Hawkish Pauses, Deflation, and The Old Man who Lost his Horse

Five reports and the balance sheet this week:

• Retail Sales (RSXFS): +0.34% m/m, prior +0.37% m/m.  Mildly recessionary (1y horizon).
• Industrial Production (INDPRO): -0.16% m/m, prior +0.51% m/m.  Mildly recessionary (1y horizon).
• Consumer Price Index (CPIAUCSL): +0.12% m/m, prior +0.37% m/m.  Inflation (1y horizon).
• Producer Prices (PPIACO): -1.24% m/m, prior +0.01% m/m.  Deflation (1m and 1y horizon).
• Total Bank Credit (TOTBKCR): -61.7B w/w [-0.36% w/w].  Deflation (1m and 1y horizon).
• Fed Balance Sheet (WALCL): -1B w/w, prior +4B w/w.  No change.

Taken together, the reports add up to recession/deflation – most especially the decline in total bank credit, which is the most alarming signal of all.   So what happens once TOTBKCR starts declining?  In the chart below, the little red boxes mark recessions.  Looking back, the only time bank credit fell harder was back in 2009.  Note that plunge happened AFTER the 2008 market crash.  We aren’t even there yet, and the %change y/y is now below 1%.  The “happy zone” for bank credit is around 7%-10%.  Recessions tend to happen once this drops below 5%.    TOTBKCR dropped really hard this past week, losing 61 billion.  I’m expecting the Fed to stop producing this series any day now – because, oh I dunno, Climate Change?   No, its because this series is a smoking gun.  Or a smocking gun, if you prefer.

The Fed held rates steady this week; I was pretty sure they would raise, but they didn’t.  Ed Dowd called it a “hawkish pause” – if you listen to the press conference, it is not clear why they paused, since the thing they focus on (called the “Core PCE” – PCEPILFE) remains elevated at 4.7% y/y, and it is stubbornly refusing to decline.  Powell explained that “non-housing-services” (more than 50% of the services sector) is showing “only the earliest sign of disinflation there”, and the largest cost are wages.  His target level for Core PCE: 2%.  The Fed doesn’t seem to care much about CPI.

Hmm.  So why might non-housing-services (Core PCE) be so stubbornly high?  Powell is baffled – he called it the strongest labor market in 50 years.