Thread by @MBjegovic

The #Fed #pivot talk has intensified lately.

Sth possibly breaking in the #UK, European financial system ( $CS, $DB...), #RBA pivoting by hiking less than expected, higher financial risk in the #US...

Should the #Fed #pivot and why?

Let's demystify all this.

A thread.

1/25

Those that follow me know I've been calling the #Fed to #pivot for quite a while.

Ever since mid-May it's been clear to me the #US #economy is in a #recession which should prompt the #Fed to #pivot in Sep.

And every important economic indicator warranted the #Fed #pivot.

2/25

But the #Fed decided to turn the blind eye to the #economy in an effort to try to regain some of the credibility they lost last yr by "transitory" talk.

So instead of amending things, they have made another policy error.

Here is more about this:

https://twitter.com/MBjegovic/status/1573396812622622720?s=20&t=wGfrOAxqBtj27MUeLeG8OQ

3/25

Reasons for the #Fed #pivot are growing each day:
1) #disinflation - the most important
2) #recession
3) slower wage growth
4) lower job mkt imbalance
5) internal imbalances
6) external imbalances
7) political pressures
8) MP lag

Let's delve into every single one of them.

4/25

1) While the #Fed keeps talking about "high" and "sticky" #inflation, on an unadjusted basis #CPI has declined in both Jul (-0.01%) and Aug (-0.04%) MoM.

There's a chance Sep will also be negative MoM which would make 3M #deflation for the first time since May 2020.

5/25

Worth to remember in May 2020 the #economy was pretty much still on lockdown that artificially lowered demand and #inflation.

Now there are no lockdowns and we are up for a 3M MoM #deflation meaning we might have an overall YoY #deflation problem on our hands very soon.

6/25

On the "sticky" front, rents play the largest role bc of OER ("Owners' Equivalent Rent) and Rent of primary residence making a total of 32.2% of the #CPI.

Rents have gone negative MoM in Sep for the first time since Dec 2021 disproving any "sticky inflation" talk.

7/25

Besides rents there are other core components showing deflation like used car prices which was one of the primary drivers of #inflation back in late 2020 and 2021.

It has been negative MoM since Jun and is now flat at 0.5% YoY.

It is poised to go negative YoY in October.

8/25

Besides rents and used cars:
1- apparel has been pretty volatile declining one month and jumping another - likely to even out in the coming months
2- transportation services are already negative
3-healthcare inflation might ease (bloomberg.com/news/articles/…)

9/25

4- this leaves only alcohol and tobacco that are mostly insignificant since together they make less than 1.4% of the #CPI.

Everything said disproves the #Fed's "sticky" and "high" #inflation theories, and makes #disinflation primary reason for the #Fed #pivot.

10/25

2) By now we know the #economy (real #GDP) contracted in Q1 (-1.4%) and Q2 (-0.6%) making a "technical" #recession.

Some opponents have criticized this saying we can't be in a #recession due to strong job mkt.

But #NFP can rise in recessions:

https://twitter.com/MBjegovic/status/1554098237690224641?s=20&t=S6dWjDz6uHSR7UGygaVk_Q

11/25

#NBER still hasn't officially declared this #recession.

If we see another negative GDP print in Q3 at the end of this M, #NBER won't have a choice but to officially declare it.

Still they will certainly not do it before the midterms in Nov.

12/25

Atlanta #Fed #GDPNow Q3 tracker has mysteriously jumped from 0.3% last week to 2.3% despite the #ISM which was pretty close to a contracting area coming at only 50.9 in Sep.

ISM New orders contracting at 47.1, lowest since May 2020 and currently in #recession territory.

13/25

3) We are awaiting Sep AHE this Friday that will shed more light on the wage growth story.

From what we know so far Aug AHE grew only 0.3% MoM or 3.6% annualized which is in line with the LT wage growth target of 3-4% the #Fed sees as sustainable for 2% #inflation.

14/25

One month doesn't constitute a trend but given lower job mkt imbalance (4), there is reason to believe AHE growth might remain lower.

JOLTS job openings dropped by 1.1M in Aug, the largest decline since Apr 2020.

This will be welcomed by the #Fed.

15/25

5) By hiking rates the #Fed tightens financial conditions including higher mortgage rates that discourage ppl from refinancing their mortgages/take new ones and has adverse effect on home prices.

The effects are also lower prices of risk assets like equities.

16/25

Risks of potential defaults (#CDS premiums) rise.

With the FI sell-off and 10Y going above 4%, there are tighter conditions for the government to refinance its ever-growing debt.

After the #UK FI problems fears about sth similar happening in the #US rose.

17/25

#UK bond crisis was created by pension funds using LDI derivatives.

There have not been higher usages of new structural leverage products in the #US that would warrant fears of sth breaking.

We are not there, yet.

However potential for sth breaking remains.

18/25

6) External imbalances have been omnipresent due to stronger #DXY as a direct result of the #Fed hiking.

I've pointed out several times to potential sth breaking in the FX mkts (#GBP, #EUR, #JPY...).

Then #UK FI mkt actually broke and prompted the #BOE to intervene.

19/25

Fears about credit (and default) risks rising in Europe ( $CS, $DB...) have largely been unwarranted, for now.

However, if the #DXY continues to surge things might get pretty ugly.

Such developments prompted #RBA in #Australia to unexpectedly lower its hikes.

20/25

Like #UK, some other countries may also see sharp rises in bond yields prompting their CBs (#ECB) to intervene.

Fears of sth breaking and tighter financing conditions for governments prompted politicians to start calling the #Fed to #pivot:
wsj.com/articles/u-n-c…

21/25

Last but not the least, it is important to note the time lag the MP has (8).

This lag is estimated to be anywhere between 6M to 18M.

We likely haven't seen the full effect of the first 25 bps hike in Mar yet, let alone other larger hikes that followed.

#Fed

22/25

Still the #inflation is cooling off with many economic figures going all the way back to lockdown months of 2020 (potentially 3M MoM #deflation, ISM new orders, decline in JOLTS job openings...)

And all this has happened without even the #Fed hikes taking full effect.

23/25

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24/25

We are coming to a point where:
1) the #Fed loses ALL reasons to keep hiking rates bc "high and sticky inflation" has been disproved by the #inflation data and
2) sth may break any moment.

I would say we are getting awfully close to a #pivot but are not there yet.

25/25