The general bearish tone continues (technically speaking for the week of 2/14-2/18)
This week, the Federal Reserve released its final meeting minutes. These provide an excellent overview of the current economic situation in the United States. Today, I’m going to use them to provide a “You Are Here” perspective on the US economy.
Let’s start with the Fed’s dual mandate — jobs and inflation:
The unemployment rate fell from 4.2% in November to 3.9% in December… The participation rate remained unchanged in December and the employment-to-population ratio increased. The rate of job creation in the private sector, as measured by the Job Creation and Labor Turnover Survey, fell in November but remained well above the levels of before the pandemic; the dropout rate was also high.
Let’s take a look at the graphs:
Total wage employment continues to rise (left). The monthly gain settles into a range of 400,000 to 500,000 (right).
The U3 (in blue) and U6 (in red) unemployment rates continue to fall. Both have returned to pre-pandemic levels.
The participation rate (top two charts) and the employment/population rate (bottom two charts) continue to improve. Remember that both have recently increased due to a rebalancing of demographics.
Extract from the minutes
Headline PCE price inflation was 5.7% in the 12 months to November, and core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 4.7% over the same period. The trimmed average 12-month PCE inflation measure constructed by the Federal Reserve Bank of Dallas was 2.8% in November, 1 percentage point higher than its rate of increase a year earlier. In December, the 12-month change in the consumer price index (CPI) was 7.0%, while core CPI inflation was 5.5% over the same period.
Here are the graphs in question:
All major price indices, whether the CPI (top two charts) or the PCE price indices (bottom two charts), continue to rise.
Back to the Fed:
Real PCE was unchanged in November, and available indicators – including components of nominal retail sales data used to estimate PCE – indicated a decline in December, possibly reflecting the sharp increase in COVID-19 cases. 19 in the second half of this month as well as some holiday sales having been carried over to previous months.
Here is the graph:
Personal consumption expenditure (a broader measure of consumer spending than retail sales) has fallen slightly over the past two months. This drop came at the same time as a rise in Covid cases, which is the likely cause of the slowdown. It’s not for lack of means:
Personal income less transfer payments is just off a 5-year high.
Average hourly wage growth on a Y/Y basis is increasing at a steady pace.
Extract from the minutes:
Manufacturing output fell in December after rising strongly in October and November. Motor vehicle assemblies reversed some of their November increase; in addition, non-motor vehicle manufacturing fell.
Industrial production has returned to pre-pandemic levels.
The minutes contain this very important caveat:
Staff provided an update on its assessments of the stability of the financial system and overall rated the financial vulnerabilities in the US financial system as notable. Staff assessed that asset valuation pressures remained elevated. In particular, the S&P 500’s forward price-to-earnings ratio was at the upper end of its historical distribution; high yield corporate bond spreads and the excess lending premium for leveraged loans remained at low levels; and house prices have risen sharply, with price-to-rent ratios at high levels. The staff noted that the market capitalization of cryptoassets has grown significantly over the past decade and has seen considerable volatility, including significant declines since late last year.
Exorbitant PEs, low rates on high-yield loans, and ongoing crypto market issues all indicate that the market’s risk tolerance is out of balance. Certainly, the low rates have a lot to do with it.
Now let’s move on to the graphs, starting with the year-to-date:
The general tone is indecisive bearish. With the exception of the DIA (bottom left), all indices posted falling highs. The 200-minute EMAs (in magenta) on all charts are also down. All indices were also unable to hold prices above the 200-minute EMA. All of these observations are bearish.
The 1-year charts remain centered on the 200-day EMA – which is the line that separates bull and bear markets.
The last quoted paragraph from the latest Federal Minutes that discusses extreme market valuations seems particularly relevant to the charts above. With the Fed clearly in the mood to raise rates, further market consolidation seems more than likely.