REAL INDICATORS
The current climate of the economy it can be described, in Winston Churchill's words about Russia, 'a puzzle, wrapped in a mystery, within an enigma'.
In fact, currents and countercurrents they are many and swirling. In America, two quarters of sub-zero growth have not prevented strong growth in employment, which implies a strange fall in productivity… Central banks they raise key rates and would like tighter financial conditions to curb demand, but the markets don't care. And if the key rates go up, market rates go down instead. It is a duel worthy of the Challenge at the OK Corral.
In the labor markets – on both sides of the Atlantic – businesses, large and small, do struggling to find workers.
Maybe because there was Great Designation (the wave of resignations), i.e. a multitude of people withdrew from work, having reconsidered the scale of values in the pandemic? But some say that with the economic slowdown will come the Great Sacking (the wave of layoffs), while those who had pulled themselves out of the workforce will suffer a Great Regret (the Great Repentance).
In fact, theerosion of purchasing power of their social security income will force many to go back to work. Compared to an expected inflation, up to 18 months ago, of around 2% a year, the acceleration in the cost of living has stably taken away ten points of real income, more than a month's salary; and others it will extract before being brought back, when it will be brought back, by Central Banks to the fold of monetary stability.
Another more direct and simple explanation of the scarcity of workers in the abundance of employment opportunities is the recomposition of the employed among the various sectors than before the pandemic. For example, in the USA, where the total number of employed people has returned to the values of February 2020, there are two million fewer employees in some sectors of the tertiary sector as a whole, offset by two million more in other sectors, including in the secondary sector; so that the first sectors are unable to return the business to the way it was before the pandemic, unless attract people with encouraging salary increases, and the second segments are now seeing the supply of labor rarefying both because unemployment is at its lowest and because people go where their wallet tells them. Unless they have an incentive to stay with salary counter-offers.
This wage-wage chase it is the result of a very tight labor market: 1,8 new job opportunities for every unemployed person. With implications for inflation, which we will discuss later, but also for the expansion of the economy.
Because, among the mysteries mentioned at the beginning, there is that of an economy that holds back due to supply constraints. Without workers, microchips, steel, or other inputs, the wheels of the cycle are bound to slow down below the speed at which demand would allow them to turn. It's the same question is blocked by the lack of supply: those who have ordered a machine and have to wait longer than usual for delivery cannot raise production and employment according to plan, and this reduces the growth of income and demand itself. But not the prices…
Or, to give a more familiar example, someone who has commissioned a car and will have it in a year's time doesn't buy another in the meantime. In other words, it is as if for a certain amount the question was diluted, due to causes related to lack of supply, over a longer period of time: since the increase per unit of time is the growth rate, this decreases because there is no supply.
These bottlenecks make it difficult to read many indicators, such as car registrations. Are they going down because people demand fewer cars or because companies fail to ramp up production? For example, in Italy the sharp decrease in car production in June contributed by about a third to the decline in the general index, and is also explained by the lack of microchips.
The same reasoning can be done for other statistics, such as those derived from the PMI survey. Both for orders and for output, both of which have been slowing down for some months now. But the backlog of orders remains large and companies are hiring to clear it, so as to invoice.
In normal times, we would have had no hesitation in calling the turn of the cycle we are observing by its name: recession. Which, usually, arises from a decrease in demand. But if the demand exists but fails to materialize due to supply limits (think of flights canceled due to blockages at airports), reading economic data becomes even more ambiguous than interpreting the entrails of an animal and the flight some birds.
What is certain is the income diversion caused by the increase in the cost of energy. A much stronger distraction in Europe than in the USA, both because the price of many energy commodities has risen more and because most of these commodities must be imported, while America is a net exporter. This helps explain the skid of the volume of retail sales in the euro area, while real US consumer spending holds up much better.
Another mystery surrounds the progress of theChinese economy, the first in the world, when compared with purchasing power parities. In fact, the manufacturing sector seems to have already exhausted the momentum of reopening after the reduction in infections, while the tertiary sector has accelerated at a rapid pace. The Chinese data still have to worry, both because it is high risk of new anti-Covid restrictions in autumn and winter and because they should be read with those of other economies in the area, where, with the exception of Singapore, manufacturing is stagnating or contracting, as in South Korea and Taiwan. And sure the roll of military exercises Chinese has not heartened the confidence of businesses and families.
INFLATION
Fu real breakthrough? The rise in consumer prices began to decline in July. At least in the US, while it continued to rise in the Euro area (as well as in its main nations). But this is not the only one inflationary difference between the two sides of the Atlantic. Let's look at a few more.
First of all, the acceleration in the cost of living had started first in America: in January 2021 the annual increase was 1,4% in the USA and 0,9% for the single currency; in June 2021 +5,4% and +1,9% respectively. This causes thebasic effect you start being supportive in the US a few months earlier.
The second difference is more important: the core inflation (ie excluding food and energy) is much higher in the USA: 5,9% against 4,0% in July. True that about one point is explained by the greater weight of rents, effective and accused, who travel there at such a pace as to create a housing crisis. It is no coincidence that the ECB has asked Eurostat to weight the cost of housing according to the American method. Stshelter, i.e. refuge, in the USA: not from dear life, however. But many studies and analyzes say that US inflation is anyway widespread and persistent. And the longer it lasts, the more durable it becomes, as we have already had occasion to say. Exactly what the Fed wants to avoid.
The third difference is in the wage dynamics. In Use the pay average hourly travel over 5% per year. It seems to have slowed down a bit: in July, on a like-for-like composition of jobs, it fell to 7,0% over three months annualized, from 7,1% in June; was at 5,8% in January and from 3,4% in June 2021. The labor is the most important component in costs of an economy, and is a component home made. It is not possible that inflation will slow down if wages do not slow down, but here we return to the question of the shortage of workers explained in the part on real indicators.
Unfortunately, there are no monthly salary indices for theEuro area (perhaps the ECB should insist on having these too?). The few countries that detect them do not report no acceleration similar, not even remotely, to the American one. But it is evident that the dam of labor relations, although reinforced by the aid that the governments have launched and will launch to control price increases, it will find it difficult to keep up with claims to recover some purchasing power.
In general, other indications of price cooling. For example, in the decline in the prices of raw material energy (not gas, though!) and food.
Or in price component of the PMI indices. The latter, however, signals increases that are no longer record, as in the spring, but still by massive increases it is, that yes they enter into pipeline of the increase in the cost of living.
Therefore, certainly the dynamics of consumer prices is moderating, but now that it returns to acceptable levels for the citizens, even before that for the central bankers, some time will have to pass. AND it will not be a free return in terms of cost of money and jobs. Because the more time passes, the more likely it is that the price-wages run-up will tighten. Hence the urgency of central banks.
RATES AND CURRENCIES
In the last twenty years in America there was never areversal so strong of yield curve. By subtracting the yield of 2-year T-Bonds from the canonical 10-year yield, we have a negative difference (see graph): 2-year rates, which are more sensitive to requests from the Fed, are higher than 10-year rates, which is inconsistent with a well-tempered yield curve, reflecting the higher riskiness of longer investments.
And instead consistent with a recession concocted in the severe rooms of the Fed, around the large oval table, in mahogany and black granite, where sit the rulers of American monetary policy. THE 2-year rates they are high because the Fed has embarked on one restrictive stage of its politics; hey 10-year rates they are lower because markets think the Fed, intent on stamping out inflation, will be successful in its endeavor. A success that will have a price: the recession brings down real demand and the demand for funds for investments in capital goods, inventories, and consumer durables. Therefore, not only have yields on long-term American bonds fallen, but also long market rates, such as i 30-year rates for home purchases. And, given that long rates have an implicit forecast of short rates (for example, a 10-year rate is constructed with a series of ten 1-year rates), this decline in long rates seems to predict that the Fed will lower its key rates, as soon as it becomes clear that the recession has cooled the price dynamics.
This is a forecast which has been supported by the data of theJuly inflation in America, which recorded zero growth of the index (month on month) and a clear reduction of the trend. But the Fed is unlikely to agree with this market interpretation. Core inflation (core, excluding food and energy) remained stable at levels that are a multiple of the famous 2% which the US Central Bank longs for. And there is compelling evidence that the inflationary process it expands to more goods and services and therefore becomes more rooted, just as the dynamics of the wages shows substantial gains.
Of course, sooner or later inflation will come down, and with it rates. But markets and Fed appear to differ on timing. The markets look at inflation expectations – both those derived from polls and those derived from finance (which are, after all, those of the markets themselves: I believe that I believe inflation will come down soon) – and they see them falling, thereby bringing comfort – hic and nunc – to the listings of both shares and bonds.
The Fed sees the same descent and also draws comfort from it: if expectations go down it means that the Fed is considered credible (I think they believe…). The Knights of the Oval Table in short, they will succeed in bringing inflation to more lenient advice. But not hic et nunc: it will take longer than the markets seem to estimate…
And in Europe? From us there are no signs of reversal of the yield curve, neither in Germany nor in Italy (the famous 'transmission' of monetary policy is currently being transmitted well). The levels of guide rates are much lower in the Old Continent, even after the first increase by the ECB, which brought the rate to… zero (from negative). And there's even less determination, compared to the Fed's growling, regarding the size and pace of future hikes.
A separate discussion deserves the Italian situation, given that, with the elections looming and the electoral promises of the possible winners, i markets are rightly concerned for our public finances. There will be a lot of fibrillation between now and then. Even if the TPI (Transmission Protection Instrument) – the anti-fragmentation shield announced by the ECB on 21 July, the acronym of which has been retranslated, by some nice Brussels wit, into To Protect Italy - it has not been used, a first BTP line of defense has already had to be put in place: in particular, the money obtained from the redemption of maturing German and Dutch bonds was used to buy Italian bonds.
Il dollar seems to have stabilized just above parity with the euro and around 6,70 – just above or just below – with lo yuan. It remains strong, and from this point of view it contributes to that stiffening of the monetary conditions which the Fed hopes, in its anti-inflation crusade (and also makes a direct contribution to the crusade, by making imports cheaper). Instead, one MY BAG that holds the punch ease financial conditions (with positive wealth effect and lower cost of equity) – which the Fed is not happy about. While waiting for the puzzles, mysteries and enigmas mentioned at the beginning to be clarified, it is unlikely that there will be large changes in exchange rates. Their it is back above 1800, but, in times of rising interest rates, it is unlikely to strengthen further (the yellow metal gives neither dividends nor interest…).
