We are in uncharted waters as we kickoff trading in 2022 but there will be a big test in the first half of the year.
January 3 (King World News) – Egon von Greyerz: The world is now in totally unchartered and very precarious waters. A ship in such danger does not require more than a minor storm to be hit by irreparable damage. We now face a fate that only future historians can tell the world about.
A Big Test In The First Half Of 2022
Peter Boockvar: My belief that the economy, markets and monetary policy are conjoined fraternal triplets will be tested in at least the first two quarters of 2022 as not just the Fed tightens, but many other central banks do as well.
As all three pieces are firmly connected, you cannot separate them out in terms of how a change in one influences the others. It means there is no such thing as tightening monetary policy without an eventual tightening of financial conditions. It will just depend on how much will the Fed tolerate.
It means that any drop of substance in markets in reaction to monetary tightening will have a direct impact on consumer spending. With respect to markets and the economy, I heard Steve Sadove last week say that when he was CEO of Saks, his trend sales had a 90% correlation with the stock market.
Also, as the cost of money is so influential on housing and autos, where funding rates go will obviously impact these two sectors greatly with prices of each at record highs, by a lot…
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It Didn’t Have To Be This Way
It didn’t have to be this way, but it is what it now is, a very financialized macro economic and market intermingling. What is different this time relative to the gradual shift in this direction over the past 30+ years is we now have notable inflation which will in turn impact the Fed’s flexibility in responding to any disruptions they cause. We are certainly very accustomed to the Fed quickly reversing themselves.
Now there are certainly moments in time when one triplet looks its own way for a period of time. For those that have been around markets for a while, we’ve heard this lot, “but rates are rising for good reason because the economy is good.” In 2017, the Fed was raising rates but markets went straight up all year with low volatility but we can attribute the disconnect to the hopes and inevitable passage of the large corporate income tax cut. Once we entered 2018 though, attention shifted immediately back to the rate hikes.
So my bottom line question is this, is there a free lunch from the epic monetary largesse the world’s central banks showered on us over the past two years? The next two quarters will be a good test.
Meanwhile In Asia
Ahead of the final December US manufacturing PMI today we saw some from overseas. South Korea’s manufacturing PMI rose 1 pt m/o/m to 51.9, Taiwan’s was up by .6 pts to 55.5, Malaysia’s was higher by .5 pt to 52.8 and the Philippines increased by a slight .1 pt to 51.8. On the downside was the Indonesia PMI by .4 pts to 53.5 and India’s to 55.5 from 57.6.
Specifically with South Korea, Markit had some issues under the hood. They said “If we take demand, reports from our survey members suggest that new orders are primarily being driven by domestic clients, and even then, growth is minimal. Survey data showed new export orders falling for the 1st time since September 2020, which firms attributed to rising Covid cases globally, congestion at ports and a lack of available shipping containers. Indeed, these factors, alongside supply shortages at vendors, were also to blame for further delays in supplier delivery times, which lengthened to the greatest extent since April 2020. Given South Korea’s prominence in the automotive and electronics industries, substantial improvements in global supply chains will be required before we see a meaningful acceleration in manufacturing growth.”
The December Eurozone manufacturing PMI was left unrevised at 58 vs 58.4 in November, the lowest since February. There were some supply pressures bright spots though as Markit saw some “further easing of the supply chain crisis as average lead times lengthened to the softest extent since February. Firms took advantage of this relative gain and added purchases to their inventories at the fastest rate ever recorded by the survey, outpacing the previous record set in November by a notable margin…Meanwhile, rates of input cost and output price inflation eased, but remained among the fastest ever seen by the survey.” With respect to the labor market, “the rate of jobs growth was strong and above its historical average by a notable margin. Business confidence also strengthened slightly to a 3 month high.” The euro is down slightly while bond yields are mixed with all stock markets in the green that are open.
Putting the rate cuts in Turkey to 14% over the past few months into perspective, Turkey reported that its December CPI rose 36% y/o/y. The estimate was 27%. Wholesale prices almost doubled, up by 80% y/o/y vs the forecast of up 68%. Hyperinflation here they come? Let’s hope not. The lira is actually up today after falling for 5 straight days last week as while these are shocking inflation stats, it’s not a complete surprise.
Setup As We Kickoff 2022
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