“Doing what's right isn't the problem. It is knowing what's right.”
— Lyndon B. Johnson
Friday Right-thing Charts
Things are getting real. The bear case is no longer just that higher interests make bad things happen in Excel spreadsheets. Bad things are happening IRL, as well: The likes of Amazon, Apple, Meta, Google and Netflix have all told us business is not great. The Fed wants lower asset prices to slow the economy, and now it’s happening: Macro and micro are colliding.
Let’s look at some charts to see what the problem is (and if the Fed is doing the right thing).
Can the Fed ignore two weak quarters in a row?
Yesterday’s report showed Q1 GDP falling by 1.4%. Kinda weird to see a negative print when the Fed is in full rate-hike mode. Q2 should be better, but hardly something to celebrate: The Atlanta Fed’s “GDP Now” model is going for 1.9% in Q2, versus consensus at 3.1%. With a little bad luck, we could be looking at zero growth for the first half of the year. Is that enough for the Fed to ease up? With stocks and bonds both at YTD lows, the market doesn’t seem to think so.
The stinker in Q1 GDP was mostly due to a widening trade deficit:
Net exports of goods and services posted a record deficit of $1.2 trillion in Q1. That’s partly because businesses stockpiled inventories in anticipation of supply-chain issues related to Russia’s invasion of Ukraine. But it also reflects that US consumers are carrying the whole world’s economy.
US consumers are sending their money abroad in record amounts, but somehow the dollar is at a 20-year high:
The dollar rally is a reminder that the US economy does not operate in a vacuum. With the pandemic in China and the war in Europe, it’s hard to imagine the US economy overheating on its own.
TIC data shows the magnitude of foreign dollar buying:
US Treasury data (as per @yardeni) shows that over the past year, a record $1.4 trillion has flowed into the US from abroad. All those dollars US consumers spend on exports are getting returned via purchases of Treasurys and things. The Fed may think US rates look too low, but the rest of the world thinks they look plenty high.
The ruble is back above pre-war levels:
The Russian currency is like a bizzaro mirror image of the dollar: Rubles flow into Russia due to energy exports, and then they’re stuck, because there are no imports for Russian consumers to buy.
But that’s a special situation. The more relevant FX chart is the yuan:
The yuan is often a canary in the global-economy coal mine. Its weakness against the dollar is more evidence that, while the Fed is focused on upside risks to the economy, the real risk is to the downside.
What’s it all mean for risk assets?
Defensive equities have outperformed in a way that would normally be associated with economic weakness, but yields have risen in a way that would normally be associated with economic strength. If the above chart from @mrblonde_macro were to mean revert, it would be positive for equities and risk assets.
Auto inventories and comments from Amazon may indicate we’re due for that mean reversion:
Auto inventories suggest supply chain issues are abating. And yesterday’s comments from Amazon’s CFO suggest labor issues are abating, too: “We’re no longer chasing physical or staffing capacity...The issue has switched from disruption, to productivity losses to overcapacity on labor.”
Overcapacity of labor is hardly something to celebrate, but with Nasdaq having its worst month since 2008, it may be what risk assets need.