🔔 The Confidence Compass

utrust

It's all getting a bit crazy in markets. Loads of volatility & plenty of uncertainty (except on FinTwit where everyone already knows the future).

Let's run through some themes...

How many Fed hikes? Have a guess 👇

@FerroTV

Barclays: 3

MS, StanChart: 4 

Citi, Wells, DB. JPM, GS: 5

Nomura: 5 (includes a 50bp move in March)

BNP: 6

BofA: 7

(25bp moves)

Stick a finger in the air and have a go yourself.

Meanwhile, the Fed insist they'll be "data-driven" when discussing tightening monetary policy.

How's that going to work exactly?

This month's NFP report will be ignored because of the Omicron skew 👇

 WHITE HOUSE ADVISER DEESE: JOB NUMBERS IN JANUARY ARE PROJECTED TO BE IMPACTED BY OMICRON.— Breaking.Live (@BreakingLive_) February 1, 2022 

Retail Sales in December disappointed:  

The drop in retail sales happened just as US Q4 GDP got a massive boost from a large increase in retail inventories.

Real inventories were the biggest explanatory factor in Q4-2021 GDP adding 4.9 percentage points to the headline growth rate. ~ Wells Fargo 👇

The above is a great read on the difficulties in trying to interpret the current data and extrapolate into the future. e.g. 👇

So what does this all mean for GDP growth? As a brief refresher, what matters for the contribution to GDP is the change in private inventories relative to the change in the prior quarter.

The $173.5 billion build in Q4 inventories was the second-largest build in the 21st century and anything short of that gain in the first quarter would result in a drag on headline growth.

The quirks of the GDP mechanics become even more clear when considering our forecast. We have a pretty sizable build in inventories in each quarter over the next two years, but given the mechanics of how inventories affect GDP, even with a greater than $200 billion increase in private inventories in each quarter of 2023, we don't get much help with top-line GDP growth.

So when the Fed look at the GDP data, this is just one of many factors they'll need to filter out before making a data-driven decision.

What if the Bullwhip Effect comes into play?

Admittedly, these examples are cherry-picked but what if... 👇  

 Bullwhip gonna be brutal when it hits pic.twitter.com/eRR9w0CLWt— Tim Rickert (@VolaTim) January 31, 2022 

Then there's the impact of car prices on the overall inflation levels.

As the supply chain issues are worked through and new vehicle production increases, KPMG see a reduction in used car prices of roughly 30%!

Is inflation even being measured 'properly' under these conditions?

Spain's 6.7% annual inflation rate was heavily influenced by energy prices.

In the latest release, the stats office noted that they're not using 'free market' energy prices even though 60% of Spain's households have precisely this type of contract.

CaixaBank ran the numbers and found that Spain's annual inflation would have been 4.7% instead of 6.5% if this had been calculated 'properly'. Minor difference...

Another hard to ignore factor: Incomes

Where was the H221 the spending?

Households that received Child Tax Credit.

@MikeZaccardi

The child tax credit expired at the end of 2021...

Over in the UK, fiscal support has been withdrawn and inflation is taking it's toll.  

Will real incomes start to fall?

 Households added just £3.2B to savings accounts in Dec, £1.7B less than on average pre-Covid. So they now are drawing on their "excess savings". GDP data next wk will show if h'holds are financing more spending, or just maintaining it while real incomes fall; I suspect the latter pic.twitter.com/T3MTFm3ORE— Samuel Tombs (@samueltombs) February 1, 2022 

I could keep going for pages and pages. There are no definitive answers to be found. The pandemic distorted everything and will continue to do so for a while yet.

📌

Beware 'data-driven' central banks & anyone forecasting the future with a high degree of confidence... 

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