Fed’s Bostic: Still Comfortable Leaning Into Tight Labor MarketsPosted: May 25, 2023 Filed under: Currencies, Economy, Monetary Policy | Tags: DXY, DXY0, Fed Fund Futures, Federal Reserve, initial claims, Raphael Bostic, technical analysis, U.S. dollar Leave a comment
I have argued for a while that as long as the labor market remains tight with low unemployment, the Federal Reserve will press as far as it dares on its cycle of monetary tightening. Raphael Bostic, CEO of the Atlanta Federal Reserve (and currently a non-voting member of the Federal Open Market Committee), confirmed that strategy during a recent interview with Marketplace.
Don’t Come Crying to the Fed Anytime Soon
Bostic definitively stated that the Fed is so determined to press against inflation that it will likely turn a deaf ear to those who will ask for easier monetary conditions the moment the labor market delivers bad news. Emphasis mine:
“You know, as we get further into inflation getting, closer to our target, I’m expecting we’re going to see stresses in labor markets. We’ve not really seen that. And when that starts to happen, people are going to be looking to us to try to do something about that as well, and maybe turn away from our focus on inflation. But we can’t do that, because failing in getting the inflation back to the 2% target will be much more problematic for the economy. And so as people start to call out for action to provide relief in labor markets, I think what we’re going to have to do is just stay laser focused on the fact that, you know, our employment mandate goal, we are very, very close to that right now. And we’re not close to that in inflation. So we have to stay focused on inflation.”
The bad news for the labor market has been long anticipated and stubbornly absent for the people who keep expecting a recession at every turn of the calendar. This “lagging indicator” of economic health just keeps chugging along. Even a recent uptick in initial unemployment claims above 240,000 fizzled out before the “I told you so’s” could drape the economic headlines. The 251,000 in weekly initial claims from January, 2022 stands as the latest high. For now, initial claims continues to tell the same message week after week after week: the Fed has room to hike if inflation remains an issue. Rate cuts are certainly nowhere on the horizon from this vantage point.
Source: U.S. Employment and Training Administration, Initial Claims [ICSA], retrieved from FRED, Federal Reserve Bank of St. Louis; May 25, 2023.
Given this data and Bostic’s determination to ignore anyone who wants the Fed to cut rates into an inflationary environment, I understand Bostic’s best guess target for rate cuts set a year or more out from now.
“My best case is that we won’t be thinking about a cut until well into 2024. And, you know, inflation is just double what our target is by just about every measure. I don’t see scenarios where the economy is going to evolve in a way such that inflation gets close enough to our target where we might contemplate any kind of cut.”
As of the time of writing, Fed fund futures have acquiesced to the likelihood of another rate hike by July. However, they still eagerly anticipate rate cuts as soon as November. By the time Bostic guesses the Fed will think about cuts, the futures think the Fed will have 6 or 7 rate cuts in the books. The persistently wide gulf between Fed and market expectations on rate policy remains one of the more remarkable features of today’s financial markets.
Fresh Wind for the U.S. Dollar
The market’s push for another rate hike by July has helped the U.S. dollar regain momentum. Strength particularly against the euro and the Japanese yen has the dollar index (DXY) bouncing off its lows for the year. I am riding this momentum as long as it holds up. If the rally continues from here, I expect fresh resistance at the year’s high which should also coincide at the time with critical resistance from the 200-day moving average (DMA) (the bluish line below).
Be careful out there!
Full disclosure: net long the U.S. dollar
Reserve Bank of Australia Revives the Ghost of Inflation PastPosted: May 3, 2023 Filed under: Economy, Australia | Tags: Australian dollar, Reserve Bank of Australia, Monetary Policy, AUD/USD, Japanese yen, RBA, AUD/JPY 1 Comment
After the Reserve Bank of Australia (RBA) decided to leave its interest rates unchanged last month, the Australian dollar sold off for a week against the U.S. dollar. The decline reversed the small rally leading into the decision on monetary policy. AUD/USD enjoyed a small rebound going into the May decision on monetary policy and then jumped after the RBA threw markets for a loop by hiking interest rates again. More importantly, the RBA quickly revived the ghost of inflation past. The RBA undermined any assumptions that it would be content to watch inflation try to guide itself from 7% down to the 2% to 3% target range. The previous pause in rate hikes did not seal the deal on the fight against inflation.
The 15-minute chart of AUD/USD shows how traders rushed to buy in the wake of a surprise rate hike. The enthusiasm peaked within 3 hours. (Source: TradingView)
The RBA acknowledged that “inflation in Australia has passed its peak.” However, inflation at 7% is too high and “…while the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range.” This inflation horizon means the RBA could intermittently hike rates for quite some time as it scours the landscape for smoldering embers of inflation.
The current problem is in services price inflation. The U.S. also faces this challenge. Indeed, he RBA referenced global commonality in explaining the sources of stubborn highly inflation (emphasis mine):
“Goods price inflation is clearly slowing due to a better balance of supply and demand following the resolution of the pandemic disruptions. But services price inflation is still very high and broadly based and the experience overseas points to upside risks. Unit labour costs are also rising briskly, with productivity growth remaining subdued…Wages growth has picked up in response to the tight labour market and high inflation.”
The RBA further explained that the rate hike should firmly anchor medium-term inflation expectations. Tightening monetary policy is acting like an insurance policy against higher inflation expectations contributing “to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the historically low rate of unemployment.” Unemployment in Australia remains at a 50-year low. Thus, the RBA has plenty of room to continue tightening as needed…at least for now. The RBA acknowledged the challenge ahead in avoiding a recession while it tightens monetary policy: “the path to achieving a soft landing remains a narrow one.”
The RBA concluded the May statement on monetary policy just as it ended the previous statement: “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.” In other words, the market will need to stay on its toes.
The intraday surge in AUD/USD was not enough to punch the currency pair through important resistance on the daily level. AUD/USD remains trapped underneath resistance from all three major trendlines: the 20-day moving average (DMA) (dashed line), 50DMA (red line), and the 200DMA (blue line). Thus, I am neutral on AUD/USD until at least after I see how the market responds to the Federal Reserve’s turn to announce monetary policy.
AUD/USD has been stuck in a range for two months. Resistance from the 20DMA, 50DMA, and 200DMA are now capping upside. (Source: TradingView)
The Australian dollar versus the Japanese yen (AUD/JPY) is much more interesting, especially with the Australian dollar holding a significant yield advantage. The Japanese yen is suffering a fresh bout of weakness because the new governor of the Bank of Japan confirmed that he has little interest in tightening policy from ultra low rates. The double dose of yen weakness and Australian dollar strength hurled AUD/JPY right into overhead resistance at the 200DMA. A rush to the “safety” of the yen in the wake of fresh selling in the U.S.’s regional banks help send AUD/JPY in reverse. Still, while the 200DMA held as resistance, AUD/JPY is now making higher highs and higher lows with the 20DMA in an uptrend. The current 50DMA breakout could hold given this fresh momentum. (Recall that a bullish AUD/JPY has bullish implications for the stock market).
Overall, with the RBA on a path that could include higher rates for some time, I like buying the Australian dollar on dips on the assumption it has likely bottomed against the U.S. dollar and the Japanese yen. I am currently (re)accumulating AUD/JPY on this pullback in anticipation of an eventual retest of 200DMA resistance.
AUD/JPY has traded in a well-defined range all year. The latest uptrend is the latest opportunity to build enough momentum to break out. (Source: TradingView)
Be careful out there!
Full disclosure: long AUD/JPY, long FXA
Don’t Blame the Fed: The Fed Gives Us What We WantPosted: March 21, 2023 Filed under: commodities, Economy, gold | Tags: CME FedWatch Tool, Fed balance sheet, Fed Fund Futures, Federal Reserve, gold, Jim Chanos, Monetary Policy, National Financial Conditions Index, NFCI, Panic of 2023, PHYS, SBNY, Signature Bank, Silicon Valley Bank, Sprott Physical Gold Trust ETV, SVB, SVB Financial Group 2 Comments
The Fed’s risk management strategy was ostensibly designed to keep pushing rates higher until the Fed slayed the inflation dragon or something in the economy forced it to stand down, whichever came first. Unfortunately for the Fed, the dice rolled in favor of the latter. Instead of a soft landing or even a mild recession, bank failures landed on the Fed’s collective lap in the form of SVB Financial Group (SVB), the parent company of Silicon Valley Bank, and Signature Bank (SBNY). It is very easy to blame the Fed for this mess (today’s chorus is pretty emphatic on this point). However, the problems in Silicon Valley Bank (SVB), which was the strongest catalyst for the Panic of 2023, started well before the Fed belatedly decided to start tightening monetary policy. ABC News confirmed reports from the New York Times and the Wall Street Journal on the following timeline:
- Starting in 2019: The Federal Reserve warned Silicon Valley Bank about risks in the bank.
- 2021: “The Fed identified significant vulnerabilities in the bank’s containment of risk, but the bank did not rectify the weaknesses.” Ironically enough, one of the six fines issued to SVB included “a note on the bank’s failure to retain enough accessible cash for a potential downturn.”
- July, 2022: a full supervisory review revealed the bank as “deficient for governance and controls.”
- Fall 2022: the Federal Reserve of San Francisco met with “top officials at the bank to address the lack of accessible cash and the potential risks posed by rising interest rates.”
In other words, tight monetary policy was not the root problem of the bank’s problems. Tighter monetary conditions finally forced the issue of disciplining the bank. Tighter monetary policy is supposed to mop up excesses in the economy, and Silicon Valley Bank is starting to look like yet one more egregious example of the excess enabled by the prior era of easy money. It will be interesting to see whether the Fed’s review of its regulatory supervision includes claims that it lacked the authority to force SVB to change its ways.
The Fed Gives Us What We Want
Regardless, as I continue to see blame heaped on the Fed for this latest episode of financial instability, I have surprisingly adopted a more sympathetic view of the Fed’s work. The Federal Reserve has a near impossible job. It seems every major change in monetary policy sets the seeds for the next financial drama. Every financial drama raises the Fed’s prominence yet higher as a centralized economic planner, never able to return to the background of a free market. The Fed now must constantly tinker with interest rates with no clear terminal point. In particular, the economy has set up the Fed to bias towards keeping monetary policy as accommodative as possible for as long as possible. The Fed gives us what we want: policy that supports higher asset prices from stocks to real estate.
The index of financial conditions, as measured by the National Financial Conditions Index (NFCI), since the Great Financial Crisis (GFC) shows extended periods of very easy financial conditions. It is remarkable how little time the economy has been stuck with a positive index, or even a component on the positive side of danger…even in the aftermath of the economic shutdowns from the pandemic.
The Fed’s balance sheet is an even better example of how the Fed gives us what we want in the form of accommodative monetary policy. The Fed was never able to reduce its balance sheet after the GFC. The current tightening cycle barely put a dent in the Fed’s balance sheet. I have a sneaking suspicion that the Fed will never get its balance sheet back to pre-pandemic levels either. Note how the balance sheet ticked up as of last Wednesday in the wake of the rescue programs rolled out to backstop failing banks.
Board of Governors of the Federal Reserve System (US), Assets: Total Assets: Total Assets: Wednesday Level [RESPPANWW], retrieved from FRED, Federal Reserve Bank of St. Louis, March 21, 2023.
Before the GFC, this kind of balance sheet expansion was considered unthinkable. Surely, such a growth in the balance sheet would cause dangerous inflation levels. Given the on-going duration and size of this expansion, I am guessing economic theories will slowly but surely normalize the existence of this balance sheet. Yet, the longer this largesse continues, the more the economy will depend on sustaining these high levels. Thus, the economy will remain vulnerable to instability whenever economic conditions force the Fed into tightening policy. (Recall how the previous tightening cycle moved at a snail’s pace but still eventually forced the entry of a “Plunge Protection Team” to put a floor under the stock market).
What We Want Is Not Free
In a July, 2022 interview on Bloomberg’s Odd Lots (starting at the 14:35 point), famous short-seller Jim Chanos presciently claimed (emphasis mine):
“The one thing people are not prepared for is interest rates resetting meaningfully higher…It just hasn’t happened in most investors’ lifetimes…the idea that actually interest rates are not going to be 2 or 3% for the foreseeable future is going to be hard for a lot of investors to deal with. If we go back to what I would think are more reasonable rates based on what we’re seeing in the economy…this market will not be able to handle 5 or 6% 10-year. It just won’t. So many business models that we look at are extremely low return on invested capital because capital has been so plentiful for the past 12 years.”
The subtext here is that the Fed’s bias has been to leave monetary policy as accommodative as possible for as long as possible. Deflation was the great imperative chasing the Fed into monetary corners. The response to the pandemic was the logical conclusion of this policy as the Fed decided it had the luxury to keep driving unemployment ever lower by holding rates lower for longer. The economy appeared to be in another era where liquidity and massive stimulus could be conjured up for free. The pandemic’s inflationary pulse eventually turned the tables. What we want can actually be quite costly.
Thus, the Fed finds itself in a new trap. I feel for the Fed, but I don’t blame them…we prefer easy money…and many eagerly await the Fed getting disciplined back into cooperation by the Panic of 2023. The Fed Fund futures suddenly expect a long string of rate cuts to follow peak rates in May. I sure hope inflation cooperates as well!
Source: CME FedWatch Tool as of March 21, 2023
A Golden Epilogue
Gold received a new burst of life thanks to the Panic of 2023. As soon as the Fed blinks, I expect gold to rally further. I am keeping the buy button close as we go into the next several decisions on monetary policy starting with March’s. The Sprott Physical Gold Trust ETV (PHYS) broke out to an 11-month high. Today’s 2.0% pullback from over-extended price action looks like it is setting up the next buying opportunity.
Be careful out there!
Full disclosure: long GLD
An Inflation Downtrend Quickly EvaporatesPosted: February 24, 2023 Filed under: Bond market, Economy | Tags: Federal Reserve, iShares 20+ Year Treasury Bond ETF, PCE, Personal Consumption Expenditures, S&P 500, SPY, technical analysis, TLT Leave a comment
Some inflation analysts have enthusiastically contorted the inflation data to dismiss today’s inflation problem and/or conclude that inflation’s run came to an end months ago (since last year’s peak). One method of dismissal came in the form of a downtrend in the monthly change in the core Personal Consumption Expenditures (PCE) starting conveniently at the peak as far down as November’s relatively benign reading. (Alan Binder used a related method dividing inflation into different time periods). Suddenly, with two consecutive up months that inflation downtrend has evaporated. The mist leaves behind what essentially looks like a random walk in the land of higher for longer.
Source: U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis; February 24, 2023.
The chart above shows how the pandemic disrupted a serene post financial crisis range for monthly core PCE largely between 0.0% to 0.2%. Since PCE’s breakout two years ago (which the Fed ignored as transitory), core PCE has effectively settled into a higher range from 0.2% to 0.6%. Inflation may have indeed peaked, but it remains stubbornly high in the aggregate. The eagerly anticipated pre-pandemic serenity remains as elusive as ever.
Higher for longer inflation aligns with the Federal Reserve’s insistence on maintaining restrictive monetary policy higher for longer. The stock market may finally be catching on to the notion of higher for longer for inflation. When the core Consumer Price Index (CPI) came in hotter than expected in the previous week, the S&P 500 (SPY) wavered from intraday highs to lows and even increased the next day. Sellers took over the next 5 of 6 trading days with today’s 1.0% loss seemingly confirming a change in sentiment.
The S&P 500’s loss would have been worse except traders decided to defend support at the 200-day moving average (DMA) (the blue line above). This important trend line separates the index from more churn and a continuation of selling back down to the bear market line (20% down from the all-time high).
The bond market sniffed out the hotter inflation environment ahead of the stock market. Bond yields have steadily risen all month. For example, the iShares 20+ Year Treasury Bond ETF (TLT) is down 5.8% month-to-date (lower TLT means higher yields). The hot PCE brought an abrupt end to a 2-day relief rally in TLT.
Of course, the inflation story does not end here. The recent experience with inflation surprises suggests inflation will continue to confound the over-confident. A humbled Federal Reserve seems validated in taking a “risk management” approach to monetary policy in this haze of uncertainty. Still, if monthly core PCE takes a fresh drop next month, I am guessing a chorus will resume the inflation dismissals. If monthly core PCE continues higher from here, I will ring fresh alarm bells. I am watching the bond market’s next moves for potential clues. Moreover, I cannot wait to hear what the Federal Reserve and Chair Jerome Powell have to say about these developments in next month’s meeting!
Be careful out there!
Kashkari Acknowledges the Fed’s Inflation Miss. Will the Fed Catch Easing Financial Conditions?Posted: January 30, 2023 Filed under: Automobiles, Bond market, Economy, Monetary Policy | Tags: Adjusted Financial Conditions Index, ANFCI, Federal Reserve, iShares 20+ Year Treasury Bond ETF, James Bullard, Neel Kashkari, TLT 2 Comments
At the beginning of the year, Neel Kashkari, President of the Minneapolis Federal Reserve, wrote a revealing piece titled “Why We Missed On Inflation, and Implications for Monetary Policy Going Forward.” The article is a worthwhile (and bit-sized) piece since it may be the first and only time any member of the Fed has attempted to confront this topic head-on. Recall that it was June, 2021 when the Fed first acknowledged a surprising increase and persistence in inflation pressures. However, Chair Jerome Powell implied that the inflation problem would go away on its own accord. It was St. Louis Federal Reserve President and CEO who raised a truly hawkish alarm bell. His colleagues took a lot longer to get on board.
Kashkari sums up the Fed’s collective miss as coming from an over-reliance on traditional Phillips-curve models. These models failed the Fed for this economic cycle:
“In these workhorse models, it is very difficult to generate high inflation: Either we need to assume a very tight labor market combined with nonlinear effects, or we must assume an unanchoring of inflation expectations. That’s it. From what I can tell, our models seem ill-equipped to handle a fundamentally different source of inflation, specifically, in this case, surge pricing inflation.”
No wonder it is easy to maintain a deflationary mindset. The Philips-curve models are biased against inflationary pressures.
Refreshingly, Kashkari is not willing to accept economic shocks as an excuse for missing the seriousness of inflation in this economic cycle. Instead, he cautions that such dismissals impede learning. Moreover, he claims that even a crystal ball on inflation shocks would not have pushed the Philips-curve models to raise an inflation alarm. Since Kashkari makes this claim without evidence, I hope that someone in the Fed is working on a related white paper to advance learning on this topic.
Kashkari went on to observe that the Fed’s policy framework focuses on the labor market and inflation expectations: “If we can deepen our analytical capabilities surrounding other sources and channels of inflation, then we might be able to incorporate whatever lessons we learn into our policy framework going forward.” Yet, in April 2022, I summarized two Fed studies that identified housing as a key source of the inflation problem. At the time, I assume these studies helped guide the Fed’s determination to finally start hiking rates. I do not know how to reconcile these studies with Kashkari’s claim, but I hope he finds his way to this work at some point.
Kashkari concludes by standing firmly behind today’s monetary policy. Without a sense of irony, Kashkari defended the current monetary tightening by using wage pressures as his example.
“One may ask why tightening monetary policy is the right response to what I described as surge pricing inflation. Unfortunately, the initial surge in inflation is leading to broader inflationary pressures that the Federal Reserve must control. For example, nominal wage growth has grown to 5 percent or more, which is inconsistent with our 2 percent inflation target given recent trend productivity growth. Monetary policy is the appropriate tool to bring the labor market back into balance.”
Kashkari is also not interested in cutting rates anytime soon: “consider cutting rates only once we are convinced inflation is well on its way back down to 2 percent.” Seemingly like everyone else on the Fed, he fears the echoes from the 1970s warning that it is all too easy to declare a premature victory over inflation.
Easing Financial Conditions
If bond yields are any indication, the bond market stopped worrying about increasing inflation pressures back in October and November. For example, the iShares 20+ Year Treasury Bond ETF (TLT) not only bottomed but also it rallied 15.5% in just three months (TLT moves inversely to bond yields). Accordingly, I am eager to see whether the next announcement on monetary policy calls out the bond market for prematurely facilitating an easing in financial conditions.
The iShares 20+ Year Treasury Bond ETF (TLT) achieved a higher low at the end of December. It is close to a breakout above tis 200-day moving average (DMA) (the blue line above) which would usher in a new phase of easing of financial conditions. Is the Fed ready for that to happen? (Source: TradingView.com)
The Chicago Federal Reserve’s Adjusted Financial Conditions Index has been consistently easing since a cycle high in October.
Be careful out there!
Full disclosure: no positions
Bullard Ready to Declare Partial Victory Over InflationPosted: January 5, 2023 Filed under: Economy, Monetary Policy | Tags: Federal Reserve Bank of St. Louis, GDP, inflation expectations, James Bullard, labor market, Monetary Policy, S&P 500, SPY, unemployment 2 Comments
James Bullard, President and CEO of the St. Louis Federal Reserve, delivered a speech today to the CFA Society St. Louis. Bullard titled the speech “The Prospects for Disinflation in 2023.” Given Bullard defined disinflation as “a decrease in the rate of inflation toward the Fed’s 2% inflation target”, he could have more directly titled the speech “We Are Beating Inflation….But Don’t Celebrate Yet.” The essence of the speech suggested that the Federal Reserve can so far take some credit for a partial victory over inflation: “front-loaded Fed policy has helped keep market-based measures of inflation expectations relatively low.” However, that victory must be secured by staying the course to nudge the policy rate a little higher into the “sufficiently restrictive” zone. Critics who think the Fed uses too much discretion should appreciate the use of the Taylor rule to calculate the ultimate destination for monetary policy. Fed critics who think the Fed has gone too far should be relieved to see that the Fed is targeting the lowest possible Taylor-based rate and not the highest. (All charts copied from Bullard’s presentation).
As rates have risen, inflation expectations have declined sharply. Bullard offered the following chart to demonstrate the effectiveness of the Fed’s rush to front-load rate hikes.
Some people look at these expectations and conclude the Fed can stop before getting into the “sufficiently restrictive” zone. Some people might even conclude that Fed should start cutting rates. Most of those folks are probably focused on the stock market’s performance. Bullard instead is looking at the actual performance in the economy. GDP growth was unexpectedly strong in the second half of 2022. Even more importantly, the labor market remains very strong in aggregate as it glides through unprecedented territory. At least since 1980, the U.S. economy has never experienced such a wide gap between available jobs to the high side and available workers to the low side.
As long as this gap persists at such a magnitude, the Fed can feel comfortable about lifting rates into restrictive territory.
The Fed can declare partial victory since inflation expectations are back to previous norms. However, as Bullard noted consistently with the Fed’s messaging for months, “inflation remains too high.” If the Fed prematurely declares victory, the tightness of the labor market could become a source for reigniting inflation pressures, both real and expected.
Bullard’s words can generate out-sized market impacts. On this day, the market took Bullard’s caution pretty well. Bullard is still hawkish, but at least he is conceding some form of victory. The S&P 500’s (SPY) 1.2% loss is well within the volatility the index has experienced since it broke down below its 50-day moving average (DMA) in mid-December.
Be careful out there!
Full disclosure: no positions
On Marketplace, El-Erian Describes the Cost of A Late Start to Fighting InflationPosted: December 21, 2022 Filed under: Economy, Monetary Policy | Tags: Jerome Powell, Kai Ryssdal, Marketplace, Mohamed El-Erian, Monetary Policy 1 Comment
Mohamed El-Erian earned kudos on these pages when he pushed against 2021’s conventional wisdom of “transitory inflation” and insisted that the Fed needed to act to fight inflation. When too many thought that inflation would take care of itself and presented no threat to the economy, El-Erian was a solid inflation-fighting voice. So when he recently showed up to Marketplace for an interview, my ears naturally perked up.
El-Erian made several references to the tardiness of the Fed’s monetary tightening. Woven together, these quotes provide a key tenet of Fed critique and characterize the implications of being late to tightening.
“We know that, had they [the Federal Reserve] not fallen into this cognitive trap of inflation being transitory, had they acted earlier, they could have hiked into a growing economy. And they could have avoided what is one of the most front-loaded hiking cycles in history…
If you are late — and the Fed has been very late — you have no choice but to move really quickly. To make it specific, this Fed has increased interest rates by .75% four times in a row. That is a record that is almost unheard of, including during the ’70s and ’80s, when we had a much bigger inflation problem…
Even when they recognized, at the end of November last year, that inflation was not transitory, they didn’t move fast enough.”
I call the “cognitive trap” the earlier lethargy of deflationary thinking. The Fed fought and worried about deflation for so long that simple inertia nearly guaranteed the Fed would be slow to respond when real inflationary pressures appeared. Now the Fed is counting on a strong jobs market to provide political and economic cover for their mad scramble to catch up. I have yet to see anyone come to this conclusion as I have, but the proof could come in the Fed’s response to definitive evidence of a contraction in the jobs market. If the Fed is not done hiking by then, they will most likely stop hiking soon after the negative impact on the job market is obvious.
Kai Ryssdal thinks Powell admitted the Fed “blew it” in his May interview with Powell. I heard something different. The relevant quote from this interview tells me that Powell only acknowledged a small possibility that moving earlier would have generated better outcomes. However, the point is moot since the Fed would have only moved earlier with perfect information:
“I have said, and I will say again that, you know, if you had perfect hindsight you’d go back and it probably would have been better for us to have raised rates a little sooner. I’m not sure how much difference it would have made, but we have to make decisions in real time, based on what we know then, and we did the best we could. Now, we see the picture clearly and we’re determined to use our tools to get us back to price stability.”
I contend that if the Fed had implemented its risk management framework last year, that policy would have moved the Fed to start hiking rates sooner. Risk management calculations could have informed the Fed that even with the low risk assigned to being wrong about “transitory”, the cost of being wrong was great enough to make earlier rate hikes worthwhile.
Six months ago, I referenced the concept of “persistently elevated, unactionable inflation.” El-Erian talked about the potential for sticky inflation. He described the possibility this way: “…because the Fed waited for so long, the inflation challenge has shifted from the interest rate-sensitive sectors to sectors that are less interest rate-sensitive: services and wages.” Assuming El-Erian is correct, then as the economy grinds into a slowdown next year, the Fed is likely to concede to an economy with inflation above target. El-Erian makes the following supportive claim:
“…if they were formulating the inflation target today, I doubt it will be 2%. I think most people agree it would be higher than that…So the best we can hope for is, by the middle of next year, we’ve gotten to stable inflation of about 3% to 4%. They keep on telling us that they’re gonna pursue 2% in the future, and society learns to live with a stable inflation rate that is not 2%.”
Considering what the economy has experienced for almost three years, some stability might feel like a welcome change.
Before careful out there! (I highly recommend reading or listening to the full interview with El-Erian)
Lennar Corporation: How the Fed Is Cooling Inflation In the Housing MarketPosted: December 20, 2022 Filed under: earnings reports, Economy, Housing | Tags: home builders, housing market, LEN, Lennar Corporation, supply chain Leave a comment
Plenty of evidence exists that the Federal Reserve’s fight against inflation is working. Home builder Lennar Corporation (LEN) recently provided a vivid example of how the Fed’s rate hikes have forced the housing market to correct and push back against inflationary pressures. Deflationary forces are now at work in the system.
In last week’s Q4 earnings conference call, Lennar described an important chain of events that are underway. The company has been proactive in getting ahead of slowing demand and rising rates by purposely reducing margins to accommodate price reductions and incentives on a community-by-community basis. (The following housing markets are Lennar’s most problematic: Orlando, Pensacola, Northern Alabama, Austin, Phoenix, Utah, Reno, and Portland). In turn, Lennar is using its size and market dominance to force concessions from its supply chain. For example:
“We have very strong relationships with our trade partners. We have demonstrated to them that we have taken the first step by lowering sales prices to drive sales, and they understand this and understand the dynamic of labor availability as overall starts slow and they’re working closely with us to lower their prices…As with our trade partners, our land partners or sellers understand that we are maintaining volume and increasing market share while taking the first hit to our margin. They will need to work together and participate or we’ll need to move on.”
Lennar was even more direct in describing its advantage when inferring that the supply chain needs the work that Lennar can provide by keeping sales volumes flowing:
“…you really can’t underestimate the leverage that we get in working with our trade partners as things slow down across the board. People are looking for work. If we’re going to be the ones out there to do — starting homes, we’re going to get cost concessions, bringing cost concessions from our trade partners, from our land partners, and we’re just going to continue”
The industry-wide slowdown in housing starts has “sped up the availability of labor and materials for Lennar.” As a result, the company can use its dominant market position to extract lower costs out of the supply chain. Scarcity in the supply chain is easing and inflationary pressures are easing. Smaller builders are likely suffering the most from this change in dynamics.
Interestingly, LEN jumped 3.8% to a 10-month closing high in response to what was a surprisingly bullish earnings report considering the market environment. This buying was particularly impressive given the post-Fed sell-off underway in the stock market. It looked like another win for the seasonally strong period for home builder stocks. However, since then, gravity has slowly exacted its toll as interest rates have started to climb again. That post-earnings celebration is completely reversed now. The chart below marks earnings with a dashed vertical line labelled “E” in the bottom axis.
An irony awaits the economy on the other side of this housing reality check. With builders slowing down starts in parallel with housing demand postponed by punishing mortgage rates, an economic recovery will deliver a rush that will expose new market dysfunctions. Home prices could quickly turn around as eager buyers once again scramble for limited inventory. The major builders will continue to move slowly in adding supply to the market. The intense rationalization of the housing market will keep “normalization” out of reach in the most attractive housing markets.
In the meantime, waning inflationary pressures should at least benefit more participants than runaway inflation.
Be careful out there!
Full disclosure: no position
Median CPI May Be A Window on Fed’s Inflation CautionPosted: December 18, 2022 Filed under: Bond market, Economy, Monetary Policy | Tags: 16 percent trimmed-mean CPI, Federal Reserve, Federal Reserve Bank of Cleveland, iShares 20+ Year Treasury Bond ETF, Jerome Powell, median CPI, TLT 1 Comment
Last week, the Federal Reserve disappointed markets once again with its refusal to acknowledge the market’s belief in the end of the inflation threat. The opening statement for December’s decision on monetary policy delivered the familiar refrain: “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” During the press conference, Chair Powell further emphasized that the Fed has yet to see substantial evidence that inflation will continue to come down in a sustained way. So while the Fed is slowing the pace of rate hikes, the Fed will continue hiking past the market’s peak rate expectations. Powell even rebuffed once again the notion that the Fed will cut rates next year. So if inflation has peaked, why is the Fed so “stubborn”? The dynamics in median CPI may be a window on the Fed’s inflation caution.
Every month, financial markets receive a bevy of inflation reports. The Federal Reserve watches all of them as is clear from the various research papers and metrics the various Federal Reserve banks produce. The Federal Reserve Bank of Cleveland produces a monthly report on the median CPI and the 16 percent trimmed-mean CPI. Per the definition provided with the report:
“Median CPI is the one-month inflation rate of the component whose expenditure weight is in the 50th percentile of price changes. 16 percent trimmed-mean CPI is a weighted average of one-month inflation rates of components whose expenditure weights fall below the 92nd percentile and above the 8th percentile of price changes.”
Why use the median CPI and the 16% trimmed-mean CPI? The Cleveland Fed explains: “By omitting outliers (small and large price changes) and focusing on the interior of the distribution of price changes, the median CPI and the 16 percent trimmed-mean CPI can provide a better signal of the underlying inflation trend than either the all-items CPI or the CPI excluding food and energy (also known as core CPI).”
This effective smoothing of the inflation dynamics produces a lag in the peak for inflation and shows almost no indication that inflation is ready to come down in the sustained fashion the Fed wants to see. In the chart below, the yellow line is the median CPI, and the greyish blue line is the 16% trimmed-mean CPI. For November, the order from top to bottom is the (headline) CPI, median CPI, 16% trimmed-mean CPI, and the core CPI.
The trend is NOT yet down. If these were stock charts, I would even argue an uptrend remains in place.
The 16% trimmed-mean CPI looks like it has likely peaked, but the topping pattern lacks the double-topping that makes the peak in core CPI look so convincing. The median CPI is the worst news for those who think the inflation threat is already over: this measure is just now plateauing after streaking straight upward since late last year. Sure, there are all sorts of forward-looking measures that the Fed sees as confirming a peak in inflation, but there is little saying the inflationary pressures are going to come down sufficiently and conclusively. The Fed’s risk management framework thus mandates that the Fed proceed with caution. The magnitude of decline that mollifies the Fed remains anyone’s guess. Meanwhile, interest rates are still fighting the Fed and likely more focused on the prospects for a 2023 recession.
The iShares 20+ Year Treasury Bond ETF (TLT) is hovering at levels last seen three months ago. TLT looks like it bottomed out in October/November. Source: TradingView.com
Be careful out there!
Full disclosure: no related positions
The Fed Plants A Flag On Peak Inflation and An Economic Soft LandingPosted: December 3, 2022 Filed under: Bond market, Economy, Jobs, Monetary Policy | Tags: federal funds rate, Federal Reserve, inverted yield curve, Monetary Policy, proxy funds rate, recession, S&P 500, SPY 6 Comments
Robert G. Valletta, associate director of research and senior VP at the SF Fed, planted a flag on peak inflation and an economic soft landing in a recent economic research blog post. Valetta provided data suggesting that inflation is finally on a sustained path lower alongside increased risks for a mild recession. The blog post is not an official statement from the Federal Reserve Board of Governors, but the work is a powerful message nonetheless.
Valetta declared “recent data suggest that inflation may have peaked.” The latest inflation projection shows a gradual decline toward the Fed’s 2% average goal around 2025 or 2026. Valetta cautions that “repeated upside surprises” to inflation mean that “the risks to this forecast [are] weighted to the upside.” In other words, we should expect the Federal Reserve to keep its interest rate higher for longer in order to ensure inflation’s glide path stays pointed downward. The graph below shows the recent peak and successive higher forecasts for inflation since March.
After on-going upside revisions, PCE core price inflation is now expected to approach the 2% target somewhere around 2025. (Source: Federal Reserve Bank of San Francisco)
The cost of peaking inflation is slower growth. Valetta expects “growth to remain well below trend this year and next year before converging back to trend in 2025.” Conveniently, that return to trend occurs just as inflation returns to the Fed’s target. Most importantly, Valetta points to a mere one percentage point increase in unemployment “through 2024.” This expectation means that the onset of a recession next year will create a mild economic slowdown. Today’s unemployment rate is still near the historic low of 3.5%. Unemployment below 5% is surprisingly low for a recessionary environment. The high job vacancy rate softens the economic blow of slowing growth as there is plenty of room to cool off labor demand without disrupting the labor market.
Valetta acknowledged that the inversion of the yield curve suggests that odds are high for a recession: “such yield curve inversions have proven historically to be reliable predictors of recessions over the subsequent 12 months. After some divergence earlier this year, two leading measures of the yield spread have now both become inverted.” However, Valetta does not want readers to decide that a recession is a foregone conclusion: “their predictions come with substantial statistical uncertainty, however, and are not definitive indications that a recession is looming.”
Inverted yield curves have preceded recessions since the late 1980s. (Source: Federal Reserve Bank of San Francisco)
The Fed’s success in fighting inflation has come from a “proxy funds rate” that is much higher than the effective funds rate. According to the SF Fed, “this measure uses public and private borrowing rates and spreads to infer the broader stance of monetary policy.” The gap between the proxy and effective rate is higher than ever. No wonder Fed Chair Jerome Powell can so comfortably reiterate that the Fed can now slow the pace of rate hikes.
With peak inflation finally here, traders and investors should focus on how long the Fed intends to keep a restrictive stance on monetary policy. Given the extended period over which the Fed expects above target inflation, monetary policy should remain restrictive for longer than the market currently expects. In turn, the implication for the stock market of restrictive policy and below trend growth means valuations must come down further and cap upside in market returns for 2023 and perhaps 2024. Time will tell of course.
The S&P 500 (SPY) is out of bear market territory and now trying to fight its way through restrictive monetary policy.
Be careful out there!
Stock Market Loves Powell Moving from “Keep At It” to “Stay the Course” On Fighting InflationPosted: December 1, 2022 Filed under: Bond market, Economy, Jobs, Monetary Policy | Tags: Brookings Institution, Fed Fund Futures, Federal Reserve, Jerome Powell, Monetary Policy, S&P 500, SPY 5 Comments
When Federal Reserve Chair tersely spoke at Jackson Hole on August 26th, he sent a chill through financial markets. Taking on the toughest inflation-fighting tone he could muster, Powell concluded by proclaiming “we will keep at it until we are confident the job is done.” The S&P 500 (SPY) promptly dropped 3.4% on the day. The message was so harsh that it almost took two months for the stock market to bottom out. Fast-forward to Powell’s speech November 30th titled “Inflation and the Labor Market” at the Hutchins Center on Fiscal and Monetary Policy, Brookings Institution in Washington, D.C. Powell concluded by proclaiming “we will stay the course until the job is done.” The S&P 500 promptly rallied 3.1% on the day. The move was bullish enough to close the index above its 200-day moving average (DMA) for the first time in almost 8 months. The S&P 500 also closed above the May, 2021 low. Something about the difference between “keep at it” and “stay the course” significantly mattered to traders!
The S&P 500 (SPY) rallied enough to punch through two important resistance levels. The cumulative losses from Jackson Hole are now almost reversed. (Source: TradingView.com)
If not for the stock market’s reaction, I would have interpreted Powell’s speech to land somewhere between hawkish as ever and no new information. In fact, there were several key points from the speech which should have told the market the Fed is as serious as ever about sustaining an extended fight against inflation (the following are direct quotes unless otherwise indicated; particularly important quotes in bold):
- It will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains much too high.
- So when will inflation come down? I could answer this question by pointing to the inflation forecasts of private-sector forecasters or of FOMC participant…But forecasts have been predicting just such…a decline for more than a year, while inflation has moved stubbornly sideways.
- It seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting and Summary of Economic Projections. (a reiteration from the November monetary policy meeting)
- Restoring [supply and demand] balance is likely to require a sustained period of below-trend growth. (another reiteration)
- Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.
- It is far too early to declare goods inflation vanquished, but if current trends continue, goods prices should begin to exert downward pressure on overall inflation in coming months. (the stock market must have focused on this claim)
- As long as new lease inflation keeps falling, we would expect housing services inflation to begin falling sometime next year. Indeed, a decline in this inflation underlies most forecasts of declining inflation. (in other words, this claim is old news)
- We can see that a significant and persistent labor supply shortfall opened up during the pandemic—a shortfall that appears unlikely to fully close anytime soon. (the stock market clearly did not hear this)
- The labor market, which is especially important for inflation in core services ex housing, shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2 percent inflation over time. (in other words the job market is at risk of sustaining high rates of inflation)
- Despite some promising developments, we have a long way to go in restoring price stability.
- It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting. (this is another reiteration, but the stock market seemed to treat this as welcome new news)
If the Fed Fund futures market reversed course and priced in lower peak rates, the stock market’s sudden burst of enthusiasm could have made more sense. However, futures speculators just shifted out the peak 5.00%-5.25% range by one meeting, from March, 2023 to May, 2023. The market did move up the schedule for the first rate cut and ended the year at 25 basis points lower. However, note well that during the Q&A Powell reiterated a warning about the market’s expectations for quick rate cuts: “Cutting rates is not something we want to do soon. That is why we’re slowing down.”
Fed Fund futures market peaked rates at the March, 2023 meeting ahead of Powell’s speech (source: CME FedWatch tool)
Fed Fund futures market peaked rates at the May, 2023 meeting after Powell’s speech and moved the first rate cut up by 5 months (source: CME FedWatch tool)
The day’s rally in the stock market is one of those many times to ignore contrary fundamental assessments and pay attention to what the market thinks. If buyers follow through with the 200DMA breakout on the S&P 500, I will assume seasonal tailwinds are in full flight. Absent any shocks, the market could then rally all the way into the Fed’s December 14th pronouncement on monetary policy. That event will give Powell a fresh chance to redirect financial markets if financial conditions loosen up too much by then. Maybe Powell will have to reiterate how the Fed will “keep at it” instead of “staying the course.”
The Q&A of the Brookings Institution session mainly reiterated points from the speech. There were two points that stirred my interest for future reference.
First of all, Powell actually admitted that the housing market was in a bubble. The conditions he described were easily observable at the time: “coming out of the pandemic, rates were very low, people wanted to buy houses, get out of the cities and move to the suburbs. You had a housing bubble. Had prices going up that were very unsustainable levels, and overheating…” However, of course, the Fed did not dare say the “B” word in the middle of the mania. Powell did not offer any thought on whether the bubble could have been moderated by hiking rates sooner…or at least jawbone about the bubble.
Secondly, Powell mentioned one regret from the 2020 policy framework reset that he mentioned almost as a footnote. Powell indicated that he would not repeat the mistake of relying on a long history of low inflation as a basis for making policy. At the reset, Powell communicated that the Fed would not “lift off” (start hiking rates) until it “saw both maximum employment and price stability.” The stock market soared on this news as it correctly interpreted the change as a Fed more tolerant of a higher range in inflation. Powell admitted that commitment “made us under-estimate tail risk.”
I soundly criticized this pronouncement at 2020’s Jackson Hole. While Powell insisted this mistake has nothing to do with today’s inflation, I continue to insist that this commitment made the Fed slow to respond to rising and then realized inflation risks. Members of the Fed have also dismissed the notion that starting rate hikes a little earlier would have made a material difference in the inflation landscape. We will never know the counterfactual of course. Still, I feel somewhat vindicated that the Fed has taken note of its policy mistake (and prior deflationary bias) and learned some lessons.
Be careful out there!
Appendix: Notes from the Q&A session
Wage increases are going to be a core part of the inflation story going forward.
The labor market has a real supply imbalance
For most workers, wage increases are being eaten up by inflation. Need price stability to get real wage increases.
We assumed that the natural rate of unemployment had gone higher during the pandemic. It’s very hard to pin down where it is when there is a massive disruption.
Used to be able to look through supply shocks. But if we have repeated shocks, it changes things. What are the implications if true? Very hard to know the answers. We tend to think things will return to where they were naturally, but that’s not happening.
Need to be humble and skeptical about inflation forecasts for some time, calls for a risk management framework. If you are waiting for actual evidence for inflation coming down, it is possible to over-tighten. Slowing down is a good way of balancing the risks.
Very few professional forecasters have gotten inflation right.
There isn’t any one summary statistic to determine when policy is sufficiently restrictive. We monitor the tightening of financial conditions (which happens based on expectations). We also look at the effect of these conditions on the economy. Look at the entire rate curve. For significantly positive real rates along the entire curve. Forward inflation expectations reflect confidence in the Fed getting inflation down to 2%. Look at exchange rates, asset prices. Put some weight on these things.
How do you know when you can stop shrinking the balance sheet? This has already been described in a document. We’re in an ample reserves regime. General changes will not impact the funds rate. Will allow reserves to decline until somewhat above where we think is scarcity. Hold the balance sheet constant….. The demand for reserves is not stable. It’s a public benefit to have plenty of liquidity.
Question: August, 2020 announced new flexible inflation targeting framework. Anything in that we should be rethinking. Answer: We will do another review in 2026 or 2026. We implemented through guidance of various kinds. Put in strong guidance because there were a lot doubters that we could ever achieve 2%. Neither did we know. One piece of guidance we wouldn’t do again (it doesn’t have anything to do with the inflation we are currently seeing): we wouldn’t lift off until see saw both maximum employment and price stability. It made us under-estimate tail risk. Remember 25 years of low inflation, inflation just didn’t seem likely.
Cutting rates is not something we want to do soon. That is why we’re slowing down.
It’s not reasonable to expect we get back to the labor force participation in 2020 before the pandemic. But I wouldn’t rule it out. It’s been disappoint and surprising how little we’ve gained back.
We have to assume that for now most of the labor force balancing has to come on the demand side. By slowing job growth, not putting people out of work.
At what point do people ask for more wages because they aren’t keeping up with inflation. Don’t know when that happens, but if it does, you’re in trouble. Labor shortage is not going away anytime soon.
Coming out of the pandemic, rates were very low, people wanted to buy houses, get out of the cities and move to the suburbs, You had a housing bubble. Had prices going up that were very unsustainable levels, and overheating, now the housing market is coming out the other side of that. We have a built-up country, we have zoning, it’s hard to get homes built to meet demand
Full disclosure: long SPY call spread
The Swiss National Bank Knows More About Inflation Than YouPosted: November 14, 2022 Filed under: Central bank, Currencies, Economy, Monetary Policy, Switzerland | Tags: FXF, Invesco CurrencyShares Swiss Franc Trust, Monetary Policy, SNB, Swiss franc, Swiss National Bank, Thomas Jordan, USD/CHF 1 Comment
Swiss National Bank (SNB) Chairman Thomas Jordan made headlines two days ago in a speech where he insisted that the SNB “will take all measures necessary to bring inflation back into the territory of price stability.” Jordan noted that the current rate, 0.5%, is not restrictive enough to get inflation back into the target range. The Swiss franc surged on a day where the U.S. dollar was already in a deep sell-off after a slightly lower than expected U.S. CPI inflation report. The combined effect completed a reversal for USD/CHF back to the August lows. The below chart from TradingView.com of Invesco CurrencyShares Swiss Franc Trust (FXF) shows a bullish 200-day moving average (DMA) breakout to end the week. FXF gained 2.6% a day after gaining 2.0%.
Jordan set the stage for his market-moving statements in welcoming remarks at the SNB-FRB-BIS High-Level Conference on Global Risk, Uncertainty, and Volatility, November 8-9, 2022 titled “Decision-making under uncertainty: The importance of pragmatism, consistency and determination.” In the speech, Thomas declared “determined action today is consistent with our resolute response to deflationary pressures in the past.” In other words, the SNB is resolute in its inflation-fighting mission and rates will continue higher.
The speech set out a clear blueprint for how the SNB conducts monetary policy in this inflationary environment. The SNB wields an impressive variety of tools that basically says the SNB knows more about inflation than you. Here is a bulleted summary:
- Disaggregated CPI data
- A “network of regional representatives who conduct one-on-one discussions about the current economic situation in Switzerland with around 250 company managers throughout the country every quarter.” The SNB collects data on inflation expectations and changes in price-setting behavior.
- Model simulations and forecasting
- Risk assessments and cost-benefit analyses
- Machine-learning models trained on “a large set of economic and alternative indicators” (in an experimentation phase)
This list is a helpful guide for judging counter-observations about inflation from various pundits (including me!).
The SNB’s developing approaches to fighting inflation are not just based on stacks of data and layers of models. The SNB is also grounded by a set of principles. Jordan launched a description of these principals with two rhetorical questions:
“How do policymakers handle this situation of high uncertainty, upside risks to inflation and limited reliability of forecasts? How do they decide when and how strongly to tighten monetary policy?”
The SNB approaches this challenge with a risk management approach. The principles of pragmatism, consistency, and determination orient the SNB’s thinking. Pragmatism requires “policies that exhibit a certain degree of robustness to different circumstances.” Consistency generates monetary policy “…based on a firm commitment to the objective of price stability” that systematically uses all available information. Determination requires “…decisive action…[because] at times, the optimal policy decisions may be those that provide insurance against particularly bad, though very unlikely, events.” Jordan cautioned that “mixed signals on the persistence of inflation might tempt policymakers to postpone further reaction to inflationary pressures until uncertainty about future inflation has receded.” In other words, the damaging risks to inflation are high enough to warrant aggressive action ahead of high degrees of certainty. (The U.S. Federal Reserve deals with this conundrum by relying on the ability to quickly reverse course if monetary policy proves to be too tight).
The SNB’s determination provides the environment or the context for how the SNB decided to finally lift rates out of negative territory. The change started late last year as the SNB “began to tolerate a certain nominal appreciation of the Swiss franc.” The SNB started raising rates in June “to counter the risk of a further build-up of inflationary pressures.” Going forward, the market should expect a combination: higher rates and a stronger Swiss franc.
Given these pronouncements, I removed my bias to fade the Swiss franc on rallies. Now, I have a bias to go long. I started with a small short position on EUR/CHF that I plan to grow over time. I will also buy the dips on FXF.
Be careful out there!
Full disclosure: short EUR/CHF
Inflation Expectations and Inflationary PsychologyPosted: October 17, 2022 Filed under: Central bank, Economy | Tags: fed funds rate, Federal Reserve, inflation expectations, interest rate, Monetary Policy, Richard Corbin, S&P 500, SPY, University of Michigan surveys of consumers 1 Comment
The Federal Reserve’s aggressive fight against inflation has savaged financial markets. Along the way, I have taken note of bouts of navel-gazing over inflation indicators. Many of us have little operating experience navigating inflation, so perhaps it is natural to get sidetracked staring at an indicator or two that confirms a desire to see an end to inflation or that confirms the persistence of inflation. Since the U.S. last had an inflation problem over 40 years ago, the data samples are quite small for making conclusions for today’s unique mix of ingredients. Yet, since the Fed has expressed fears about entrenched inflationary psychology, consumer expectations for inflation have entered the basket of metrics used for assessing the Fed’s every move.
For example, back in April, 2022, Richard Corbin, a research professor at the University of Michigan who has directed the consumer sentiment surveys since 1976, issued this ominous warning in describing “inflationary psychology”:
“There is a high probability that a self-perpetuating wage-price spiral will develop in the next few years. Households have already become less resistant to paying higher prices and firms have become less resistant to offering higher wages. Prices and wages will continue to spiral upward until the cumulative erosion in inflation-adjusted incomes causes the economy to collapse in recession…
…Although consumers have increasingly expected higher inflation, they have also expected a strong job market and rising wages, especially among consumers under age 45. In the year ahead, wage gains will continue to reduce resistance to rising prices among consumers, and the ability of firms to easily raise their selling prices will continue to reduce their resistance to increasing wages. Thus, the essential ingredients of a self-perpetuating wage-price spiral are now in place: rising inflation accompanied by rising wages.”“Inflationary Psychology Has Set In. Dislodging It Won’t Be Easy” – Richard Corbin
Note well that the University of Michigan’s U.S. consumer sentiment survey showed 1-year inflation expectations last peaked in March at 5.4%. There have been encouraging signs from the subsequent drift downward. However, hopes were dashed that these numbers could convince the Fed to pause after October’s 1-year expectation of 5.1% delivered a significant jump from September’s 4.7%. In other words, at best, expectations may be stabilizing at high levels, especially with core CPI surprising to the upside in September. Note, Corbin warned about over-extrapolating trends from wiggles in inflation numbers:
“Another critical characteristic of the earlier inflation era was frequent temporary reversals in inflation, only to be followed by new peaks. That same pattern should be expected in the months ahead.”
Surveys of Consumers, University of Michigan, University of Michigan: Inflation Expectation© [MICH], retrieved from FRED, Federal Reserve Bank of St. Louis, (Accessed on 10/16/2022, note the data are updated only through August per agreement)
For reference, the 5-year inflation expectations remain just above 2% which indicates consumers are still clinging to confidence that over the “long-term” inflation will return to the “before times”.
Federal Reserve Bank of St. Louis, 5-Year, 5-Year Forward Inflation Expectation Rate [T5YIFR], retrieved from FRED, Federal Reserve Bank of St. Louis, October 16, 2022.
Corbin wrote on the heels of the Fed’s first rate hike which was a mere 25 basis points. Corbin reacted with dismay and presciently argued:
“What was perhaps more surprising was that the quarter-point hike the Fed adopted in March was simply too small to signal an aggressive defense against rising inflation. Instead, it signaled the continuation of a strong labor market along with an inflation rate that would continue to rise.
Much more aggressive policy moves against inflation may arouse some controversy. Nonetheless, they are needed.”
Apparently, the Fed got the message and has been aggressively hiking starting with May’s rate hike!
If inflation expectations remain stubbornly elevated, then the time when the Fed is finally forced to take a pause could present a critical juncture of economic tension. In this scenario, I expect those who applaud the Fed’s pause will dismiss on-going high inflation expectations as transitory or even uninformed. Watch out if those expectations achieve new highs in the wake of a Fed pause.
The current controversy about aggressive policy demonstrates an instructive contrast with the last tightening cycle. What a difference pace can make! The S&P 500 (SPY) (red line with scale on the right) had little problem drifting higher while the Fed tightened with baby steps from 2016 to 2018. A sharp correction in late 2018 helped to convince the Fed to pause and then bring rates down. Market participants are still waiting for the Fed to care about the current market sell-off in the wake of higher rates.
Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; S&P Dow Jones Indices LLC, S&P 500 [SP500], retrieved from FRED, Federal Reserve Bank of St. Louis, October 17, 2022 (data available through September 1, 2022)
Be careful out there!
Full disclosure: short SPY put spread
Why the Fed Won’t Read Cathie Wood’s Open LetterPosted: October 11, 2022 Filed under: Bond market, Central bank, Economy, Monetary Policy | Tags: ARK Innovation ETF, ARKK, Cathie Wood, deflation, Federal Reserve, inverted yield curve, Monetary Policy 2 Comments
A Letter or A Plea?
ARK Invest’s Cathie Wood has opposed the Federal Reverse since at least the time the U.S. central bank first hiked rates above zero. Just three weeks after the Fed’s first interest rate hike, with more promised, Wood warned the Fed was making a mistake. On April 2nd, Wood jumped on a market signal from the inversion of the yield curve to underline the point.
The inversion barely lasted 2 days. The yield curve quickly “reverted” for the next 3 months and threw wrenches into the prognostications of a Wall Street looking for a recession to stop the Fed in its tracks. The yield curve inverted again in early July and has yet to look back. Yet, the Fed has become increasingly hawkish even in the face of this traditional signal of a recession. The Fed’s resolution was epitomized by a curt speech at Jackson Hole where Chair Jay Powell stood resolute on the Fed’s inflation fighting mantra.
So it is no surprise that Wood recently opened a new salvo in her campaign against the Fed’s monetary policy by writing an “open letter to the Fed” to extend her latest criticism in her videocast “In the Know.” In this letter, Wood warns that the Fed is overly focused on lagging indicators from inflation and employment and cannot see the “deflationary bust” that awaits the other side of its aggressive monetary tightening. In many ways, a deflationary bust has already occurred in financial markets. For example, Wood’s flagship fund The ARK Innovation ETF (ARKK) is just a “day’s trade” away from returning to its pandemic lows. Those sudden March, 2020 lows came on the heels of an economic and market crash that was full-force deflation until monetary and fiscal stimulus saved the day.
A Deflation Is Already Here
In other words, the deflation that Wood fears has already unfolded in certain financial markets. That pain is felt by anyone invested in the stock market. That pain runs even deeper for those speculating in the companies uncomfortably jostling around in the collection of ARK funds. However, Wood’s letter does not point to prices in her funds. Instead, the letter relies on a series of economic readings showing peak prices and subsequent declines for gold, silver, lumber, iron ore, DRAM, shipping, copper, corn, oil, and container board. The letter points out the ballooning inventories at major U.S. retailers and elements of employment data that show the first signs of a hot labor market finally beginning to cool.
All this complaining across Wall Street and all these data of course beg the question: why is the Fed ignoring it all? However, I think this question is misplaced. For example, Mary Daly, head of the San Francisco Fed, insisted that the Fed is forward looking. She even scolded the market is wrong in expecting rate cuts in 2023. The Fed has hundreds of economists on staff, including the ones who help to curate the charts from the St Louis Fed that I used to show the yield curve inversion. They know everything and more than the economists who get all the attention in the media. So I think it is a stretch to conclude that the Fed has no idea what is going on.
Why the Fed Won’t Read Cathie Wood’s Letter: Speculating on the Fed’s (Unstated) Strategy
Instead, I look to the larger, strategic context. The Fed kept rates too low for too long: the mania in the housing market and stratospheric valuations of profitless companies (again, see the ARK Funds) are sufficient evidence that the Fed should have started the journey toward normalization earlier. Moreover, the Fed has a massive $9 trillion dollar balance sheet that represents a considerable share of the $20 trillion U.S. economy. My guess is the Fed is not hearing the whispers of the famous inflation fighter, former Fed Chair Paul Volcker. Instead, the Fed recognizes the layers of distortions it helped to create in the economy, and it desperately wants to hit the reset button. From the purview of neutral to slightly restrictive policy, it can THEN observe the impact and assess whether the economy can sustain the resulting damage. I also guess that the Fed fully recognizes that the very minute markets sniff a peak in monetary tightening, speculative forces will roar away. Just watch what happens to the ARK Funds in that moment. Indeed, when Wood expected the Fed to cry uncle in July, she anticipated a vindicating resurgence in the ARK Funds.
In this environment where financial markets have become accustomed to easy money and have little experience dealing with inflationary pressures, the Fed is forced to err on the side of being aggressively hawkish as long as it dares possible. The Fed needs to make sure that when the time comes to pause and observe, little to no inflationary embers are left smoldering, ready to reignite with the giddy anticipation of easy money days to come again. As long as employment remains robust and resilient, the Fed can maintain political support for its actions even as support from market participants plummets. The rush to get to neutral or past neutral is likely exactly because the employment window cannot remain open to the Fed for an extended period. The Fed’s actions suggest a strategy for finishing hikes by the time the labor market’s weakness is obvious through an uptrend in the unemployment rate. The Fed has shown itself unmoved by losses in financial markets. So, pundits can throw all the macroeconomic tomatoes they want, the Fed is in over-correction mode for now.
Clinging to the ARK
When the bottom fell out of the ARK Funds, I updated my technical assessment and trading strategy on each of the major funds. I continue to think that the technicals are much more important than the fundamentals here. While the inverse correlation between interest rates and ARK performance is fundamental (surely much to Wood’s chagrin), the technicals of trend-following are sufficient for making trades. At some point, rates WILL peak. I contend the technicals (of trading on extremes) will actually become even MORE important then. Who knows what will be left standing in the ARK funds by that point…
Be careful out there!
Full disclosure: long ARK
Fed’s Daly: The Market Is Wrong About A Hump in 2023 Fed RatesPosted: October 6, 2022 Filed under: commodities, Economy, iron ore, Monetary Policy, oil, Salaries | Tags: BHP, BHP Group, Fed Fund Futures, Federal Reserve, Mary Daly, Monetary Policy, real wages, UGA, United States Gasoline Fund 4 Comments
The Federal Reserve board governors continue to stay on message, reminding the market over and over about its serious intention to fight inflation. San Francisco President Mary Daly has been particularly articulate on the Fed’s plan and what likely lies ahead. In an interview with Bloomberg Finance today, Daly informed financial markets that they are “wrong” to project what the interviewr called a “hump” in rate expectations. This hump is a peak sometime in 2023 with rate cuts to follow soon after. The current view from CME FedWatch has rates peaking from the February through June, 2023 meetings with a rate cut in July.
Daly’s steadfast perspective is important to remember every time the stock market rallies in anticipation of peak inflation and/or a “Fed pivot.” Indeed, Daly warned that the Fed needs to be prepared for inflation to be more persistent than expected. For context, Daly was one who was unwilling to predict peak inflation ahead of what turned out to be the “CPI shocker” that delivered a surprise of higher core inflation. Part of Daly’s persistence comes from what she and the Fed see as inflation’s greater potential for economic harm than the short-term consequences of normalizing monetary policy. Daly noted that over two years real wages have fallen 9%. She even shared an anecdote of a worker who told her about how he “loses” money when he goes to buy something with his earnings (an anecdote that speaks to nominal wages failing to keep up with nominal increases in prices).
Other interesting nuggets from the interview:
- Rates are probably now around the neutral rate, and the Fed needs to get slightly restrictive.
- The length of time rates stay neutral (or slightly restrictive) is more important than the specific level.
- 50% of today’s inflation is driven by demand (thus justifying the Fed’s desire to get slightly above neutral), 50% from supply.
- Daly refused to take the bait on the question of whether the Fed was purposely trying to induce a recession, trying to force losses on the stock market, or intent on hiking rates until something breaks.
- Daly insisted the Fed is forward-looking and recognizes lagging indicators of inflation.
- Daly pushed back on the notion the Fed needs to coordinate with global central banks. She insisted that the Fed must stick to its domestic dual mandate.
While the signs a few months ago were clear from commodity prices that the Fed’s actions were impacting inflation, the recent strength in oil threatens to rekindle inflation fears from the average person. For example, gas prices look like they are already done declining. The United States Gasoline Fund, LP (UGA) broke out today. UGA looks like it double-bottomed in September.
The recent downtrend in United States Gasoline Fund, LP (UGA) came to an end this week with a powerful breakout above 50 and 200DMA resistance.
Similarly, diversified commodities producer BHP Group (BHP) looks like it is holding a bottom in place since late last year.
BHP Group (BHP) has so far held its lows from a year ago. While upside may be limited, BHP also looks like it is done going down for now.
If these bottoms are indicative of what is ahead, then any soft readings in the near-term inflation numbers could be, well, transitory… (tongue-in-cheek intended!)
Be careful out there!
Full disclosure: long BHP
Softening Inflation Expectations Are the Beginning Not the End of the Fed’s Hawkish PosturingPosted: September 18, 2022 Filed under: Economy, Monetary Policy | Tags: CME FedWatch Tool, Fed Fund Futures, New York Federal Reserve, S&P 500, SPY, Survey of Consumer Expectations Leave a comment
The surprisingly bad CPI report caused shockwaves throughout the stock market. Part of the shock likely occurred thanks to the relatively benign news the day before from the New York Federal Reserve’s August 2022 Survey of Consumer Expectations. Expectations for 1-year-ahead and 3-year-ahead inflation declined significantly in August.
The Fed’s aggressive anti-inflationary posturing is apparently finally having a positive impact on inflation expectations. Source: NY Federal Reserve.
I would caution anyone who wants to declare victory from the return of 3-year-ahead expectations to pre-pandemic levels. Inflation expectations were so well-contained for so many years, it is hard to project the dynamics of going from high to normalized expectations. For example, how long does the Fed need to continue its aggressive posture to maintain this momentum? Moreover, if the 1-year ahead expectation remains predictive, the Fed will have to stay on course tightening policy into 2023 as the Fed Fund Futures currently expect per the CME FedWatch Tool.
The market keeps pushing expectations for peak rates higher and higher in 2023. Suddenly, the market thinks the Fed is on track to reach a 5.0% to 5.25% range but then quickly back down by year-end.
The apparent predictive nature of the 1-year ahead expectation is particularly notable. Both the 1- and 3-year-ahead measures increased steadily a few months into the pandemic. A large gap opened starting in June, 2021 at the same time that the Federal Reserve was convinced that inflation was transitory. The comfortable math of “base effects” allowed the Fed and many others to essentially ignore the soaring inflation expectations. Clearly, the average consumer agreed with me and did not believe the story. Expectations just kept climbing for an entire year. It is only in the last 2 months – in the wake of a Fed that is suddenly consumed with anti-inflation religion – that inflation expectations took a notable downward turn. So while the big drop in August is encouraging, the Fed will likely need to maintain the psychological pressure for some time to keep a lid on expectations.
In turn, this necessary pressure could keep a lid on the stock market for a while. The S&P 500 (SPY) closed the week perfectly testing the line that defines a bear market (a 20% decline from the all-time high). We might have to get accustomed to the index pivoting around or near this important, psychological line.
The press release accompanying the NY Fed’s report included several additional key points indicating the worst of inflationary pressures could be in the rearview mirror if the Fed maintains the pressure.
- Median five-year-ahead inflation expectations declined to 2.0% from 2.3%.
- Median home price expectations declined by 1.4 percentage points to 2.1%. This drop represents a dramatic decline from April’s 6.0% and is the lowest reading since July, 2020.
On the other hand, despite inflationary pressures decreasing and respondents reporting declining access to credit, the NY Fed reported “median household spending growth expectations increased by 1.0 percentage point to 7.8%. The increase was driven by those with a high-school degree or less.” At the same time, respondents reported higher odds of missing a minimum debt payment, households felt better about their current and prospective financial condition. Net-net, these numbers tell me that the Fed’s posturing and policy have managed to bring some relief to pricing pressures without crushing economic expectations. These cross-currents will likely resolve in yet unexpected ways.
Be careful out there!
So Much For Peak InflationPosted: July 13, 2022 Filed under: CPI, Economy | Tags: Brian Deese, Carl Quintanilla, CNBC, CPI, PEP, PepsiCo Inc 1 Comment
“How long are we going to keep saying this is the worst of it?”Carl Quintanilla questioning Brian Deese, National Economic Council Director, about the June inflation numbers – CNBC, July 13, 2022
So much for peak inflation. The Consumer Price Index (CPI) once again came in hotter than “expectations” for both headline and core inflation. The U.S. Bureau of Labor Statistics reported annual June CPI at 9.1%, an increase over May’s 8.6%. Core inflation, excluding food and energy, came in at 5.9%, slightly lower than May’s 6.0%. The monthly increase of 0.7% was slightly higher than the 0.6% of the previous 2 months. The report called the increase in prices “broad based” and “…almost all major component indexes increased over the month.”
Despite being wrong for the last several months, the peak inflation narrative finally has a chance to come through with the next report on inflation. The prices of a large swath of commodities have plunged in recent weeks as it appears the Fed’s aggressive hawkishness is finally breaking the back of inflationary pressures. Financial markets have reflected these declines with large losses for commodity-related stocks. These declines continued today even in the face of the hot inflation print.
However, even if inflation’s momentum abates, prices promise to remain elevated for quite some time. Companies are warning in their earnings reports about this very prospect. For example, PepsiCo, Inc. (PEP) reported yesterday the following observation and expectation on inflation (from the Seeking Alpha transcript of the earnings call):
“Balance of the year inflation is higher than it is for the first half of the year. I think we’ve mentioned in the past, we’re in the teens in terms of commodity inflation. That will continue, but a little bit higher in the back half.”
Company reports are typically more meaningful than the expectations of economists because companies have money on the line and profits at stake.
Ultimately, what matters most is how the Federal Reserve responds to the latest numbers. If the Fed stays the course, inflation’s momentum should take another step down. (Notably, Brian Deese acknowledged on CNBC that core inflation remains too high and outlined the myriad of inflation-fighting initiatives underway by the administration). If the Fed gives in to pressures to slow down and also communicates its belief that its job is near an end, I fully expect a massive rally in financial markets and asset prices…at least in the short-term. If the Bank of Canada’s large (and surprise) 1 percentage point increase in its interest rate is any indication today, the Fed will stay on message.
Be careful out there!
Growing Inflationary Pressures Force Even the Swiss National Bank to Hike RatesPosted: June 17, 2022 Filed under: Economy, Monetary Policy, Switzerland | Tags: Monetary Policy, SNB, Swiss franc, Swiss National Bank, USD/CHF Leave a comment
The financial world last saw the Swiss National Bank (SNB) hike its interest rate back in 2007. It took “signs of inflation also spreading to goods and services that are not directly affected by the war in Ukraine and the consequences of the pandemic” to force the SNB’s hand (from the Introductory remarks by Thomas Jordan, head of the SNB). The rate move from -0.25% to -0.75% took financial markets by surprise and sent the Swiss franc soaring. USD/CHF declined 2.8% on the day in a move that may have created a double top.
The SNB insisted that “the tighter monetary policy is aimed at preventing inflation from
spreading more broadly to goods and services in Switzerland.” While the SNB also warned that these inflationary pressures may force the SNB to increase rates further, its current forecast for inflation at the -0.25% rate is for inflation to return to the 2% target starting next year. Note the significant increase in the inflation forecast since March (the red line over the yellow line).
The fast transmission of price increases also caught the SNB’s concern: “…price
increases are being passed on more quickly – and are also being more readily accepted – than
was the case until recently.” This acceptance is one of the drivers of higher inflation expectations that can lead to stubbornly high inflation. Moreover, second order inflation effects are threatening the inflation outlook. Interestingly, weakness in the Swiss franc is suddenly working against the SNB’s attempts to avoid deflation: “the Swiss franc has depreciated in trade-weighted terms, despite the higher inflation abroad. Thus the inflation imported from abroad into Switzerland has increased.” This comment makes me much less inclined to short the Swiss franc going forward.
In other words, the Swiss economy has been hit from all angles with price-related shocks. Content to keep rates at -0.25% for so many years, the SNB had to respond with a rate hike. With another 50 basis point hike on the table, the SNB has joined a growing chorus of central banks scrambling to normalize monetary policy. The race to the bottom of devaluation suddenly reversed this year.
Be careful out there!
SF Fed President Maps the Path Toward Neutral Policy, Not Banking On “Peak Inflation”Posted: April 22, 2022 Filed under: Economy, Monetary Policy | Tags: interest rates, Mary Daly, Monetary Policy, San Francisco Federal Reserve 5 Comments
More hawkish, anti-inflation commentary from Fed Chair Jerome Powell got top billing today in financial markets. While Powell said nothing new or surprising, he got the blame for a downdraft in stock markets. However, the head of the San Francisco Federal Reserve caught more attention for Inflation Watch. In a great scoop for Yahoo Finance, San Francisco Fed President Mary Daly gave a 15-minute interview discussing her stance on monetary policy. Daly crisply aligned with the new hawkish mood on the Fed. At the same time, she provided clear guidance on the Fed’s objectives and assessments of the current inflationary economy. I recommend watching the video embedded in the article. Otherwise, here are the key highlights and take-aways as you get ready for the May Fed meeting.
- “The Fed is expeditiously marching towards neutral. It is clear the economy doesn’t need the accommodation that we’re providing” – notice the recognition that current policy is over-stimulative. Maintaining an easy money policy while the economy is strong is not only bad policy, but also doing so increases inflation risks.
- “The neutral rate is about 2.5% by the end of the year” – this statement sets the stage for several 50 basis point rate hikes this year given rates are still at a paltry 0.25%-0.50%.
- “We don’t want to go so quickly or so abruptly that we surprise Americans and make them have to adjust quickly…” – the Fed never likes to create downside surprises, only upside ones. Indeed, Daly observed that tightening financial conditions are already tapping on the economy’s brakes. She pointed to mortgage rates as a prime example; a notable reference given a hot housing market is at the center of the Fed’s concerns.
- Daly insisted that the Fed can pull off a soft-landing.
- Daly cautioned that predicting “peak inflation” is “fraught with peril” given on-going COVID shutdowns in China and Russia’s invasion of Ukraine.
- “High inflation is as bad for workers as not having a job” – in other words, the Fed cannot afford to allow inflation to erode spending power on a sustained basis.
- The Fed funds rate is more precise than and better known for moving monetary policy.
Compare Daly’s comments to this key quote from Powell today:
“It may be that the actual [inflation] peak was in March, but we don’t know that, so we’re not going to count on it…We’re really going to be raising rates and getting expeditiously to levels that are more neutral and then that are actually tight … if that turns out to be appropriate once we get there.”
The Fed is all-aboard the anti-inflation locomotive!
An Attempt to Explain Today’s Lower Inflationary Pressures In JapanPosted: April 3, 2022 Filed under: Economy, Japan | Tags: AMAMIYA Masayoshi, Bank of Japan, FXY, Invesco CurrencyShares Japanese Yen Trust, Japanese yen, Monetary Policy 6 Comments
In a world of soaring commodity prices, major commodity importers should worry about increasing inflation risks. Japan is the world’s fifth largest importer with at least its top 5 imports consisting of commodities: crude oil, coal briquettes, petroleum gas, refined petroleum, and iron ore. Yet, the Bank of Japan is not much worried about inflation risks. In an important speech on March 29, 2022 AMAMIYA Masayoshi, the Deputy Governor of the Bank of Japan, described inflation as a problem for the U.S. and Europe but not for Japan. In “The COVID-19 Crisis and Inflation Dynamics: Opening Remarks at the Workshop on ‘Issues Surrounding Price Developments during the COVID-19 Pandemic‘, Masayoshi offered several explanations for Japan’s lower modest 2% increase for its consumer price index (CPI):
- Japan experienced a limited shift in demand. In the U.S. in particular, a sharp shift from services to goods consumption created severe supply shortages which in turn helped drive up prices.
- A strong risk aversion in Japan limited pent-up demand for private consumption. As a result, Japan did not experience disruptive shifts in demand. Japanese conservatism has also anchored labor mobility, a key ingredient for the kind of wage pressures that can contribute to inflation.
- The waning of the pandemic has revived the Japanese corporate “norm” of deflationary thinking – the “assumption that prices will not increase easily.” Accordingly, unlike U.S. firms, Japanese firms prefer to focus on long-term business relationships and are reluctant to increase prices. According to Masayoshi, “When there are supply-side constraints for certain goods, U.S. firms tend to raise prices relatively quickly and allocate goods by giving preference to customers who are willing to pay higher prices. In contrast, Japanese firms seem to place more emphasis on long-term business relationships with customers and respond to their demand as much as possible while keeping selling prices unchanged.”
- Service prices remain relatively weaker in Japan (although Masayoshi called on a review of statistical practices).
Masayoshi concluded with the claim that “our understanding of inflation remains limited.” Despite this purported limited understanding, the Bank of Japan is quite confident enough to buy an unlimited amount of bonds to defend its ultra-low interest rates. Last week the BoJ surprised financial markets with this vigorous defense of its zero interest rate policy (ZIRP). The immediate reaction in the currency market sent an already rapidly weakening yen even lower. The rush to sell more yen created a (likely temporary) exhaustion of sellers. The yen rebounded for three days before selling resumed on Friday.
As long as a differential in inflationary expectations exists between Japan and the U.S., the downward pressure on the yen should also persist.
Be careful out there!
Full disclosure: long FXY put options