DATA DIVE - Fighting Windmills

Reading Time: 4 min

The economy continues to contract on a global scale.

Meanwhile, our overloads over in Central bank LaLaLand, in an effort to contain inflation, continue to tighten policy at a record pace, exacerbating the slowdown.

If years of low interest rates and QE brought secular disinflation, it is worth wondering if QT and higher rates will only serve to perpetuate inflation, as opposed to fighting it.

Maybe Powell is fighting windmills, but unlike poor innocent Don Quixote, he is likely to get us all hurt in the process.

To briefly recap what has occurred in CB LaLaLand this week:

Sweden +100bps to +1.75%

United States +75bps to 3.25%

UAE +75bps to 4.50%

Saudi Arabia +75bps to 3.75%

Brazil +0 staying at 13.75%

Taiwan +12.5bps to 1.625%

England +50bps to 2.50%

Norway +50bps to 2.25%

Switzerland +75bps to 0.50%

Japan +0.0 staying at -0.1%

Indonesia +50bps to 4.25%

Philippines +50bps to 4.25%

And I probably missed someone……

Now, even if the Fed seems unable to slay the Inflation Genie, on the demand side they seem to be getting somewhere, destroying it!Central Banks have all been very clear, that they want to slow their economies, and this is precisely what’s happening.

UK GDP has flattened and is headed towards contraction.

Retail sales in the UK have been declining all year and in Aug had the largest MoM decline yet.

Consumer Confidence in Denmark made a new low.

Same goes for Consumer Confidence in Slovenia

And Consumer Confidence in Ireland.

And last but not least, Belgian Consumer Confidence also registered a new low.

In the miracle Island of Iceland, the sick man of the 2008, but poster child of the post GFC recovery, unemployment rate has risen for the 4th consecutive month and is sitting at this year's high.

Note that the unemployment rate in two other Nordic countries, Finland and Sweden both ticked up in August.

Business Confidence in France continues to decline to new post-pandemic lows.

While Construction Output in Italy declined for the 6th consecutive month.

So clearly Europe is slowing in a major way, and do not ignore the impact that this will have on US earnings.

As Hedgeye recently pointed out, 50% of FANG earnings came from abroad, and via a quick online search, it would appear that approximately 30% of S&P 500 earnings also come from abroad.

Not that the picture in the US is much rosier, where the housing market deterioration is starting to pick up its pace with US 30yr fixed Mortgage Rates making a new high at 6.25%

Existing Home Sales have declined for 7 straight months.

And US Building Permits declined -10% in August, the largest monthly decline since the start of the pandemic

It is important to reiterate that despite all of this the FED is unlikely to take the foot off the tightening pedal any time soon with CPI at 8.3% and Core Inflation accelerating to new highs.

Especially as the Labour Market remains tight and Continuing Jobless Claims in the US declined for the 4th straight month.

This year saw the start of a major macro shift, the rules of the game have changed, and if anything this process is unlikely to resolve itself any time soon, and not until considerably more pain has been inflicted on the economy.

Stay patient, and trade safe.

The process to the bottom is likely to be a long one.

DEEP DIVE “Government Spending = More Inflation”

As a side note, I want to bring up something I have been repeating for a while, and which follows on from the article I published on Arthur Burns and the experience of the 70s, that is: Inflation begets more Inflation.

Looking at the recently announced Dutch Government 2023 budget, we see several spending packages which will release HIGH VELOCITY (inflationary) money into the economy.

Because of concerns about high energy costs, the Government has decided to spend €15.5 billion (1.6% GDP) more in 2023 than it already planned.

Some of the most relevant measures to my point are listed below:

• one-off energy compensation benefit for lower-income households of €1,300 (€1.4 billion)

• continuation of the 21% reduction in excise duty on fuel (€1.2 billion)

• increase in health care allowance by €412 (€2.1 billion)

• increase in rental allowance (€0.2 billion)

• 10% increase in statutory pension benefits

• 10% increase in welfare benefits

CREDIT due to ING for sending a note with the summary of the Dutch Gov budget this morning.

Unlike QE, which sends money into asset prices, fiscal spending like this via handouts to households sends money directly into the economy.

The fight against inflation is truly proving to be a Don Quixote vs the Windmills kind of event.

Thank you for reading.

Antonio C. Nobile

I am not a Financial Advisor & this is not financial advice

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