Ten dollars for a dozen eggs

“And I like eggs!” protested an amiable advisor in my travels this week to the pristine paradise of Honolulu. Indeed, paradise ain’t cheap. Some of my hosts were freely sharing their politics: “I thought the president said inflation was going down.” Informed that the local coal plant was to shut down in a plan to go from 30% renewable energy to 100% by 2025, “we were notified that our electric bill would go up 7-10%.” However, “my electric bill is up 50% over the last two months,” complained advisors in various meetings. Not to be outdone, my San Diego colleague reported a $1,000 electric bill in her expensive piece of paradise. “A gallon of premium gas is $6 in Honolulu.” “It’s $7.39 in California!” Ouch. Pittsburgh’s looking like its own kind of paradise …. Our banker hosts shared that the back-to-office push is working here as employees seek AC. Unfortunately, “young people don’t want to be bankers. We want to pay Des Moines salaries for professionals with San Francisco expenses.” “It’s like looking for driftwood on the beach.” (So poetic … Gosh, I love visiting the people here!) “How can you afford a $1 million home or a half-million-dollar condo on a $70,000 salary?”

Good news is bad news (more below) as economic resiliency keeps “pivot” and “pause” talk in the closet. The Atlanta Fed raised its GDPNow Q3 growth forecast to 2.7%, and Yardeni Group wonders if the next recession might be the most widely anticipated recession that doesn’t happen. It does expect a growth recession in S&P 500 earnings, however. While forward revenues rose to a record high in August, S&P forward margins and earnings peaked in June and have been flat since, with the latter down 1.5% since May. While downward revisions from bottom-up analysts have been missing—likely reflecting the illusion that comes from higher nominal levels of revenue and profits associated with inflation—there is evidence of margin contraction. The percentage of S&P sub-industries estimated to post positive earnings growth over the next 12 months has fallen 15 percentage points, and the downtrend is accelerating. The forward P/E has sunk to its historical average of 15x, the lowest since April 1, 2020. Seasonality tends to turn favorable around mid-to-late October, and this year, could get an added catalyst. Two-thirds of S&P stocks are down more than 10%, making them ripe for tax-loss harvesting, i.e., sold before Oct. 31, the cutoff for most mutual funds to realize capital gains. Tax-loss stocks typically outperform the market significantly through year-end. Tuesday’s surge and Wednesday’s reversal of an early sell-off suggests near-term momentum. But without a broad breakout, it’s technically more in line with a counter-trend bear rally, with resistance at 3,900-4,000. Most notable in the midweek rally was Energy, the standout performer, and Big Tech’s continued underperformance.

Lots of strategists worrying something may break. Tightening cycles have a deep association with financial shocks: Continental Illinois in 1984, Asia in 1997, Long-Term Capital Management a year later, the 2008 GFC and the eurozone crisis in 2012. All were affiliated with a Fed policy shift. September saw the tightest U.S. financial conditions of the past two decades, while data from 1997 show U.S. bank exposure to countries tied to the Asian currency crisis was a fraction of what the U.K. exposure is today. The dollar’s global dominance is threatening liquidity and financial stability. When the Bank of Japan last month spent $21 billion to defend the yen, long-dated U.S. Treasury prices fell 3% and yields spiked. Japan owns $1.2 trillion and the rest of the world another $6.3 trillion of Treasuries. Even the sale of a small portion could cause severe problems for the Fed and a possible restart of QE, much as the Bank of England did to support the British pound, TIS Group warns. That could send the dollar plunging, worsening already elevated inflation and obliterating hopes for just a rocky landing. This week’s data and comments from Fed speakers offered not even a sniff of a pause. Inflation is still running hot. The labor market, too. And energy prices look to climb higher, again (more below). I, too, am a fan of eggs. Thanks for the hospitality, Honolulu, until next time.

Positives

• Good news is bad news September private payrolls came in slightly above consensus and the jobless rate fell back to a 50-year low 3.5% as labor force participation slipped to 62.3%. It stood at 63.4% in February 2020, before the pandemic, and 66.4% 15 years ago, when there were 6 million more Americans in the labor force. This morning’s jobs report, which countered August JOLTS that showed openings plunging 10% (though the ratio to jobless is still a highly elevated 1.7), pushed odds of a 75 basis-point November Fed hike above 80%.
• Good news is bad news September’s services ISM surprised, signaling above-trend growth, and despite the strong dollar, the nation’s trade balance continued to improve. The performance runs counter to the rest of the world, where Strategas Research says 12 surveys it tracks in other countries are either contracting outright or weakening. More green lights for the Fed.
• Consumer has momentum With hourly earnings holding steady at a 5% year-over-year rate in September, job growth staying robust and $1 trillion to $2 trillion of excess savings in their pockets, consumers are heading into the holiday sales season with ample ammo to keep spending. A key factor in the Atlanta Fed’s upgrade of GDP growth expectations was an upward revision to consumer spending.

Negatives

• Stick in the eye That’s what OPEC+ did, metaphorically, to the Biden administration and its G7 allies, ignoring pleas against a production cut. Because it came off baseline and not quota levels, the 2 million-barrel daily reduction is closer to 1 million. But the Saudi/Russian-led cartel’s message was clear: it will oppose any attempts to hold down prices due to the war in Ukraine. At nearly $90/barrel, oil has jumped roughly 15% from its Sept. 22 low on the highly telegraphed move.
• Housing drag deepens Mortgage rates continued to surge higher, crossing 7% on 30-year fixed loans and marking the biggest pace of increase since the early 1980s. Also, mortgage purchase applications slumped to a 7-year low and home prices declined at their fast pace since 2009. Unlike the mid-2000s’, however, too much supply isn’t the issue as home inventories remain below January 2020 levels.
• Consumer canary? Subprime auto loans delinquency rates have risen 430 basis points the past 15 months.

What else

It took 20 minutes to find the bookstore! The Ala Moana Center in Honolulu claims to be the largest open-air shopping mall in the world. Of course, my local host noted there’s not much competition, what with the North’s bitter cold and the South’s oppressive heat making indoor malls the venue of choice for most mainland U.S. shoppers.

Voters don’t like high gas prices After declining 14 consecutive weeks, the longest streak since 2015, gas price are climbing again on OPEC+’s move, with GasBuddy projecting a 15-to-30 cents-a-gallon increase over the next few weeks. Not good for consumers or Dems, where recent polls show Republicans regaining momentum in key midterm races that could turn the Senate.

Out of Africa? India’s population appears certain to overtake a shrinking China over the next few decades, but Africa appears set to overtake both by year-end, UN forecasts show. By 2,100, its population is projected to be 5 times that of China, 2.5 times that of India and 6.6 times that of the U.S.

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