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Sentiments Are Again Changing

The markets are suggesting a 30% chance the overnight rate will be lowered by 0.25% in March.  Is this realistic or wishful thinking?

Will yesterday’s no pricing environment return, and will the 2% inflation speed limit be achieved?

Or has the rise of geopolitical tensions that is now ushering in wave of deglobalization be the new norm?

As noted several times, from 1990-2020 for the first time in human existence countries outsourced their most vital industries to their adversaries believing that such economic codependence will make war obsolete.  Price was the only determinate of a purchasing decision.  Efficiency was valued more than reliability.

China became the exporter of deflation as its objective was to use its massive population to make inexpensive goods to be exported to the western world.

Around 2015 economic nationalism began to reappear, a reappearance that was accelerated via the COVID lockdowns and the Ukrainian invasion.

Bloomberg reports that from 2000-2019, core goods inflation as measured by the CPI averaged 0% and there were 118 months of year over year deflation.  Bloomberg states globalization was the major factor for this pricing environment.

As noted, deglobalization is gaining momentum.  Considerable attention has been focused upon the anemic Chinese recovery.  China is an export driven economy thus suggesting it has surrendered some of its economic independence to its trading partners.

According to trade data, depending upon the month, Chinese exports to the US are down 25% to 30% from the previous year for a myriad of reasons thus impacting the Chinese economy.

Labor is the largest cost of production and utilizing the UAW contract, cost push inflation—wage inflation—is now becoming a factor for the first time since the 1970s.  As inferred, China strategized to be the low-cost global producer thus wage inflation was not a major factor during the 2000-2019 era. 

Will production costs revert to the norm of 2000-2019?  Or was 2000-2019 the one-off event?

The answer is pivotal as to whether deflation may return.

And then there is the national debt.  According to the CBO, during 2024 net treasury issuance is forecasted to be around $4 trillion.  This debt will be placed but at what price?

The Federal Reserve has created today’s volatile environment by stating monetary policy will be data dependent.  The Fed has been entirely wrong for the last 40 months, a daunting performance given its legion of economists and analysts parsing large volumes of information and statistics.

Perhaps the more important question to ask is why the Federal Reserve has greatly missed its mark for the last 40 months and perhaps the last 14 years?  The predecessor to the “dot plot” was its “Central Tendency.”   They too widely missed their mark from 2009-2016.

Commenting on yesterday’s market action, both Treasuries and equities further advanced following “fairly strong demand” for the $16 billion sale of 20-year Treasuries.  The NASDAQ 100 is around 22-month highs.  Less than one month ago it was on the verge of entering into a bear market. 

Last night the foreign markets were down.   London was down 0.54%, Paris down 0.23% and Frankfurt up 0.19%. China was down 0.01%, Japan down 0.10% and Hang Seng down 0.25%

Futures are nominally lower as the markets are overbought and appear stretched.   The 10-year is up 1/32 to yield 4.42%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.