Three “Data” items today:
Topic #1: The most straightforward way to bring down US inflation is to have a recession. That’s an awkward observation for a few reasons. First, no one wants to see the American economy contract, especially after the challenges of the last 2 years. Second, even with the S&P 500 down 11 percent on the year, US large caps certainly do not discount a recession. Lastly, while the Federal Reserve may want to tame inflation no one at the FOMC will ever come out and say a recession is their Plan A. The other part of the Fed’s dual mandate is employment, after all.
Still, the historical record on recessions as inflation-busters is quite clear, as this Consumer Price Index chart from 1962 – present below shows (NBER recessions noted in gray):
Three comments on this data:
- There have been 8 recessions in the United States over the last 60 years, and in every case inflation declined noticeably. Aggregate demand declines, supply remains sticky, and producers must adapt to those realities. Inflation falls. All that is Econ 101, but it is good to see it works in the real world as well.
- Inflation can decline during an economic expansion, but this most commonly occurs when energy prices decline suddenly. Such was the case in the mid 1980s, late 1990s, and mid 2010s. All those periods are visible in the chart above.
- US inflation has never declined from +5 percent back to the Fed’s target of 2 percent without a recession. Since CPI inflation is currently 7.5 percent, that’s an important if unwelcomed fact to know.
Takeaway: we are sure every Fed economist and FOMC member, including Chair Powell, knows this historical relationship between recessions and inflation. They would very much like to avoid the former even as they bring the latter under control. The trouble is there is no playbook for that outcome.
If nothing else, this explains why the Fed has been so quiet on its plans for 2022 monetary policy and may well remain so even after the March 16th meeting. Perhaps supply chain issues really will start to resolve themselves this year and maybe energy prices will come off the boil if the Russia-Ukraine situation has a diplomatic outcome. If those events don’t come to pass, there will be plenty of time to raise rates until either inflation is tamed, or the US is in a recession. Or, as history shows, both …
Topic #2: US-listed mutual and exchange traded fund flows. These are a reasonable proxy for retail and smaller institutional investor confidence and are published weekly each Wednesday by the Investment Company Institute (link below). Three highlights from this week’s data (for the week ending February 16th):
- US fund investors continue to add to their domestic equity fund exposure, albeit at a slower pace than the last few weeks. Inflows totaled $4.5 billion last week, less than the $27.3 bn from the week before or the $14.7 bn in inflows 2 weeks prior.
- The bond fund buyers’ strike we’ve been talking about most of the year was very much in force last week. Outflows totaled $9.6 billion and total $39.0 billion over the last 4 weeks.
- Commodity fund (mostly physical gold) fund flows continue to be strong. Last week saw inflows of $913 million for this asset class, and every week since the start of 2022 has seen positive money flows.
As for the trailing 4 weeks of fund flows:
- Fund investors have added $57 billion to their equity holdings, mostly (75 percent) into domestic stock funds ($43 bn).
- Investors have also added $5 billion to their commodity fund holdings.
- They have sold $39 billion in fixed income products and a further $3 billion in “hybrid” products that hold both stocks and bonds.
- This nets out to $20 billion of positive flows into US-listed mutual funds and ETFs. While that sounds like an impressive number, it is not. Average fund flows last year were $72 billion/month, more than 2.5x the current run rate.
Takeaway: fund flows can’t explain 100 percent of why markets do what they do, but in the current environment they do give us some useful context. First, fund investors have no interest in adding to their bond exposure at current prices. This explains why bond yields continue to edge higher as the year progresses. Second, this cohort is still increasing its equity exposure. That is not pushing stock prices higher, of course, but may be buttressing them against steeper declines.
Topic #3: US office occupancy. The chart and table below are from Kastle Systems, which provides office access control hardware and software throughout the United States. The data is current through last Wednesday (February 16th) and reflects actual ID card swipes across the 10 largest office markets in the US:
Takeaway: US office occupancy is steadily improving but is still below the post-crisis peak of 38 percent set last December. Remote and hybrid work continue to be the status quo for the majority of US office workers. That is changing, but only very slowly. At the current pace, US office occupancy won’t hit 50 percent until just before Memorial Day (late May), just in time to see it drop off again during summer vacation season.
ICI money flows: https://www.ici.org/research/stats/weekly-combined
Kastle Systems data: https://www.kastle.com/safety-wellness/getting-america-back-to-work/