Fed Rates, Dollar Reacts

There were three important economic reports this week:

• Retail Sales (RSXFS): -0.59% month over month, prior +1.29% m/m. Negative, especially the month before Commercialized Christmas.
• Industrial Production (INDPRO): -0.22% m/m, prior +2.45%.  Negative.
• Consumer Price Index (CPIAUCSL); +0.10% m/m, prior +0.44%. Falling energy prices are mostly responsible for the decline.

Unlike last week, this picture is recessionary, especially in retail sales and industrial production.

At this week’s Fed meeting, the gang raised the Fed Funds rate by 50 basis points, to 4.25%. Then Powell came out on stage, read his statement, and answered questions. He said that more rate increases will be appropriate, inflation risks remain weighted to the upside, there will not be any premature loosening of policy, and “we will stay the course until the job is done.” He also said it wasn’t so important how fast we go, but by end of 2023, aggregate rate projections from the Fed gang (a document called “the SEP”) are currently about 5% for the Fed Funds rate. Is that a pivot? No, although dropping to just a 25 bp increase in February would be a slowdown – the CME fedwatch tool (Source – CME) is projecting this outcome as well. Interest rate Shock & Awe is turning into a War of Attrition.

Powell also talked about a huge overhang of vacancies in the labor market, especially in the services sector. The unprecedented labor shortage remains. The reason? Powell brought very little data – he just waved his hands and blamed “retirements” and “half a million COVID deaths.” That’s it. But he did quantify the shortage: it is 3.5-4.0 million people, which is identical to what Wolf Richter reported two weeks ago. But neither Wolf nor Powell can find any time-series that supports an explanation as to why said labor shortage exists. It’s a big mystery. “Retirements.” “Bitcoin profits.” “Real Estate sales.” But no supporting time-series.

My guess – as long as that services labor shortage remains, Powell and the gang will continue their inflation-fighting efforts. The “experts” at the Fed appear to believe rate increases can somehow heal millions of people who have been disabled due to “vaccine” side effects. Or maybe they just have no clue.

The mostly-short-term rate chart (below) shows that the 6-month and 1-year Treasury bills are projecting a 30-40 bp interest rate increase, while the 1-month and 3-month bills lag a bit behind. The 6-month yielding more than the 12-month tells me that “Mr. Market” is currently dubious the Fed will hold rates above 4.5% for the entirety of 2023. The falling 10-year yield (yellow line) is hinting at a recession, and at a longer-term pivot. At least that’s what I think it says this week.

The buck fell 0.47 [-0.44%] on the week to 104.33.  The buck sold off early in the week, it was mostly flat on the day of the press conference, then rallied for the next two days, limiting the weekly loss. My model felt that the weekly “hammer” candle print was reasonably bullish; the buck appears to be trying to put in a low, although DX remains below all 3 moving averages.