Sun Changzhong (Researcher at the Global Private Equity Research Institute of Tsinghua University)
Recently, a series of important data and documents related to the global economy and finance have been released one after another, leading to sudden major events. On October 6th, the US Department of Labor released September US non farm data, significantly exceeding expectations. On the 7th, Hamas launched a surprise attack on Israel, sparking renewed fighting in the Middle East. On the 11th, the Federal Reserve released the minutes of its September interest rate meeting, which was interpreted by the market as biased. On the 12th, the US Department of Labor released September CPI data: the overall CPI in September increased by 3.7% year-on-year, slightly higher than the expected 3.6%, unchanged from the previous month, with a month on month increase of 0.4%, lower than the 0.6% last month; The core CPI increased by 4.1% year-on-year (continued to decline) and increased by 0.3% month on month, both of which were in line with expectations. The housing component accounted for more than half of the overall CPI growth and contributed the most. After the data was released, the two-year yield of US Treasuries increased by 8bp.
Previously, Federal Reserve officials issued important signals. On the 9th, Federal Reserve Vice Chairman Jefferson said in a speech at the American Association for Business Economics: "By increasing bond yields, financial conditions will tighten, and this will be kept in mind when evaluating future policies." Dallas Fed Chairman Logan, a hawkish official who has been supporting further interest rate hikes, said during the same event that day, "If long-term interest rates continue to rise due to long-term premiums, then there may not be much need to raise the Federal Reserve funds rate Federal Reserve Governor Waller said at a meeting in Park City, Utah on the 11th that "the financial market is tightening, and they will do some work for us." San Francisco Federal Reserve Chairman Daley said more clearly: the rise in the yield of treasury bond bonds since the last meeting of the Federal Reserve is equivalent to the 25 basis points rise in the short-term interest rate of the Federal Reserve, so there is no need to increase interest rates. The Federal Reserve Watch Tool on the Chicago Mercantile Exchange shows that the market expects a 91.5% probability that the Federal Reserve will maintain interest rates unchanged in November; The probability of maintaining interest rates unchanged in December is 72.9%. This is also in line with the author's previous article's viewpoint.
Compared to CPI, the Commerce Department's PCE data, which is more valued by the Federal Reserve, shows that the core PCE rose only 0.1% month on month in August; The year-on-year increase was 3.9%, significantly lower than the 4.3% in July and the first time in nearly two years that it has fallen below 4%. The average annualized core PCE for the three months ended August was 2.2%, close to the Federal Reserve's inflation target of 2%. These two aspects of data provide strong support for the Federal Reserve to continue to remain stagnant.
At present, the US economy, especially employment, is still strong and resilient, and is gradually slowing down. The September employment data may have temporary factors such as the start of the school season. Although the total employment growth is strong, large enterprises are relatively weak. The employment growth is mostly in the frontline service industry, which is still a recovery growth after the epidemic. The white-collar industry, especially the IT information industry, is facing difficulties in finding employment and increasing unemployment. According to data from the American Bankruptcy Association, as of September 28th, nearly 1500 small businesses in the United States have filed for bankruptcy this year, approximately equivalent to the number for the entire year of last year. According to data from consulting firm Cornerstone Research, in the first half of this year, 16 companies with assets above $1 billion filed for bankruptcy, exceeding the average of 11 companies from 2005 to 2022. The increase in the number of corporate bankruptcies reflects high interest rates, tightened credit, increased costs, and the end of government aid programs for the epidemic, which also indicates that the economy and employment will continue to cool down.
Employment data is important, income data is more important. The report shows that the month on month growth rate of hourly wages in September was only 0.2%, lower than the expected 0.3%. The three month quarter on quarter growth rate significantly decreased from 4.4% in August to 3.4% year-on-year, which is consistent with the Federal Reserve's 2% inflation target. The service industry's hourly wage growth rate, which the Federal Reserve is more concerned about, has dropped to 0.2% month on month, and the three-month quarter on year growth rate has dropped from 3.9% to 3.0%. Faced with high interest rates and fees, consumers' financial situation is under dual pressure from interest rates and debt. As credit card expenses decline, credit card debt has continued to rise in the past year, recently exceeding $1 trillion for the first time.
As the biggest factor causing inflation to rebound in the third quarter, oil prices fell again after rising for three consecutive months. The reason for this is that in over three years, hedge funds and speculators have been the largest sellers of long positions; The second is that the rising oil prices have suppressed demand and the prospects for a slowing and weakening world economy; Thirdly, Saudi Arabia and Russia, which led OPEC+to reduce production, increased their crude oil exports last month, and some OPEC members' production increased in September, while non OPEC+members also increased production; Fourthly, Saudi Arabia has recently expressed its willingness to increase production, which has a particularly significant impact on oil prices. The conflict in the Middle East has limited impact on the global economy and finance, and major stock markets around the world have largely not priced this crisis. Oil prices have also continued to decline after the initial rise. From a historical perspective, apart from the oil embargo in 1973 and the Iran Iran War in 1979, conflicts in the Middle East have rarely caused long-term disruptions to the market. From the current geopolitical situation in the Middle East, the conflict situation, and the reactions of all parties, it can be seen that the situation of the 1970s mentioned above will not be repeated.
Finally, it cannot be ignored that although the crisis of small and medium-sized banks in the first half of the year has subsided, the rise in interest rates has put significant pressure on banks of all sizes in the United States; The huge fiscal deficit and high treasury bond yield limit the absorptive capacity of domestic and foreign markets for US treasury bond, which is also an important factor that monetary policy makers must consider. As stated in the minutes of the Federal Reserve's September interest rate meeting, "all attendees agree that the committee should proceed cautiously," and "some participants believe that the focus of monetary policy decisions and public communication should shift from how high policy interest rates rise to how long policy interest rates remain at restrictive levels
The greater risk lies in the rise in wage costs. The recent series of major strikes in the United States reflects the strong position of the labor side, which may lead to wage increases and transmit them to prices. Therefore, on the one hand, the Federal Reserve will demonstrate significant progress in curbing inflation, but will not announce victory yet. It will still retain various policy options, including interest rate hikes, depending on economic and financial development changes and comprehensive data.