FRB CHAIR’S CONGRESSIONAL TESTIMONY COMMENCES TOMORROW

The WHO reported Friday the number of new coronavirus cases declined for the second consecutive day. Equites however ignored that factoid and sold off Friday on virus fears.

I find it interesting however that according to Citicorp based upon hedges and the derivatives market, fear has peaked as demand for protection is back to levels before the coronavirus became known. Can I suggest it might be something else, perhaps something as benign as a much-needed pullback?

Treasuries advanced for the same reason ignoring the stellar employment data.

Speaking of jobs, growth in both non-farm and private sector payrolls were considerably higher than expected, December’s data was revised higher, wages accelerated at a greater pace than expected, December’s wage growth was revised higher and the labor participation rate (LPR) rose by 0.2%. The LPR is at the highest level since June 2013.

Because of workers re entering the work force, the unemployment rate rose 0.1% to 3.6%. In my view this nominal increase in the unemployment rate is positive because it was the result of a portion of that vast pool of forgotten and uncounted workers re entering the work force believing that employment is possible.

In my view the implications of this is huge for as written last week, a job is important for one’s self esteem. Most psychologists would state self-esteem is earned not given.

Tomorrow FRB Chair Powell commences his semi-annual two-day testimony to Congress about the state of the economy. Powell is expected to state the coronavirus presents a “new risk” to the economic outlook and could potentially disrupt global markets and supply chains. It is also expected he will comment about the repo market and whether or not the “issues” have the ability to spill over to other markets.

How will his comments be received?

Radically changing topics, yesterday I commented about a possible rotation back to value. It is widely accepted the gap between value and growth is at historic proportions, exceeding the difference that existed during the dot-com era. Many have written off value stating there will never be a reversion to the mean.

Twenty-five years ago value was considered “conservative” and growth viewed as “aggressive.” Today it is the inverse. Extremes never last to perpetuity as there always a reversion. I ask are times that different?

Speaking of which, legendary hedge fund manager Ken Griffen stated “US markets are utterly and completely unprepared for inflation.” Griffen commented about the obvious…negative yielding debt, the lack of liquidity, etc.

He further stated “there is absolutely no preparedness for an inflationary environment” fearing that the Federal Reserve could “lose credibility with the markets.”

Inflation is defined as too much money chasing too few good fearing higher prices tomorrow. As I indicated, today inflationary expectations are non-existent and sovereign debt is priced as though inflation or expectations will never rise again.

What happens if prices do rise? Everything is tied back to interest rates. It could get really ugly.

Griffen did not state a potential inflationary environment is at hand but was only stating what I believe is the incredibly obvious.

What will happen this week?

The economic calendar is comprised of various inflation indices, retail sales capacity utilization and industrial production. How will the data influence economic perceptions?

Last night the foreign markets were down. London was down 0.14%, Paris down 0.31% and Frankfurt down 0.27%. China was up 0.51%, Japan down 0.60% and Hang Sang down 0.59%.

The Dow should open flat. There are ample stories about possible supply chain disruptions because of the coronavirus. Speaking of which Bloomberg reports the number of new cases in China declined for the fourth consecutive day. The 10-year is unchanged at 1.58%.

 

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