#1013 - What is the Economic Data Telling Us? | with Jeff Snider

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0:49What is the economic data telling us? Welcome to Real Vision Daily Briefing. It's Thursday, April 11, 2024. I'm Ash Bennington. Today, we're joined by Jeff Snyder, host at Eurodollar University Channel. Before we get started, we wanted to tell you that there is a digital asset world beyond Bitcoin and ETH. There is opportunity. There is risk. Join us on April 18 through April 19 for a free online festival talking about exactly that. That will help all of us have a successful crypto summer. We hope, I guess we should say. Head to realvision.com slash F-O-L to register for free. That's realvision.com slash F-O-L to register for free.

1:33Okay, back to macro with Jeff Snyder. Jeff, it's a pleasure to have you here. You know, we've done a number of really long form deep dives on what's happening in macro data and in bond markets for our Real Vision members. It's great to have you joining us today on YouTube for the whole world to see. Jeff, I teed it up at the beginning of the show by asking you this question. What's the economic data telling us? Big picture, where are we right now? 50 ,000-foot overview. I wish we knew because we keep getting conflicting signals all over the place. And I know that's not the popular opinion. Most people think that the U.S.

2:08economy in particular has settled into its, at the very worst, a soft landing scenario, and that more likely we have a no-landing scenario. People are becoming more constructive on the European economy, which has been stuck in recession forever. There's some sort of optimism about China climbing out of its hole. Japan moving past the recession with all the wage increases. And so it seems like on the surface, recession, all that stuff, nobody wants to go there anymore. All the bears have thrown in the towel. Yet we continue to see conflicting data all over the place. And today's a perfect example.

2:46Yesterday and today. You start out with the U.S. CPI that wasn't necessarily hot. The problem with the CPI was that it wasn't cold. It didn't actually change all that much, which has raised a number of fears, including those apparently at the central bank, that maybe consumer prices are now stuck. And, you know, we had some disinflation. It seemed to go as far as it possibly could. But now consumer price numbers seem to be, you know, the CPI is hovering around 3%. Of course, the CPI seems to be hovering at an annual rate around 4%, which is too hot. And of course, that's raised other fears that maybe it's not just a CPI stock.

3:24Maybe there's a structural inflation issue there. And so the deflation debate has focused on potentially is consumer prices going to be higher going forward on a consistent basis. But then not even 12 hours later, the Chinese come out and say, yeah, we got really bad deflation here. For all the positivity that had been built up over the last couple of months, the Chinese report some, not really surprising if you're following along, but for most people, some surprisingly bad consumer price, as well as producer price estimates that are very deflationary. So you got the US arguing about whether or not inflation is structurally huge and going to be a big problem moving forward.

4:03And the Chinese are saying, we still can't get out of deflation. And the thing is, if the Chinese can't get out of deflation, that's not just a China story. That's a global story. So is it the US economy is just fine and China's over off in its corner, which is never really the case. There's never really decoupling. Or is China telling us something that maybe we don't want to hear because we're hooked on the U.S. GDP and the U.S. payroll report? But even those numbers, there are conflicting signals there too. You know, the U.S. labor report, payrolls, the establishment survey has been terrific, but that raises all sorts of questions about why that is, since all the rest of the labor data has been less than terrific, especially the household survey.

4:43So I, you know, everybody has thrown in the towel on weakness and maybe it's just recession fatigue. We've been talking about this for a couple of years. We've been under the thumb of economic weakness and persistent threat of downturn for so long that it's just, hey, maybe it's time to talk about something else. I don't know. But as far as the evidence and the data is concerned, it is still split. And there's a lot that says that things are still going wrong and there's still potential for worse yet to come. And there are other things that are just kind of hanging in there like they have over the last year's.

5:16So, Jeff, I'm going to ask you the difficult question. When you look at all of this data, as you point out, going this way and that way, how do you try and form a cohesive view of what's happening in markets? There's always contradictory data. You always have data going in different directions. But to your point, Jeff, at this particular moment in time, it seems like it's just all over the place. And it's really hard to get your head around what exactly is happening here. How do you think about that? How do you come up with a cohesive narrative for everything that's going on, or at least try to?

5:47And how do you reconcile it, I should say, with what's going on with risk asset markets, particularly fixed income, the U.S. Treasury market, and U.S. equities? Well, U.S. equities are going to do what U.S. equities always do, which is look for any excuse to go higher. I mean, that's just built into it over the last 15-whatever years, passive investing and everything else. equities are going to go up no matter what. As long as there's an excuse for equities to buy and nobody's selling, which is quite often the case, stocks are going to go up. That doesn't tell us anything particularly interesting or meaningful about the economic situation.

6:21That's just what stocks do. But as far as your question, you know, where do we focus? And the thing is, I don't think you do focus. You don't focus on one thing or another. You don't want to get tunnel vision on one statistic or another. You want to take a broad survey of economic accounts, not just in one place, but in every place and see what the weight of the evidence is saying. From my own perspective, the weight of the evidence seems to be leaning more toward consistent weakness. And I include the bond market in that, believe it or not. Because when you look around, there are a few numbers that look good, but they're increasingly isolated, outliers.

6:53Again, the establishment survey and the labor market. Well, you've got a whole host of statistics that are lined up against it, including not just the household survey. You've got the JOLT survey that suggests that U.S. businesses are no longer hiring. So we've got some modest layoffs from places like Challenger Gray and Christmas. The household survey, full-time jobs have fallen off pretty sharply, replaced by part-time jobs would suggest U.S. employers are cutting hours in their workforce. That doesn't sound like a soft landing to me. Even if companies are still hoarding workers and not laying off in mass waves like we're used to in recession, there's still a balance of statistics that suggest that even in the U.S.

7:30labor market, which is maybe the strongest indication that there is out there, that there is not a unified, uniform opinion about what's happening in it. So then you look at other places around the world. Europe is a good place to start. Europe's been a recession, whether it's declared or not, for almost a year and a half now, actually a little bit over a year and a half now. And so I think there's a lot of optimism that's been built up on the combination of, well, it's been a year and a half. We're bound for recovery at some point, plus disinflation, which is a little bit further advanced in Europe than it is here in the United States.

8:04And then they throw in ECB's rate cuts. And I think a lot of people are responding emotionally to that combination and thinking, OK, this has got to be positive for Europe going forward. Same thing with China. And we hear this every year, by the way, with China and Europe that they've turned a corner. The Chinese government is throwing a bunch of stimulus at the local economy, trying to stabilize the situation. When you talk about really clear signals about whether or not that's the case, look at some of the Chinese statistics. I mentioned the consumer prices and producer prices. How about China's yuan?

8:39How about some of the other recent developments in the Chinese property market that suggest that China has not turned a corner and that there is a substantial probability, potential, that China actually gets worse the rest of this year. And that's one thing you also have to keep in mind. We hear this every year. Every year the economy is getting better, usually for the same combination of reasons. If you go back one year ago, back to last year, before the banking crisis, February and early part of March, we heard all the same things. China was going to reopen, and that was going to move the global economy in the right direction.

9:13Europe was experiencing the first round of disinflation. That was going to get it out of its recession. The U.S. was going to rebound too. And two out of the three didn't actually happen. So the broad survey of evidence still suggests that there's more weakness and that the optimism may be based on more wishful thinking than actual looking at what the evidence says. And I mentioned the bond market, and the bond market is absolutely part of that too. We're going to take a quick break and be right back with more of the day's top analysis on the Real Vision Daily Briefing. In an era where AI, robotics, biotech, and digital assets are reshaping our reality, staying ahead is not just an option, it's a necessity for investors and entrepreneurs.

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12:01there just to bring this for people who are not following the economic data as well as the fixed income data as closely as you are, just to explain a little bit about - You mean not everybody does that day in and day out, all day, every day? It turns out, no. No, yeah. Hey, listen, I want to start where you started, which is inflation. And I know we can get sort of bounced around here a little bit on the numbers because you look at these numbers as they come out. You've got CPI and PCE and PPI. All these numbers come out monthly. They're revisions. I mean, stuff happens. It's really complicated.

12:36But I want to talk here about the general trends. You're talking about disinflation. For folks who may not know and may be confused, disinflation is the decline in the rate of inflation. We peaked out, I think, around 9 % at some point back in, I think it was June or so, the summer of 2022, where we peaked out on inflation with the reopening trade. But look, Look, Jeff, if you just zoom the camera out and you want to give folks a big picture view of what's happening here, I went while you were talking, actually, and went up to the Fred website. This is the St. Louis Federal Reserve data website where you can get all kinds of data about the economy.

13:11I baselined CPI to the rate of lowest CPI, which was May of 2020. compared to where we are right now in April of 2024, so almost exactly four years later, we've seen an increase in prices of roughly 22%, 22 % over four years, an extraordinary amount of pain for U.S. consumers, for families, for purchasers in this economy. Talk a little bit about something that you said at the top of the show, which is, hey, maybe we're just stuck above the 2 % rate target that the Fed has set, coming in close to between 3 % and 4%. How do you think about what that does to an economy big picture? Yeah, that's one of the reasons to be somewhat pessimistic about moving forward, because it has been a tremendously painful adjustment period, not just for consumers, but also businesses.

14:01And that's still ongoing. As you mentioned, consumer prices increased by an enormous amount, and we're never getting that back. That purchasing power won't come back. You're right. I mean, to be perfectly clear, the term disinflation doesn't mean we're going to go back to where we were in 2019 and that prices are going to go back down. That's just never going to happen. And so what we're really talking about is the rate of change. And at the very best we can hope for is that the rate of change turns modestly negative in terms of prices. That would actually be bad for the economy. But as far as prices go, we might be able to get a small negative in consumer prices.

14:37But we're never going back to where we started from, which, again, looks big picture viewpoint here. That suggests that there's still a lot of potential adjustment left to be done and a lot of pain to be taken because real incomes have lagged far behind everything. Or nominal incomes have lagged behind price changes, which means real incomes have been negative for so long. Pricing power of consumers has been reduced, substantially reduced. And I mean, we still haven't seen the full effect of that in the economy yet, though I think we started to at the end of last year. When you look at retail sales, for example, retail sales were actually negative in the fourth quarter and then decidedly negative in January.

15:20That indicated a couple of different things that maybe, like we're talking about here, real incomes have gotten to be too far behind. They've fallen too far behind to maintain spending. I also think it had to do with another factor to be somewhat pessimistic about the global economy moving forward, oil prices. We had another painful increase in oil and gasoline prices last year, if you remember August and September, which again, destroyed more demand, more purchasing power at a time when the US economy started to get a little bit more weak, a little weaker, less momentum, less cushion, less savings and all that thing.

15:55And the European economy is the same thing. European economy has been in recession. It looks like the last year's oil shock may have pushed it further into recession. And now we have another one brewing in 2024. That's not something that we can just easily gloss over. And one way that that comes out and that works out is in the consumer price estimates. So it looks like consumer price estimates are stuck at the 3 % level. And for most people, they don't care why it is or what's really happening. If it's stuck at 3 % for another year, that's another year of real substantial pain in their pocketbooks.

16:31But as far as macroeconomics go, there's two different questions that we're looking at and looking to answer in that scenario. One is, what does that lead to? Does it lead to a situation where consumer prices can continue to go up at a 3 % or more rate over the long run? Or does that lead to a situation where the U.S. economy, in particular consumers and businesses, get weaker and weaker and weaker and inevitably leads to a point where they all just start to pull back and cut back. And you have this nonlinear reaction to the downturn or nonlinear reaction to these imbalances that creates a downturn.

17:08So I look at some of these things like oil prices and say, yeah, let's separate that out from the CPI and look at it from a macroeconomic perspective, independent of consumer prices, even though in most people's minds, there's not any difference there. because if they're absorbing another oil price shock or gasoline, I don't care why or whatever the reason is, they just feel that continued pain. But to ask for your point here, I think, is that we're still feeling continued pain, which is not going to be, it's not conducive to a recovery, nor is it really conducive to the idea of a soft landing either.

17:44Obviously, with energy prices, all kinds of geopolitical factors, supply constraints, et cetera, et cetera, beyond just the traditional money supply type issues. Jeff, I want to zoom the camera out just one second here to get your view. If we could, Brian, bring up that five-year chart on U.S. Treasury 10-year yields. This is one of the most striking charts of the last decade, I think it's fair to say, rolling up from the low point in, call it, around the summer of 2020 to 50 basis points on 10-year yields, something that I'd never seen before, something that most people alive had never seen before, rolling up to call it 500 basis points in October of 2023.

18:24What does this chart tell you? Obviously, you can see it's rolled over a little bit and now rising again. But what does this chart tell you, big picture? It tells me that the Fed has been active. That's it. You look at the difference in rates, it's all Federal Reserve. There's nothing else. That's why the curve is inverted. the Federal Reserve has raised its interest rates for 525 basis points, and long-term rates haven't gone up nearly that much in that same period. So it's all been the Fed. It hasn't been an expansion inflation expectations or growth expectations. It's been the market saying the Fed continues to raise rates, and that's why rates have to go up.

19:01So we're basically looking at the market reaction to alternatives offered by the Federal Reserve, not necessarily a fundamental re-change or re-shift in priorities or outlook. In fact, I would say that when you factor the Federal Reserve's rate hike, what the bond market is telling you, that rates are going to go lower over the future, which again gets us back into the previous discussion, which is not a no-landing scenario, nor is it a scenario where structural inflation becomes embedded in everything, that there's some kind of underlying increase in the minimum baseline for consumer price rate increases.

19:39So if you factor out the Fed, the bond market is actually saying we're still looking more like 2010s than anything new or brand new. And so, you know, if I'm Jay Powell, I'm a little bit nervous about that, as well as if you're thinking that consumer prices are structurally, you know, we're still at risk of inflation here. What does that say about the most aggressive rate hiking campaign in the Fed's history? If the Fed is still facing inflation risk, then obviously its rate hikes didn't do what they were intended to do or really much of anything. So, I mean, as far as Jay Powell's concerned, there's really no good answers here for him.

20:15Either he has to admit that the rate hikes didn't work, or he has to admit that the future looks a lot different than most people are thinking as far as a soft landing and whatnot. I mean, they were able to push, I guess, if you attribute the causal factor to the central bank, they were able to push down CPI from around 9 % to around 3.5%. But maybe it's that last 200 basis points or 150 basis points that they just can't squeeze out with what they're doing because of structural factors. Or maybe, as you might be suggesting, tell me if I'm wrong, that we're in this problem stage right now because you see essentially the Fed potentially losing control of the narrative.

20:50Yeah, I think that I don't attribute the improvement, disinflation to central bank rate hikes. I don't think that's the evidence shows it's not. Even the Federal Reserve will tell you, if you listen to what they're saying, they're trying to sell you on two different types of inflation. What they said is we had the supply shock where demand increased much faster and farther than supply was able to respond to in 2020 and 2021. And the only way to reconcile those two things, simple economics, is prices had to adjust, which they did. But prices don't readjust on the other side in the symmetrical fashion.

21:21And so what they'll tell you, what you should get out of all the evidence is that the readjustment on the supply shock side started long before the rate hikes actually got going. You look at the US CPI, just a simple CPI. It changed in trend, as you already stated, Ash, in June of 2022. That was before rate hikes ever got started. So the actual underlying reason for the consumer price outbreak had already started to heal itself well before the Federal Reserve got involved. So disinflation was well underway before rate hikes would have had any real impact, whether they actually did have an impact.

21:59And so where we are now is in this usual nonlinear behavior of disinflation and consumer prices, where there was this whole thing. We went through the same thing last year. When the rate of disinflation started to slow down, everybody made the same exact arguments. They said, oh, no, No, the Fed's hiking rates, but now disinflation is slowing down, which means that there must be some structural problem underlying inflation. Except that didn't happen. Instead, we still got more disinflation through to the middle of last year. And then what happened? Oil prices surged, not for economic reasons, but for non-economic reasons.

22:37That had nothing to do with the Fed. That had nothing to do with the economy. It was all about Saudi Arabia and OPEC. And then what happened? After that oil price shock finished up, the economy weakened. And once again, we went to more disinflation for a three-month period at the end of last year. And then we got another oil price shock to start this year, again, for the same non-economic reasons. That's not structural inflation. That's OPEC. That's Saudi Arabia. That's problems in the energy market. So what we're seeing is, again, the change in the second derivative on consumer price increases, which is really more disinflation that is affected by these non-economic factors.

23:16And when you can control for that factor, what you see is that disinflation actually is proceeding along as like it was before. And that most people who have expected inflation to continue on forever forward, like it's going to be the 1970s all over again. The so-called no-landing scenario. Yeah, they keep latching onto these intermittent changes as proof positive that there's underlying structural inflation when there really isn't any. It's just these idiosyncrasies that come along pretty regularly throughout economic history, not even just in the last four or five years during the supply shock era.