Market Volatility Rises – Markets Shoot First And Ask Questions Later

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They say that life can change at the “drop of a hat”. Market too!

Interest rates were significantly higher on Monday, Tuesday and Wednesday of the Thanksgiving week, only to return to lower levels by the close of Friday (November 26) based on fears that the newly identified COVID-19 variant (Omicron) may be on its way. May be like a Delta-different sister, once again the world is in disarray.

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Friday, the day after Thanksgiving, has always been a short market day with the most senior market participants. Junior traders often have the green light to sell but not buy, which is perhaps partly why major equity indices also fell more than 2% on Friday. What happens Monday depends on updates from Omicron, but it’s clear that over the near-term horizon, both the equity and fixed income markets are going to exhibit a level of volatility that we haven’t seen in the past 18 months. . Yet, we cannot just dismiss the interest rate hike on Monday, Tuesday and Wednesday as if it never happened.

yield curve

Obviously, bond investors expected President Biden to appoint Lyle Brainard as chairman of the Federal Reserve. Ms. Brainard is considered quite “defective” (i.e., will keep monetary policy super-easy). Powell’s reappointment partially ignited the yield curve upward, with the end result being a three 25 basis points (.25 percentage point) increase in the federal funds rate (which banks pay to borrow from the Federal Reserve). increases, starting from mid-2022. , got the price. This was a substantial change from Friday’s earlier outlook that there would be only one rate hike at the end of 2022.

  • Portraying Powell as a “hawk” seems like a stretch. Over the past few months, he has opposed any forecast of rate hikes and insisted that such growth is data dependent (i.e., based on the performance of the economy).
  • Powell has scheduled Q2 or Q3/2022 for the Fed’s assessment of inflation. That is, the Fed expects the “transient” period to be as long as another year. At Fedspeak, it should indicate that there will be no rate action until at least the third quarter if inflation is still rising (hardly “hawkish”).
  • Brainard was appointed as vice president and Biden has three more FOMC vacancies to fill. Given the policy actions of his administration so far, we expect those seats to be filled by people with a low profile.
  • In our view, the markets were making an unfair assumption (ie, shoot first!).

labour market

Also affecting the bond market on Wednesday were weekly preliminary unemployment claims (IC) data for the week of November 20. This showed a modern record low of a seasonally adjusted (SA) of 199,000 IC. As we have noted for the past 18 months, trying to seasonally adjust for the effects of a pandemic (which has been around for less than two years) is troublesome and can lead to unreasonable conclusions.

The table below shows the IC for the first three weeks of November. Note that the downdraft has only happened in SA numbers for the November 20 week. Also note that SA numbers are rounded off to the thousands (000s) indicating that there is too much “guessing”. It seems a bit odd that for the first two weeks of the month, the SA and NSA (not seasonally adjusted) numbers were similar in size, but for the week of November 20, the SA numbers dropped significantly (-71K) whereas it was NSA Raised on base (+18K).

We see that in the attached chart (NSA data), there has been a decline in the data for the last six weeks. Thus, it is risky to jump to conclusions from one week’s worth of SA data; It would seem prudent to wait a few weeks to see if the NSA confirms the data. We suspect the SA factor has been biased by a possible Thanksgiving week. Still, it is clear that the bond market shoots up first and questions later, as rates have risen on this data release, as if they were lower on Omicron fears, i.e., due to some of this new COVID stress. Even before the actual analysis.

Retail Sales

Retail sales grew +1.7% m/m in October. The big increase was driven by 4.0% m/m growth in non-store sales (read this as “Amazon”)
, Even after adjusting for inflation, the increase in real terms appears to be +0.8%. Once again, we’re looking at SA numbers. On an NSA basis, sales grew only 0.3% m/m and were negative after adjusting for inflation.

We suspect that the SA data is misleading. While we don’t have any hard survey data or GDP numbers, every household in our sphere of influence has started their holiday shopping early because of the “shortage” narrative in the daily media. As a result of demand being “pulled forward”, seasonal factors will bias the SA number upward. We suggest that December SA retail sales may not be as strong as the markets now believe. One way or another, those December sales will give us a clue of the strength of the economy in 2022 and whether (and when) the Fed will hike rates. That data is still 45 days away.


David Rosenberg featured a picture of Walmart in his recent daily blog about the “shortage”
The store’s bicycle inventory at the start of the year, in the middle of the year, and in October. At the beginning of the year, there was very little inventory; By mid-year, bicycles took up almost half of the available space. But, by October, it appeared there wasn’t even room for another bike. Looking at data from a few large retailers, we find that Target
Inventory up 18% from a year ago, Home Depot
27%, and Walmart’s 12%. There are certainly some manufactured items that have a longer “lead time” than usual, but we don’t feel like “shortages” are going to ruin Christmas!

how did we get this inflation

The government shut down the economy in 2020. This reduced production (i.e., “supply”). At the same time, the government sent free money, ensuring that incomes did not fall. Thus, “demand” remained near pre-pandemic levels. A drop in supply coupled with a drop in demand gives a textbook economic consequence: higher prices!

Add to this the idea that appears to have been adopted in Washington DC (called modern monetary theory – the government can print as much money as it wants with no consequences) of a budget deficit of $5-$6 trillion. The resulting inflation we currently have appears to be mainly due to the federal government.

Meanwhile, in the background, the Fed continues its QE (quantitative easing) policy. Remember, in the Great Recession, QE was an emergency measure to ensure the smooth functioning of the financial markets. While the Fed has promised that this QE will end sometime next year, we see the financial system engulfed in liquidity with excess bank reserves now above $1.5 trillion on a daily basis. The first end of this QE policy appears to be in order; Perhaps we will see such a result from the upcoming December Fed FOMC meetings.

Is inflation endemic?

Will it work? Here are some observations:

The Baltic Dry Index has fallen -55% from its peak in the past month and a half. This is the cost of shipping bulk goods (like iron ore) (though we see Amazon partially resolved its shipping issues, some of them by loading their containers on top of the bulk cargo in the ship’s hold) – Miracles of Capitalism!). The decline in the Baltic Dry Index may have had a lot to do with China’s faltering economy – yet, it still has ramifications around the world.

The University of Michigan’s latest consumer sentiment survey showed a low in November not seen in decades; This is usually a good leading indicator. Auto and home buying intent is at 50-year low (see chart above).

Goldman Sachs Industrial Metals Index is down -11.6% from its high.

  • Aluminum: -17%
  • Zinc: -16%
  • Copper: -10%
  • Iron ore, timber, steel have all declined by more than -20%.

Regional Fed surveys are reporting that corporations are raising prices faster than their costs. (Due to the ubiquitous “inflation” and “shortage” statements, customers are not resisting sizable price increases, assuming they are lucky enough to receive shipments!) As the metal indices are now falling, so do It appears to be only a matter of time before input costs soften. Corporations will come out with hefty margins, but that won’t be an excuse to raise prices, and if demand falters, we may even see some price drops.

The CPI has 30% load of fares, and they are increasing. Once again, we can trace much of this to federal actions that include evictions and foreclosures. Now that these have been taken away, the fares are increasing. We see home prices skyrocketing in 2021. Once again, we refer to the University of Michigan Consumer Sentiment Index which reflects a 50-year low on home buying intent, and see that housing starts are now falling. However, this decline is concentrated in single-family onset (–10.6% Y/Y (October data)). On the other hand, multi-family onset is +37% Y/Y and is at a 47-year high. We believe that the introduction of multi-families will reduce the issue of “rents” in the CPI by the middle of 2022.


The Fed, under Powell, is likely to be patient, waiting to see how “transient” inflation could be after Q2/2022. Other signals affecting Fed policy include:

  • The federal government has closed most of its free money programs. We are confident that we will soon see significant employment growth and an increase in the labor force participation rate.
  • SA growth in retail sales in October (and possibly November) appears to be a pull-forward due to demand…


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