The horrors of stagflation, the hawkish Fed and a humbled FedEx Corp. (FDX) . These are the characters we're dealing with in this volatile time. But some, I believe, are playing major roles, while others should just be blips on the screen.
Let's take these fears of stagflation first, and why I don't think they're like to make a big appearance in the economy ... unless we really mess things up.
I'll preface this by saying I am not a big believer in stagflation. In general, stagflation seems like something that can be avoided by a country like the United States. We are energy independent (more or less), we are the reserve currency (although autocratic nations are using the Chinese yuan more and more), and we still produce goods.
I've always believed that stagflation is an "unstable" state for an economy like ours. Maybe we get a month of data suggesting inflation combined with economic slowing, but that seems temporary, as either inflation slows along with the economy, or the economy bounces back.
Stagflation, I believe, could only occur in the United States for any period of time, from almost willful policy mistakes.
While I still don't see stagflation as likely (I think inflation data will roll over), but I cannot completely discount it.
Data Delivery: Why FedEx Is a Big Deal
The most important data we got last week was from FedEx. The company is at ground zero of the global, domestic and local economies and what it's seeing, isn't pretty. The picture it sees dovetails well with other measures of freight and shipping (like the Baltic Dry Index).
For a recap, FedEx reported some tough preliminary results for the fiscal first quarter, with adjusted earnings per share of $3.44 -- significantly below the consensus view -- on revenue of $23.2 billion, which also fell short of expectations. Operating income dropped from $1.4 billion a year ago to $1.19 billion.
Aside from that, I continue to be extremely nervous about the inventory build.
I'm told, the consumer spending data looked good last month? I look at the retail sales data, and I find it mixed at best, and in some cases, plain bad. The "control group" supposedly spent at 0.8% last month, but that was revised down to 0.4% and was at 0.0% this month vs. expectations of 0.5%. These revisions, which we also saw in jobs data, make me nervous.
Yes, the rail workers got a massive pay raise, but did they top tick the market? Did they catch us at peak fear of supply chain disruptions -- even, if as insiders, they see the business potentially slowing?
Finally, onto the consumer price index, the way they calculate housing inflation -- the owner's equivalent of rent --went up 0.7% and was big contributor to the report. Nothing I see in the housing market confirms that. Yes, the CPI calculation understated inflation last year, but overstating it now, doesn't help anyone.
Sifting through the data, I am increasingly concerned that as "official" data catches up, it will be far worse than expected. Add in the wealth effect, where losses are mounting again, especially in disruptive stocks and crypto, this could be bad.
Tightening the Screws: QT Pain
Quantitative tightening is going to look a lot different than quantitative easing, or QE. On QE, the Fed bought almost daily and bought a variety of maturities.
I expect the Fed to tweak its mix at this meeting or to de-emphasize mortgages, as that market is too messy to absorb Fed selling.
On the Treasury side, the Fed will rely on maturities to reduce their balance sheet. By the nature of the Treasury market, that will typically occur on the 15th of the month and end of month (that is when Treasuries, other than T-Bills mature). We had potentially $8 billion leave the system. I doubt that played into the sell-off in bonds, commodities, and stocks on Thursday, Friday and early on Monday, but... Remember, if QE helped asset prices (as I believe it did), then QT will act a headwind. The timing will be more concentrated (due to maturity schedule) but the impact will be somewhat muted as there is a difference between allowing a bond to mature versus buying a 10-year or 30-year bond.
Nonetheless, QT will get some increased attention as we head into month-end.
My Take
I think Fed Chair Jerome Powell will give markets a little hope on Wednesday as he tweaks QT and gives a nod to economic concerns.
Any rally on that, will likely be short lived.
I'm in the awkward position of betting the Fed helps the markets briefly, while being more convinced that economic weakness will hit home this year in a meaningful way, and that inflationary pressures will turn deflationary as the economy struggles.
