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Wage inflation is not dead yet

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The news of wage growth has not been so good, everyone please calm down

Markets experienced last Friday morning Jobs report – and in particular his data on slowing wage growth – as further evidence that inflation will continue to decline rapidly, and the Fed will be able to start cutting interest rates before the end of this year. The S&P rose 2.3 percent on the day, and the two-year Treasury yield fell 19 basis points, almost a full rate hike that fell short of investors’ expectations. Futures market prices now a 95 percent chance The Fed’s interest rate will be lower than what the central bank says targeting 5.1 percent at the end of 2023.

Regular readers wouldn’t be surprised that Unhedged didn’t think the news was quite as good as all of that, both because of our inherent bad temper and because we’ve argued in the past that the final rounds of anti-inflation will be the toughest.

Economic data remains vague, opaque, and confusing. Yes, the downturn in wage growth to 4.6 percent in December, and a revision to growth rates in previous months, leaves us on a trend of steady slowdown in wage growth going back to May – even if the current rate of growth is uncomfortably high:

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Line chart of US average hourly wages, % annual growth showing Yay?

New jobs added have fallen off each month since August, too. But adding more than 200,000 jobs a month, with ample job openings and a high turnover rate, isn’t a downturn, even with the sudden weakness in activity surveys reporting recent weakness. Barclays’ Christian Keeler thinks markets should ditch the champagne so the data will be easier to read:

A combination of rising hiring and slowing wage growth would certainly be good news on a macro level, which could make the Fed less hawkish. But we warn about that [the average hourly earnings data] It is notoriously noisy and subject to distortions from ongoing shifts in the composition of payroll employment and back to lower-wage service-sector jobs, as strong labor demand pulls in lower-skilled workers. . . The Atlanta Fed’s wages tracker next week and the Employment Cost Index for the fourth quarter (Jan. 31) both control for compositional effects, which should shed more light.

Don Resmiller of Strategas also emphasized the compositional issues:

Average wages can be affected by mixed shifts: the economy adds more part-time jobs versus full-time jobs. But it seems that workers choose to work part-time (that is, they are not part-time mainly for economic reasons). There is still a mismatch in labor supply versus labor demand. The tight employment situation will continue to threaten future wage pressures. . . Price inflation has peaked, but wage inflation appears to be holding.

Chances are good that the recession is killing wage inflation, Rissmiller thinks.

Matt Kline, in The Overhoot, makes something else important pointThe marked slowdown in wage growth can only be deflationary if it is accompanied by a lesser contraction in the labor market. If inflation is under control, demand must be lower than supply. When someone loses their job, their contribution to demand falls as their spending tightens, but their contribution to supply falls to zero – they’re out of work! So job losses alone are not deflationary. Employees should be afraid to accept the jobs and wages they now receive, and control their budgets:

Forcing people out of work does not in itself reduce pressure on prices. Scaring people away leads to spending less compared to the value they generate. Thus, from the Fed’s point of view, the ideal scenario is for workers to lose leverage to demand larger bonuses without anyone actually being fired. But this (relatively) benign outcome will only happen if the labor market returns to normal. Unfortunately, the latest data suggests that this is still a long way off.

The number of job vacancies relative to the number of people actively looking for work is still about double what it was on the eve of the pandemic. . . More important, given the close relationship with wage growth, is the number of people leaving their jobs for better prospects elsewhere. While the number is down slightly compared to the peak at the end of 2021, there has been no real change since June.

Olivier Blanchard also focuses on openings. Back in November, that is chirp that the US will soon experience a “false dawn” of inflation as commodity prices begin to fall, but that wage growth remains consistent with inflation consistently above the Fed’s target. In an email yesterday, Blanchard wrote that despite the recent data, he hasn’t changed his mind. we wrote:

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The problem is that once energy/food prices stabilize, can we keep inflation stable with an unemployment rate of 3.5 percent? I guess, based on my work with Summers on the Beveridge curve in particular [the relationship between unemployment and job vacancies] That we need a higher unemployment rate, maybe around 4.5 percent.

Recent wage numbers suggest I may be too pessimistic. I don’t think so, but we’ll see. If I’m right, the Fed has to slow the economy, or think the economy will slow, before it starts cutting rates, given the delays.

Everyone, including the unprotected, wants inflation to hit the target without stagnation. But this is not the most likely outcome.

Gold and central banks

In a bad investment landscape, gold has performed well over the past 12 months:

Gold price line chart, showing $Old Yeller

The strong performance since August is particularly impressive because it occurred while real interest rates were strongly positive — in the one-and-a-half percent range, as measured by the yield on the 10-year Treasury Inflation-Protected Securities. Gold usually moves inversely to real rates, which reflect the opportunity cost of owning an expensive, inert metal.

One of the main reasons for this rise, such as the Financial Times mentioned At the end of last month, the increase in demand from central banks:

Central banks are snapping up gold at the fastest pace since 1967, with analysts pinning China and Russia as big buyers in a sign that some countries are keen to diversify their reserves away from the dollar. ..

in the third quarter [of 2022] Central banks alone bought nearly 400 tons of gold, the largest three-month haul since quarterly records began in 2000.

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Does the increase in central banks’ appetite indicate a permanent shift in the supply/demand balance? John Hartsell, CIO of Donald Smith & Co. This request is noted

. . . It’s been consistently positive around 500 tons per year since the Great Financial Crisis (against mine output of about 3,500 recently), but hit a record high of 400 tons in the third quarter alone, and it’s very likely to average between 750 and 1,000 tons each from now on given For the geopolitical background as the utility of gold as a neutral (non-US dollar) reserve asset for Russia, China and Middle Eastern countries becomes more evident in 2022.

James Steele, precious metals analyst at HSBC, takes a more cautious tone. He believes that the recent strength in the gold price has something to do with expectations of a Fed rate cut as well. While acknowledging that central bank demand is higher and likely to remain that way, he believes three points should be kept in mind:

  • Central banks are not preparing to avoid the dollar. It is best to think of gold purchases as a marginal diversification, in a way that does not require a commitment to other global currencies, all of which have their own problems.

  • About 50 or 60 percent of doctors’ gold production goes to jewelry in developing economies like China and India, where consumers are very price sensitive. With the gold price hovering above $1,800 or so, demand is ebbing fast.

  • Central banks are also price sensitive, and will adjust their purchases of gold as prices rise.

Non-hedging is a bit skeptical about gold as an investment, for standard reasons (no return, not a yielding hedge, over-inflation) but we’ll be watching closely for now.

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Economic

We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

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International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

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The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

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However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

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Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

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David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

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BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

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Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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