Quiet Firing
February 25, 2024 – Weekly Comment
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The big data point of the week will likely be PCE prices on Thursday. Month-over-month is expected to show some acceleration with headline +0.3 from +0.2 and Core +0.4 from +0.2. Yoy measures are expected 2.4% from 2.6% and Core 2.8% from 2.9%. The concern of course, is possible near-term reacceleration. Powell and others have noted that goods inflation has come down appreciably, but core services have been much slower to recede. The implication has been that unemployment needs to increase, euphemistically “the labor market needs to come into better balance” and that equity prices need to decline.
With respect to equity prices and labor, Scott Galloway in a note titled ‘Corporate Ozempic’ cites the amazing revenue and profit increases in some of the big tech firms, concluding that AI is a huge factor in sparking lay-offs that support the bottom line:
What’s really going on? I believe AI is playing a larger role in layoffs than CEOs are willing to admit. There have been hints: IBM’s chief said the company plans to pause hiring for positions that could be replaced by AI, and UPS acknowledged that AI factored into its recent layoffs. But as a general rule, expect a CEO to be reluctant to state on an earnings call that the fastest-growing technology in history is already giving her “the ability to lay off people without any impact on the top-line.”
You’ve heard of “quiet quitting”. Call this “quiet firing”.
A more muted outlook on AI was espoused by NY Fed Pres John Williams in an interview with Axios:
“One way to think of it is AI is – and this is my own, but based on what I heard from others – is AI is just that new thing that’s going to get us that 1% to 1.5% productivity growth that we’ve been getting for decades or even a century.
It’s the thing that gets us that, just like computers did or other changes in technology and how we produce things in the economy. So it’s just the thing that gets us that 1% to 1.5% productivity growth.
The other view, which I think has some support, is AI is more of a general purpose technology. …So there is a possibility that we could get a decade or more faster productivity growth if this really is its general purpose and revolution. You can’t exclude that.”
“Today we produce a very small share of computers and chips. It’s produced in other countries, which just means that that productivity growth might happen in other countries more than it happens here.”
https://www.axios.com/2024/02/23/federal-reserve-bank-ny-john-williams-transcript
We have an incredibly complex economy; the outlook needs to be analyzed by both policymakers and investors. Is it more complex than the Greenspan years? Perhaps, but many challenges of price and asset measurement were voiced by Greenspan then, perhaps most memorably with this line from Dec 1996:
“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
This is an appropriate look back, as Japan’s Nikkei only last week exceeded the 1989 high. Greenspan’s view was that prices are set by millions of knowledgeable investors, and that the central bank can only clean up afterwards (from Jackson Hole, 1999):
To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes.
History tells us that sharp reversals in confidence happen abruptly, most often with little advance notice.
Enough with the Greenspan stuff (though both speeches are linked at bottom and have fascinating insights). Switching from AI to more prosaic concerns about food production, here’s a chart of the BBG Agricultural Commodity Index:
From this chart, it’s clear that prices are deflating. Call me crazy but I think food is more important than AI. There’s hardly a day that goes by that at least one snippet about farmer protests doesn’t pop up. Most frequently it’s about tractors clogging traffic in European cities. If one googles “Angry farmers” the results point mostly to the French, who are apparently madder than most, taking the boiling point to the extreme by throwing eggs at Macron. Angry. However, “farmer protests” gives results across Europe, India, and the US. I’m making light of a situation that should be taken seriously. Food supplies aren’t to be trifled with, a fact that appears to have escaped politicians imposing green regulations on growers.
OTHER THOUGHTS
The yield curve continued to flatten/invert last week. Last week I highlighted the red/green sofr pack spread which I had expected to hold the lower channel line. It broke that level (-19) and settled -26.25. On the week SFRM4 was -5.0 to 9490, SFRM5 (red) was -5.5 to 9601.5, SFRM6 (green) +2.0 to 9633.0 and SFRM7 (blue) +6.0 to 9633.0 (same as M6). On the treasury curve, 2/10 moved similarly to red/green, falling 7 from -36 to -43 (4.685%/4.255%).
Given rhetoric from Fed officials and renewed inflation concerns, the market continues to push back the timing of Fed cuts and lessen the total magnitude. The most inverted SOFR 1-year calendar has moved back a slot from SFRH4/H5 at -110.25 to SFRM4/M5 at -111.5. On Feb 1, SFRH4/H5 settled -160.5, so low to high has been an astonishing 50 bps just this month.
On the treasury curve the two-year rose 3.3 bps to 4.685% while the thirty-year fell 6.8 bps to 4.378%.
On Monday Treasury auctions $65b in 2’s and $64b in 5’s, followed on Tuesday by $42b in 7’s. With the addition of t-bill auctions, on the first two days of the week $398 billion in debt will be sold. Of course, a large amount of bills and notes are maturing, so much of the supply will simply be absorbed by rolls. However, it’s still worth noting that $400 billion used to be a significant deficit for an entire year. There’s recently been concern that corporates won’t be able to roll existing debt at favorable terms. The treasury seems to assume that bond issuance will never encounter a bout of indigestion.
| 2/16/2024 | 2/23/2024 | chg | ||
| UST 2Y | 465.2 | 468.5 | 3.3 | wi 465.7 |
| UST 5Y | 428.6 | 428.2 | -0.4 | wi 426.7 |
| UST 10Y | 429.3 | 425.6 | -3.7 | |
| UST 30Y | 444.6 | 437.8 | -6.8 | |
| GERM 2Y | 281.6 | 285.3 | 3.7 | |
| GERM 10Y | 240.2 | 236.3 | -3.9 | |
| JPN 20Y | 151.2 | 144.5 | -6.7 | |
| CHINA 10Y | 243.9 | 240.0 | -3.9 | |
| SOFR H4/H5 | -115.0 | -110.3 | 4.8 | |
| SOFR H5/H6 | -45.5 | -53.0 | -7.5 | |
| SOFR H6/H7 | 3.0 | -1.5 | -4.5 | |
| EUR | 107.79 | 108.23 | 0.44 | |
| CRUDE (CLJ4) | 78.46 | 76.49 | -1.97 | |
| SPX | 5005.57 | 5088.80 | 83.23 | 1.7% |
| VIX | 14.24 | 13.75 | -0.49 | |
https://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm
https://www.federalreserve.gov/boarddocs/speeches/1999/19990827.htm
