39%) in July.

However, as the most recent CPI report demonstrated (applying a ‘reversed logic’, of course), a relatively minor improvement (compared to the expected one) in home sales figures might trigger an adverse (‘recessionary’) market reaction, which might turn to be the disproportioned one, specially given the abrupt sell-off across all markets we had seen on Friday, August 19.

The Durable Goods Orders report (Report on Durable Goods Manufacturers Shipments, Inventories and Orders) is also expected by analytics to show a slower rate of increase (0.8%) in July compare to June or to 2.18 billion bringing the new orders for manufactured durable goods to $274.78 billion in absolute numbers.

Starting from February, when the new orders figure fall abruptly by -0.7 percent to 262 bln (it was preceded by its pick of $264 billion reached in January) its rate experienced the +/- 0.2 percentage fluctuations around its 0.5 median (+0.7 to 264 bln in March, +0.4 to 265 bln in April, +0.8 to 267 bln in May) until June, when, prompted by increased military expenses, it jumped almost three fold to 272 bln (an increase of 1.9 percent or by USD 5 billion).

Generally speaking the new orders placed by businesses executives reflects their economic perspectives expectations on the medium to long-term time frames. For example, this number rapidly expanded in 1990th growing 7.1 percent annually on average (from 1.3 trl in 1992 to 2.3 trl in 2000). That was the post cold war expansion era, when US corporations stated to penetrate new developing markets opened after the USSR collapse and China starting to implement its new markets-orientated politico-economic doctrine.

Two major crisis of the first ten years of twenty first century — one in 2000–2003 following the Dot-com boom and another in 2007–2008 during the securitized mortgages markets implosion — brought this expansion to a hold leading to new orders remaining the same by the result of 2010 as in 2000 (2.3 trl). It happened because of two significant contractions — to 2.070 trl in 2001 (-10.85% compare to 2000) and to 1.8 trl (-29.02%) in 2009 from 2.6 trl in 2008.

The next decade (2010–2019) started with the new orders rapid increase — by 23 percent in 2010 followed by 10 percent in 2011. This was mostly caused by the FED implementing its ‘anti-crises policies’ (the rate was dropped almost to zero). Then, in 2015, when FED decided to start its new cycle of the banks funding rate increase, the new orders fall by 6% to 2.7 trl (from 2.9 trl). As a result in 2018 this measurement remained equal to the same 2.86 trl as in 2014.

Seeing the US economy starting to contract in 2019 FED reverted its policy again reducing rate, first to below 2 percent in Q4 2019 and then dropping it to zero in 2020 again. In response to which we have witness the unsubstantiated by economic realities explosion of new orders in 2021 from 2.5 at the start of the year to 2.9 at its closure.

U.S. Bureau of Economic Analysis (BEA) will release its, so-called, ‘second’ GDP estimate for the second quarter of 2022. I have the first (‘advanced’) BEA estimate already covered in SVET Markets Review (July 29, 2022):

QUOTE (BEA): Real gross domestic product (GDP) decreased at an annual rate of 0.9 percent in the second quarter of 2022 … In the first quarter, real GDP decreased 1.6 percent. … Current‑dollar GDP increased 7.8 percent at an annual rate, or $465.1 billion, in the second quarter to a level of $24.85 trillion. In the first quarter, GDP increased 6.6 percent, or $383.9 billion. … EQ:

The bottom line of that report was that a GDP Q2 decrease was smaller than that in Q1 because of growing exports (energy, mostly) and rising govs spendings.

QUOTE (BEA): The smaller decrease reflected an upturn in exports and a smaller decrease in federal government spending that were partly offset by larger declines in private inventory investment and state and local government spending, a slowdown in PCE, and downturns in nonresidential fixed investment and residential fixed investment. EQ:

In 2021 UDS GDP (non adjusted for inflation) showed a record 10.7% growth reaching 24.4 trillion. For comparison, US GDP surpassed 5% yearly growth rate mark only four times during the past two decades (2000–2021):

1st: consecutively in 2003 (6.7%), 2004 (7%) and 2005 (6.52%), when US economy was stimulated by an increased productivity in the high-tech sector, coming from its two-years-long correction as well as by the rapidly growing housing market, which then led to a spectacular mortgage lending overextension of 2007–08. It was also added by the massive military build up, followed 911 and epitomized by the invasion into Iraq (March, 2003), during which US increased its total spendings on arms to 47 percent (from 437 bln to 644 bln) during three years period. Additionally, 2001–2003 was marked by FED dropping its rate from ~6.5 to ~1 percent.

Comment: FED sharply reversed (again) its policies in late 2003, spooked by an early signs of rising prices. It started to hike banks rate in late-2003 again. As a result the rate reached 5.25 in mid-2006. However, that didn’t cause inflation to drop. Instead, inflation rose from below 2% in 2003 to almost 5% in 2006. As a result, the only visible economic effect which FED achieved by its high inter-banks rate policies (leading to a homes costs drastic rise) was to jump-start the mortgage debt collapse in 2006–2007. Of course, this crisis was then blamed by its real culprits — corrupt politicians and govs bureaucrats — on consumers, entrepreneurs and their financiers.

2nd: US GDP jumped 5.17% in 2017 following tax relief initiative for businesses promoted by the new WHite House administration.

By the August 2022 we do not have a particularly business friendly officialdom populating the Pennsylvania Avenue. Instead, what we have is a very likely continuation of FED and govs brainless policies both on financial and production sides of economy. Accordingly, analytics do not expect any short way out of the on-going recession. Their prognosis for a revised GDP repeats its ‘advanced’ version (-0.9 percent).

The Personal Income and Outlays report published by the same gov agency, which produces GDP estimates — U.S. Bureau of Economic Analysis — will present to analytics (and to traders) another opportunity to speculate about the FED reaction on one of its most important constituencies — the Personal Consumption Expenditures or PCE Price Index.

It will appear on BEA site this Friday, August 26 at 8.30 AM, just one and halve hour prior to scheduled Powell’s speech on the Jackson Hole Economic Symposium.

According to markets guesstimates, from three major macro-indicators, which are suppose to measure the inflation — Consumer Price Index (CPI), Producers Price Index (PPI) and Personal Consumption Expenditures (PCE) — FED uses the later — PCE — to formulate its policies.

The ‘official’ reason is that BEA, which calculates PCE, uses more ‘trustworthy’ sources to generate it — US corporations financial statements and its own GDP estimates — than Bureau of Labor Statistics (BLS), which produces both CPI and PPI largely based on interviews. The ‘non-official’ reason is that CPI and PPI is much more detailed and transparent for an independent verification than PCE, which is, therefore, much easier to manipulate if needed (allegedly, there has not been proves of such manipulations presented yet).

Another advantage of PCE is that it strives to encompass incomes of all economic participants — individual consumers — as CPI mostly covers urban areas where the most of the peoples interviewed by BLS are localized.

The latest Personal Income and Outlays report, which was revealed in mid-July but covers only June, states:

QUOTE: Personal income increased $133.5 billion (0.6 percent) in June … . Disposable personal income (DPI) increased $120.4 billion (0.7 percent) and personal consumption expenditures (PCE) increased $181.1 billion (1.1 percent). The PCE price index increased 1.0 percent. Excluding food and energy, the PCE price index increased 0.6 percent. EQ:

This report also showed PCE Price Index annualized as following: 6.3 (Feb), 6.6 (Mar), 6.3 (April), 6.3 (May), 6.8 (June). For comparison (see SVET Weekly Markets Update for July 11, 2022) CPI increased 8.6 percent in June (compare to 6.3 PCE). The latest CPI update — that which caused an August bull-run on crypto-markets — showed an inflation reduction to 8.5 percent in July.

Now, of course, the betting question is will Friday’s PCE confirm a reduction tendency in yearly inflation, which was already signaled by CPI? The majority of analytics expect PCE drops to 6.2% in July. Does, therefore, it means that a common sense dictates us to take an opposite side of this trade?

All in all, FED monkeying with banks rate brings to the world’s markets the high level of volatility, specially on the downside, during the rapid rate hikes, which leads to a wild fluctuations even of one of the most supposedly stable macroeconomic parameters — the orders of durable goods. Under the normal, competitive, free-market conditions it would be totally different. The hyper-connected twenty first century world economy must be growing much more steadily, if not for the governments corrupt bureaucrats interventions.

On the one side, this growth will be propelled by the steadily increasing consumers demand for new and better goods / services (including those in the virtual worlds and, prospectively, in the solar system). On the other side it will be supported by a growing manufacturing capacity of the society, enhanced by the accelerating technological progress as well as by the individual entrepreneurs initiatives and their unlimited ingenuity.

Certainly, not only FED must be hold responsible for making periodic speculative expansions / contractions on the markets to be far worse than it might be without govs unsolicited, uneducated, misguided and violent intrusions into humans creative processes. Moreover, the whole world’s economic corrupt regulatory apparatus, which is based on an everyday cohesion and on a constant violation of our most rudimentary rights must go into a dumpster alongside with FED. Otherwise, it won’t be too long before entrepreneurs would have to spend all their lives on being compliant — not on being productive.