Powell, Yellen Weigh In On Omicron, Debt Ceiling During Senate CARES Act Testimony
With the new year just weeks away, Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell will testify before the Senate Banking Committee on Tuesday, part of routine testimony required by the CARES act.
Just two weeks ago, investors could be forgiven for writing off Tuesday’s testimony as a likely snoozefest now that Powell has been nominated for his second term as Fed chairman. But over the last week, the emergence of the omicron variant has (according to some) thrown the recovery timeline out of whack. After the release of Powell’s prepared remarks last night, markets eagerly priced in a more dovish outlook at the Fed.
But hours later, warnings from Moderna CEO Stephane Bancel sent markets back into turmoil, as investors struggled to decide who to trust more: the “science” (ie trial data which haven’t yet been gathered or released), or the authoritative executives who have been talking their book this entire time (whether the market realizes that or not is unclear).
In yet another indication of just how confused Wall Street has become, Deutsche Bank described Powell’s prepared testimony as “hawkish”, an assessment that we (and plenty of investors, judging by the market reaction) would strongly disagree with. Although DB specifies that the only hawkish aspects of Powell’s statement pertained to inflation.
We would agree with DB that nobody cares much about the pair’s prepared remarks. The “real fireworks” – as DB put it – will likely land during the Q&A, where Powell and Yellen will be grilled by Senators of both parties.
Fed Chair Powell set to appear before the Senate Banking Committee at 15:00 London time, where he may well be asked about whether the Fed plans to accelerate the tapering of their asset purchases although it’s hard to believe he’ll go too far with any guidance with the Omicron uncertainty. The Chair’s brief planned testimony was published on the Fed’s website last night. It struck a slightly more hawkish tone on inflation, noting that the Fed’s forecast was for elevated inflation to persist well into next year and recognition that high inflation imposes burdens on those least able to handle them. On omicron, the testimony predictably stated it posed risks that could slow the economy’s progress, but tellingly on the inflation front, it could intensify supply chain disruptions. The real fireworks will almost certainly come in the question and answer portion of the testimony.
Keep in mind: regardless of what Moderna CEO Bancel says, only a tiny minority on Wall Street actually expect omicron to be a major issue a few weeks from now.
In other news, concerns about the next debt ceiling fight, which will kick into high gear in the coming days, is already creating kinks in the US Treasury Bill Curve.
But that still presents some difficulties for the central bank as it weighs whether to continue tapering asset purchases, as well as what it should signal regarding the pace of rate hikes.
Read Yellen’s prepared remarks, released Tuesday morning:
Chairman Brown, Ranking Member Toomey, members of the Committee: It is a pleasure to testify today. November has been a very significant month for our economy, and Congress is a large part of the reason why. Our economy has needed updated roads, ports, and broadband networks for many years now, and I am very grateful that on the night of November 5, members of both parties came together to pass the largest infrastructure package in American history.
November 5th, it turned out, was a particularly consequential day because earlier that morning we received a very favorable jobs report– 531,000 jobs added. It’s never wise to make too much of one piece of economic data, but in this case, it was an addition to a mounting body of evidence that points to a clear conclusion: Our economic recovery is on track. We’re averaging half a million new jobs per month since January.
GDP now exceeds its pre-pandemic levels. Our unemployment rate is at its lowest level since the start of the pandemic, and our economy is on pace to reach full employment two years faster than the Congressional Budget Office had estimated. Of course, the progress of our economic recovery can’t be separated from our progress against the pandemic, and I know that we’re all following the news about the Omicron variant.
As the President said yesterday, we’re still waiting for more data, but what remains true is that our best protection against the virus is the vaccine. People should get vaccinated and boosted. At this point, I am confident that our recovery remains strong and is even quite remarkable when put it in context. We should not forget that last winter, there was a risk that our economy was going to slip into a prolonged recession, and there is an alternate reality where, right now, millions more people cannot find a job or are losing the roofs over their heads.
It’s clear that what has separated us from that counterfactual are the bold relief measures Congress has enacted during the crisis: the CARES Act, the Consolidated Appropriations Act, and the American Rescue Plan Act. And it is not just the passage of these laws that has made the difference, but their effective implementation. Treasury, as you know, was tasked with administering a large portion of the relief funds provided by Congress under those bills. During our last quarterly hearing, I spoke extensively about the state and local relief program, but I wanted to update you on some other measures. First, the American Rescue Plan’s expanded Child Tax Credit has been sent out every month since July, putting about $77 billion in the pockets of families of more than 61 million children.
Families are using these funds for essential needs like food, and in fact, according to the Census Bureau, food insecurity among families with children dropped 24 percent after the July payments, which is a profound economic and moral victory for the country. Meanwhile, the Emergency Rental Assistance Program has significantly expanded, providing muchneeded assistance to over 2 million households. This assistance has helped keep eviction rates below prepandemic levels.
This month, we also released guidelines for the $10 billion State Small Business Credit Initiative program, which will provide targeted lending and investments that will help small businesses grow and create well-paying jobs. As consequential as November was, December promises to be more so. There are two decisions facing Congress that could send our economy in very different directions. The first is the debt limit. I cannot overstate how critical it is that Congress address this issue. America must pay its bills on time and in full. If we do not, we will eviscerate our current recovery. In a matter of days, the majority of Americans would suffer financial pain as critical payments, like Social Security checks and military paychecks, would not reach their bank accounts, and that would likely be followed by a deep recession. The second action involves the Build Back Better legislation.
I applaud the House for passing the bill and am hopeful that the Senate will soon follow. Build Back Better is the right economic decision for many reasons. It will, for example, end the childcare crisis in this country, letting parents return to work. These investments, we expect, will lead to a GDP increase over the long-term without increasing the national debt or deficit by a dollar. In fact, the offsets in these bills mean they actually reduce annual deficits over time. Thanks to your work, we’ve ensured that America will recover from this pandemic. Now, with this bill, we have the chance to ensure America thrives in a post-pandemic world. With that, I’m happy to take your questions.
And readers can find Powell’s prepared remarks, first released last night, below:
Chairman Brown, Ranking Member Toomey, and other members of the Committee, thank you for the opportunity to testify today.
The economy has continued to strengthen. The rise in Delta variant cases temporarily slowed progress this past summer, restraining previously rapid growth in household and business spending, intensifying supply chain disruptions, and, in some cases, keeping people from returning to work or looking for a job. Fiscal and monetary policy and the healthy financial positions of households and businesses continue to support aggregate demand. Recent data suggest that the post-September decline in cases corresponded to a pickup in economic growth. Gross domestic product appears on track to grow about 5 percent in 2021, the fastest pace in many years.
As with overall economic activity, conditions in the labor market have continued to improve. The Delta variant contributed to slower job growth this summer, as factors related to the pandemic, such as caregiving needs and fears of the virus, kept some people out of the labor force despite strong demand for workers.
Nonetheless, October saw job growth of 531,000, and the unemployment rate fell to 4.6 percent, indicating a rebound in the pace of labor market improvement.
There is still ground to cover to reach maximum employment for both employment and labor force participation, and we expect progress to continue.
The economic downturn has not fallen equally, and those least able to shoulder the burden have been the hardest hit. In particular, despite progress, joblessness continues to fall disproportionately on African Americans and Hispanics.
Pandemic-related supply and demand imbalances have contributed to notable price increases in some areas. Supply chain problems have made it difficult for producers to meet strong demand, particularly for goods. Increases in energy prices and rents are also pushing inflation upward. As a result, overall inflation is running well above our 2 percent longer-run goal, with the price index for personal consumption expenditures up 5 percent over the 12 months ending in October.
Most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate. It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year. In addition, with the rapid improvement in the labor market, slack is diminishing, and wages are rising at a brisk pace.
We understand that high inflation imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing, and transportation. We are committed to our price-stability goal. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.
The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.
To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission.
We at the Fed will do everything we can to support a full recovery in employment and achieve our price-stability goal.
Thank you. I look forward to your questions.
The big question now: will Powell sound dovish, or hawkish, under questioning? What’s more, investors should be on the lookout for Yellen’s comments on the debt ceiling – particularly anything she says about the timing for when the Treasury might run out of funds.
M2 and Nominal GDP Update: still growing rapidly
I am fascinated by the fact that these days hardly anyone is talking about the very rapid growth in both M2 and nominal GDP. Both suggest that inflation…
Chart #9 compares the growth of the personal consumption deflators for services and durable goods. Of interest is the explosive growth in durable goods prices.
A Market Green Light or No?
Was “selling the rumor” responsible for the recent weakness? … how are traders sizing up Wednesday’s Fed release? … what’s important in today’s…
Was “selling the rumor” responsible for the recent weakness? … how are traders sizing up Wednesday’s Fed release? … what’s important in today’s market
Wall Street traders often front-run major events that are likely to move the markets.
It’s the old adage of “buy the rumor, sell the news” (though in reverse).
Is that what’s been happening with the market weakness over the last few weeks? Have traders been bailing on stocks based on the rumor of what the Fed will do, preparing to buy back stocks after the fact?
Our technical experts, John Jagerson and Wade Hansen of Strategic Trader believe that’s what’s been happening.
From their Wednesday update:
Traders like to be ahead of the curve by both buying before the news is confirmed and then taking their profits off the table once the news is official.
The opposite phenomenon frequently occurs as well; traders sell their stocks before the news is confirmed and then buy back into their previous positions once the news is official.
While there isn’t an old saying that goes, “Sell the rumor; buy the news,” we think that is what has been happening in the stock market.
Traders have been worried for the past two weeks that the Federal Open Market Committee (FOMC) might signal the following things in today’s Monetary Policy statement:
- More than four rate hikes this year…
- An individual rate hike larger than a 0.25%…
- An accelerated tapering of its bond-purchase program…
- And a dramatic reduction of its $9-trillion balance sheet this year.
This worry has caused traders to sell into the rumor… or the worry, in this case.
As you know, the Federal Reserve released its policy statement on Wednesday.
How did it impact these fears? And what does that mean for a market rebound?
Let’s find out.
***Is Wall Street “buying” the news now?
For newer readers, John and Wade are the analysts behind Strategic Trader. This premier trading service combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.
In their Wednesday update, they dove into the details of the Fed’s policy statement. They identified language that speaks directly to the fears that have been weighing on Wall Street traders.
From the update:
The FOMC just released its statement, and here’s what it said:
- It will likely start raising rates in March.
- “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
- It is not planning on more than four rate hikes in 2022, but it’s not taking the option off the table.
- “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
- It will be accelerating its tapering… slightly.
- “The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.”
- It has no plans to start dramatically reducing its balance sheet.
- “The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”
John and Wade sum up by saying they believe that this statement should ease Wall Street’s worries.
Now, that doesn’t automatically mean these traders will push stocks higher. Rather, it just removes this overhang from the market. But traders are still highly sensitive to economic data and earnings.
***On that note, we’re beginning to see a pattern of Wall Street shrugging off strong earnings, focusing on weaker guidance
On Wednesday, this market darling reported strong fourth-quarter results that included a record number of vehicle deliveries.
Adjusted earnings came in at $2.52 per share versus the forecast of $2.36 per share. Revenue rose 65% year over year in the quarter, while automotive revenue totaled $15.97 billion, up 71%.
Great quarter, right? Deserving of a nice pop in the share price?
Nope. Wall Street decided to focus on the potential for problems in the months ahead.
Tesla sold off 5% after hours on Wednesday. And the pressure continued yesterday, with the stock ending the day down 12%.
Here’s CityIndex explaining why:
Tesla warned its ability to meet its ambitious target to grow deliveries this year will depend on the availability of equipment, maintaining operational efficiency and ‘stability in the supply chain’.
It is that last factor that markets fear the most.
Tesla has so far proved to be far more resilient to the supply constraints hampering the global automotive market compared to its rivals, but the company is not immune and warned supply chain issues are ‘likely to continue through 2022’.
***It was similar with Netflix’s earnings last week
The streaming giant beat on its bottom line and was in-line with revenue expectations. But shares plummeted in after-hours trading based on fears of slowing subscriber growth.
From The New York Times:
Netflix added 8.3 million subscribers in the fourth quarter, raising its worldwide subscriber base to 222 million, but the company said on Thursday that it expected growth to slow in the opening months of 2022.
That news, in the company’s earnings release, prompted the stock to drop nearly 20 percent in after-hours trading.
Netflix ended up falling more than 30% over ensuing trading sessions and remains down 26% as I write.
Now, compare Tesla and Netflix to Apple, which released earnings yesterday after the bell.
The world’s most valuable company smashed its revenue record, also topping earnings of $30 billion for the first time.
Most importantly, CEO Tim Cook said that the supply chain challenges are improving. Though Apple hasn’t given formal guidance since the beginning of the pandemic, here were Cook’s comments:
What we expect for the March quarter is solid year-over-year revenue growth.
And we expect supply constraints in the March quarter to be less than they were in the December quarter.
Bottom-line, Apple’s growth story remains intact. So, its share price is benefitting, up 6% as I write.
This all points toward a reality of today’s market…
What matters now is growth.
Can a company continue to grow despite inflation, a rising rate environment, and the threat of a slowing economy?
If so, Wall Street will reward it. If not, watch out.
***Looking at growth on a macro level, we received encouraging GDP news yesterday
Gross Domestic Product grew at a 6.9% annualized pace in the fourth quarter. That’s much higher than the 5.5% estimate.
Plus, consumer spending, which makes up more than two-thirds of GDP, climbed 3.3% for the quarter.
So, there are positives here (despite today’s massive inflation number…but that’s no surprise anymore).
Just make sure any trade you’re considering is similarly rooted in fundamental strength – which means growth.
Returning to John and Wade, they believe some short-term bullish trades are setting up.
They’re not pulling the trigger yet. Instead, they’re giving the market a few more days to digest recent news. But they’re feeling cautiously bullish.
I’ll give them the final word:
What matters most is not whether the Fed will raise the overnight rate in March and then again in the second quarter – traders are already pricing that in. What is important is whether the underlying fundamentals are still positive…
We don’t want to fall into the trap of ignoring the bad news in favor of the good, which is why we are recommending patience before adding more risk to the portfolio.
However, it’s essential to be aware of the solid prospects the market still has in the near term to rally and provide easy profits.
So, for now, we don’t recommend making any changes to our trades. Still, we think the likelihood of new opportunities and some profitable exits over the next few days is high.
Have a good evening,
All The Curves, From Supply To Demand To Yield
Technically speaking, the rebound from the 2020 recession wasn’t strictly a supply shock. That was a huge part of it, no doubt, but a near-concurrent…
Technically speaking, the rebound from the 2020 recession wasn’t strictly a supply shock. That was a huge part of it, no doubt, but a near-concurrent demand shock, if you will, also materialized. The combination of the two left the public bewildered, believing it an actual inflationary impasse which could only be further passed on into this year.
Consumer prices did rise, of course, and they still are rising, though not because of (monetary) inflation. Rather, the first half of 2021 was an anomaly rather easily explained by simple, small “e” economics.
The first part of it, supply, that was all the impediments imposed by both non-economic (lockdowns, reconfiguring product lines) and economic (money and credit) factors which left the supply curve far more inelastic. This simply means suppliers and producers (along with shippers) are less responsive to changes in demand.
Sketching supply inelasticity out like any middle-schooler might upon their very first introduction to economics, the basics of it would look something like this:
It must be noted that these changes were applied globally and not just to or in the United States. Various national parts of the global economy were affected by them differently and to different degrees, by and large this was a universal phenomenon.
What then followed the evolution of supply inelasticity was the demand “shock” in the form of various government interventions; again, not just domestic US, all over the world. Those originating from the American government were the most pronounced, therefore created the biggest bounce to the right for the demand curve. Others followed to lesser extents.
The combined result is somewhat surprising considering how much the economy has been described, repeatedly, especially in America, as red hot and dangerously overheating. On the contrary, supply inelasticity means that most of the effect is illusory in terms of price whereas overall output doesn’t necessarily increase much at all.
Though these drawings are admittedly cartoonish, they aren’t very far off the actual data. Look at GDP or Industrial Production all over the world. Prices went up, especially here, but output not so much.
This has been excused as difficulties sourcing raw materials and whatnot, but that’s baked right into the inelasticity of the supply curve! And while others blame a purported labor shortage, it’s far more easily and readily explained by producers who aren’t producing nearly as much therefore aren’t as willing to pay market clearing wages (or even hire more workers).
Either way, as the supply curve shifts back more elastic, prices begin to come down as output actually rises…only if all things are equal (ceteris paribus). We know, however, they are not equal.
Even as the supply side twists slowly back toward its long run stable state, unless there’s (actual) monetary expansion behind the demand shift, demand won’t stay toward the right, either. Instead, it’s going to migrate back to the left toward its own long run stable state.
Depending upon other factors, output might rise again but much more slowly or in more limited fashion than it otherwise could have, all the while prices descend in the direction of their own starting equilibrium (assuming there is such a thing, or that there is one which could be stable).
Viola, there’s yesterday’s generally ugly GDP figures along with the PCE numbers (monthly) published today. The general supply curve is becoming less elastic (pumping out massive inventory into the supply chain) while the effect of the previous government interventions (including Uncle Sam) fade further and further into the past.
Prices haven’t yet backed off, though they have started to exhibit the general tendency toward deceleration (not all at once, therefore three camel humps that I’m told can’t describe a camel at all). In some places, though, we’re seeing perhaps the beginning stages of outright reversion (like China’s producer prices or US services prices).
The biggest macro problem is that the private economy’s actual state is obscured underneath this “inflation.” Labor shortage, red hot, etc. Because the mainstream treats each and every outbreak of consumer price acceleration as the same thing, especially those times when it is due to something other than money (true inflation), it can only result in mass confusion.
In fact, at some point, the bottleneck of forced price increases actually inhibits the demand curve staying to the right; prices rise faster than the economy’s ability to maintain even the same levels of demand (because it’s not caused by monetary expansion). Thus, what we saw in yesterday’s GDP along with today’s Personal Income and particularly consumer spending:
Even though the labor market has likewise struggled to recover (consist with the low changes in output) despite the artificially-fueled spendy frenzy, incomes have been rising though nowhere near enough to absorb the equally artificial increase in the general price level.
As such, private economy labor falls further and further behind (fails to catch all the way back up) exacerbating the demand curve shift back left.
Economists (capital “E”), however, they all believe (without evidence, only regressions) such interventions as last year’s massive helicopters produce lasting effects – a more durable perhaps permanent move in the (aggregate) demand curve out to the right. Furthermore, after the extreme price changes last year, most (Larry Summers!) are more worried that the curve had been pushed too far to the right and will remain too far out that way.
This group now includes the FOMC whose members then add psychological hokum to their even more primitive curve graphics thereby manufacturing the hawkish double-taper, triple-maybe-quadruple rate hikes for 2022 all the while real markets reject all these things.
True economics, the lack of money impulse, and now more upon more data all bely these mainstream interpretations. It’s only a “growth scare” in the context of merely assuming those first, that Economists and central bankers employing standard DSGE assumptions have anything worthwhile to say about the situation.
Rather than “growth scare”, the actual situation appears to be nothing more than the other side of last year’s double anomalies. One supply. One demand. None monetary.
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