FOMC, Fiscal, Energy Markets, and More | Top Three Things to Watch this Week

FOMC Policy Decision | Nov. 3, 2021

"We are continuing to dance while the music is playing, and it is time to turn down the music and settle down." - Bill Ackman Between the metaverse, the next FOMC policy decision, and negotiations about infrastructure on Capitol Hill, Bill Ackman gave a presentation to the New York Fed. The Pershing Square founder and CEO doesn't only call on the Fed to start tapering immediately, but also start hiking rates as soon as possible. Based on the historical standard of rate hikes, we are well into the prime of the economy and there are few reasons why the time for taper is not ripe.

  • Without the CPI's shelter component's lag, headline CPI would already be at 8%+ YoY

  • Wages are accelerating, especially in the areas the Fed wants to see most progress: services

Given all these circumstances, what is the Fed's goal? Is it stable prices and maximum employment, or are global central banks - and the Fed in particular - on a different mission? "Whatever it takes." - Mario Draghi Whatever it takes for maximum employment, price inflation, or maybe the treasury's solvency? We won't write a thesis in response to this question, but we are surely questioning the underlying goals that guide decision making on the monetary level. With inflation coming in hot, the employment picture not as bad as recent headline figures may suggest, and public demands to stop record monetary activity during peacetimes, a taper announcement is widely expected: "The FOMC will announce the start of tapering next week, presumably at the $15bn per month pace noted in the September minutes. If implementation begins in mid-November, the last taper would come in June 2022. Large surprises on the virus, inflation, wage growth, or inflation expectations could prompt a revision, but we think the hurdle for a change in either direction is high." - Goldman Sachs, Calculated Risk Finance & Economics "We are pulling forward our forecast for the Fed’s first rate hike by one full year to July 2022, shortly after tapering is scheduled to conclude. We expect a second hike in November 2022 and two hikes per year after that." - Goldman Sachs, Calculated Risk Finance & Economics We talked about the Fed's baseline expectations at length during our last edition of this writing and encourage you to go back for reference. Once the Fed releases its statement on Wednesday, you will be able to access the latest economic forecasts here: Meeting calendar, statements, and minutes In addition to the Fed's own expectations we covered last time, we want to provide you with Bloomberg estimates for the economic trajectory ahead.

Accelerating Wages vs. Maximum Employment

Refer to Pershing Square's presentation to the New York Fed for more details on past recoveries.

Is the Fed creating a wage-price spiral or are federal benefits that rolled off in August and September effecting economic data as well as hiring on a lag?

This Week's Economic Agenda:

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Fiscal Space and Global Economies

With trillions of $s of fiscal spending, the Fed has one of the hardest jobs currently existent. Balancing domestic spending with the ripple effects policy moves have on a global scale, committee members may have to choose between a rock and a hard place.

EM economies are already raising rates while those are the very nations that are still deeper into the Covid crisis than advanced economies themselves.

This is happening during a time where fiscal policy makers are given lots of room to spend due to low interest rates and the expectation of near zero rates in the years to come.

Source: Committee for a Responsible Federal Budget

"As a share of the economy, net interest costs will decline to a low of 1.2 percent of Gross Domestic Product (GDP) in FY 2022 and remain at that level through 2025 before rising to 2.6 percent of GDP by 2031. Over the long term, interest payments will grow to 5.3 percent of GDP by 2041 and 8.7 percent of GDP by 2051. Under the alternative scenario, interest costs would rise to 2.9 percent of GDP by 2031, 6.7 percent of GDP by 2041, and 11.5 percent of GDP by 2051. By comparison, interest payments have averaged 2.0 percent of GDP over the past 50 years and peaked at 3.2 percent of GDP in 1991. " - Committee for a Responsible Federal Budget

So, what happens when interest rates do rise and interest expenses increase? Interest costs surmount as spending continues and the Fed has to manage and balance policy as well as expectations accordingly.

Source: Committee for a Responsible Federal Budget

Sensitivity to debt levels has been relatively low. Debt levels matter until they don't, which may force the Fed to conduct extensive yield curve control under the scenario of prolonged inflation in the economy.

Source: IMF

Fiscal space is all about the degree to which the central government issue debt. The IIF's August issue highlighted current levels of absorption.

As global economies have continued to be distorted by hiccups in hiring, rolling lockdowns, and supply chain constraints, the recovery may drag on for a prolonged period of time -- absorbing some of the inflation concerns.

It is about the relative movement to expectations rather than absolute numbers.

Sometimes, it comes down to thought experiments. Hence why, it is important to find asymmetric opportunities that show a favorable risk-reward ratio.

Food for Thought

Low-to-Zero Natural Gas Flows Into Europe

Source: Bloomberg

"Among the explanations, it could be faulty data from the gas network operator. So we are checking that too. But it’s not the only Russian pipeline entry point into Europe reporting low flows." - @JavierBlas

Global oil inventories amidst OPEC+ regaining control over output in the face of decreased CAPEX in the west.

Baltic Dry Index