"Santa's Little Helper... The Fed"

MONETARY

• Federal Reserve Chairman Jerome Powell gives a speech on the current state of the Fed’s progress towards restoring price stability¹
  • Regarding the overall level of Inflation, as well as recent inflation data releases, Chairman Powell noted that Inflation still remains much too high and that several months of confirming data will be needed to justify a more pronounced adjustment to Monetary Policy¹
    • (Powell) “While October inflation data received so far showed a welcome surprise to the downside, these are a single month’s data, which followed upside surprises over the previous two months.” “…It will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains much too high.”¹
  • On the topic of what would constitute the effective Terminal Rate for the Fed Funds Rate, Chairman Powell offered the following¹
    • (Powell) “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”
  • Powell also noted that there is significant evidence that the broad supply-chain disruptions previously plaguing the economy are easing¹
    • (Powell) “Reports from businesses and many indicators suggest that supply chain issues are now easing. Both fuel and nonfuel import prices have fallen in recent months, and indicators of prices paid by manufacturers have moved down.”
  • Regarding the current state of the labor market, Powell noted that excess retirements during the Pandemic are currently causing Labor Market Participation to persist below Pre-Pandemic levels, which has contributed to lower Labor Force levels relative to what was expected Pre-Pandemic¹
    • (Powell) “These excess retirements might now account for more than 2 million of the 3‑1/2 million shortfall in the labor force (relative to prior projections)” “…The cost of finding new employment may have appeared particularly large for these workers, given pandemic-related disruptions to the work environment and health concerns.9 Also, gains in the stock market and rising house prices in the first two years of the pandemic contributed to an increase in wealth that likely facilitated early retirement for some people.”¹
  • Finally, regarding the pace of future interest rate hikes, Chairman Powell noted that a slower pace of hike will likely be appropriate in the coming meetings, an early sign of the Federal Reserve beginning to adjust its Monetary Policy implementation efforts¹
    • (Powell) “Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, 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.”
• In the Federal Reserve’s most recent Beige Book publication, several developments were noted regarding overall Economic Activity, Labor Markets, and Inflation²
  • Overall Economic Activity was seen as being slightly fragmented, as 5 Reporting Districts experienced slight to modest growth, whereas the remaining 7 experienced either no growth or slight declines²
    • Higher interest rates were seen as weighing on activity levels, with housing and construction sectors being acutely affected by continued slowdown in demand²
    • Higher interest rates also contributed to continued slowdowns in Consumer Lending by Banks²
    • By contrast, demand in Travel and Leisure/Hospitality areas of the economy was characterized as being robust²
  • Employment was characterized as having grown modestly during the last reporting period. Additionally, it was noted that hiring and retention difficulties eased further in the period²
    • Overall, the Labor Market was still seen has being very little slack in the labor market, and wage growth continued to persist, albeit at a lower pace than previously reported²
  • Overall levels of Inflation remained high in the reporting period, however the pace of increases continued to slow²
    • The slowdown in price increases was mainly attributed to improvements in supply-chain difficulties, as well as weaking demand as a result of more restrictive Monetary Policy²
    • Consumer Substitution Effects were seen across various regions of the economy as consumers substitute higher priced goods and services for cheaper alternatives²

 

GEOPOLITICS

• Nationwide protests break out in several major cities across China, as protestors call for an end to the country’s Zero-COVID Policy and its accompanying restrictions⁴
  • Protests began to exacerbate following a deadly apartment fire in the western Chinese region of Xinjiang that killed 10 and injured 9⁴
    • It is widely believed that significant physical barriers that were put in place as a result of China’s Zero-COVID Policy substantially prevented first responders from accessing the building in a timely maner⁴
  • Some major cities within China have responded by partially relieving some of the Covid restrictions that were previously put in place⁴
    • Beijing officials stated that the city would allow some individuals that test positive to be able to isolate at home, rather than isolating at a central government quarantine center⁴
    • Additionally, the city said it would drop its citywide compulsory testing efforts⁴
  • The Chinese government has increased its efforts to scrub social media sites of any posts related to, or filming of, the multi-city protests⁴
    • Government officials have seen an increased amount of public scrutiny and criticism over the prolonged, restrictive measures taken under China’s Zero-COVID Policy, with some protestors even calling for President Xi Jinping to step down⁴

 

MISCELLANEOUS

• Popular cryptocurrency trading platform FTX, files for bankruptcy as a meltdown of proprietary cryptocurrency prices cause billions of dollars of customer funds to go missing³
  • At the core of the issue, it has become apparent that FTX inappropriately transferred customer funds to a proprietary trading firm owned and operated by FTX’s CEO, which then placed large bets on FTX’s own cryptocurrency known as the FTX Token³
  • In response to FTX’s biggest rival (Binance) publicly selling all of its holdings in FTX Token the price has dropped by roughly 95%, effectively evaporating all customer deposits from existence, even though customers never actually bought the FTX Token themselves³
  • It is estimated that FTX now owes over $10B to over 1 million different people and business entities as a result of the bankruptcy³
  • The incident has caused lawmakers to investigate the company, and has prompted immediate questions as to the future of regulation and viability of the cryptocurrency space³

 

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

Cryptocurrencies are non-traditional investments, resulting in a different tax treatment than currency. Federal, state or foreign governments may restrict the use and exchange of cryptocurrency. The use and exchange of cryptocurrency may also be restricted or halted permanently as regulatory developments continue, and regulations are subject to change at any time. Cryptocurrency exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers, malware, or bankruptcy. ​

 

ANNOTATIONS

1. The Federal Reserve. “Inflation and the Labor Market”. November 30, 2022.
2. The Federal Reserve. “The Beige Book: Summary of Commentary on Current Economic Conditions”. November 30, 2022.
3. The Wall Street Journal. “FTX Files for Bankruptcy, CEO Sam Bankman-Fried Resigns”. November 11, 2022.
4. The Wall Street Journal. “China Clamps Down on Internet as It Seeks to Stamp Out Covid Protests”. December 1, 2022.