Ear to the Ground

April 08 2022

This week saw the release of the latest minutes from the FOMC meeting. Whilst they increased rates by 0.25%, the minutes revealed that many members would have preferred a 0.5% hike. Without the conflict in Ukraine, it is likely that the latter would have been adopted. This potentially suggests that we will see a 0.5% rate rise at the next meeting at the beginning of May. The FOMC forecast interest rates will be at 1.9% and 2.8% by the end of this year and next, with market expectations slightly ahead at 2.01% and 2.96% respectively.

The minutes also confirmed that they are looked to reduce the balance sheet by $95bn a month, phased in over the next three months. This will be split $60bn for Treasury securities and $35bn for mortgage backed securities. As we have referred to in previous editions, the fortunes of global equities have been closely linked to the change in size in central bank balance sheets. Correlation does not mean causation, but we expect that eyes will be keenly focussed to see if the relationship we have seen for the last 12 years holds true.

The Treasury yield curve, meanwhile, depending on which maturities you look at, continue to flirt with inversion. Whilst historically an inversion and then re-steepening has been a good predictor that a recession is coming, the Fed continue to tell us not to fear the yield curve. Perhaps giving them comfort is the large amount of spare cash which US households have accumulated since the COVID induced recession of 2020.

According to research from Longview Economics and Macrobond, had the previous trendline been followed it is estimated that US households would have accumulated $14.4trn of bank deposits. During COVID however the US consumer saved substantially more than trend, unable to spend in their normal manner due to the restrictions imposed. Those cheques from the government meant that household bank deposits stood at $18.1trn at the end of 2021, a surplus of $3.7trn above the longer term trend. Unless we see wages rise in line with inflation it is likely that some of this may be used to meet the higher cost of living, but just maybe it is enough of a buffer. This of course does not take into account the distribution of this additional wealth across the income earning cohorts.

Next week we have the release of inflation data from both the US and the UK, along with average earnings data for the latter, which will help show us just how far the cost of living is running above the consumers increase in earnings.

Potentially adding support to the economy is the labour market, which in the US remains tight. Data from BLS/NFIB/Department of Labour shows that at the end of March the ratio of job openings to job seekers was 1.89. With labour in short supply, is this the catalyst which will lead to higher wage increases, dare I say creating a 1970’s esq environment? Walmart are certainly one of those feeling the pressure to find staff and new drivers can now expect to earn between $95,000 to $110,000 a year. The average for a first year driver had been $87,500, representing an 8.57% increase on the bottom end of the new range. According to Glassdoor.com the average salary for a long haul driver in the US is $56,491. Surely the ‘Walmart effect’ will see this rise!

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