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Inflation Volatility

Powell warned me with this critical message about inflation so far. This is my thoughts about his speech on 30 Nov 2022.

I’m more convinced of this.

Last Saturday, I sat down at my office desk, finally took time to read Fed Chairman Jerome Powell’s latest speech – which I highly encourage you to read – on his inflation and interest rates update.

He said he will slow down the rate hikes from this month onward. But also stressed rates will remain high in the near future.

This is to fight against the worst inflation in 40 years.

At one point, I struggled with making out how the market will play out. Now, was I more certain.

According to Powell, he said: “It will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains much too high.”

What he talked about was the core PCE inflation – which tracks detailed numbers like employer contributions and sources data from businesses.

The PCE is a preferred inflation indicator than the CPI.

While inflation have dropped somewhat, last month, but it is still rather “sticky”.

Source: Board of Governors of the Federal System website

As Powell puts it: “But forecasts have been predicting just such a decline for more than a year, while inflation has moved stubbornly sideways. The truth is that the path ahead for inflation remains highly uncertain.”

He thinks the graph doesn’t show a clear trend inflation is cooling. 

So why is the Fed slowing their rate hikes?

The thing is, the Fed wants to avoid overtightening interest rates to quickly, which could dump their economy into a full-blown recession — or a “hard-landing”.

But Fed’s message was clear — the war against inflation isn’t over.

And the Fed will still… 

Keep pumping rates until something breaks

You see, the Fed needs to bring inflation down to 2%, and they know they aren’t anywhere close.

Powell said: “It seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting…”

Now the projected target rate is 4.6%. And this could go even higher. 

The big problem? There’s still too many jobs, more than jobseekers 

I find the labour market the most important thing to know, because salaries make up the biggest cost of spending – from healthcare, to education, to haircuts and buying a house.

There are too many job openings chasing too few jobseekers.

This led to a 50 year low in unemployment rate, forcing higher price pressures.

I mean, Powell spoke in greater detail about labour, but I won’t go too deep into it.

Unemployment rate is still tight as yoga pants.

Last week, Larry Summers also said the Fed has to increase rates even more than the projected 4.6%.

In fact, he says it should go up to 6%, “thanks to stubbornly high inflationary pressures.”

I respect Summers as an astute economist. He took over Robert Rubin as Treasury Secretary in 1999, and was a potential successor to Ben Bernanke. At one point, he was a managing partner for a hedge fund. He probably saw a dark looming round the corner, which got him to make that statement.

What worries me is… 

What happens after we hit “peak” rates?

Homebuyers will be forced to service higher mortgage rates, which could cause house prices to fall — sellers would rush to put up their properties for sale, as higher mortgages rates hit homeowners.

How will all these affect us here in our sunny island?

Of course, it’s not so much about our inability to service our mortgages. That’s the good news.

The bad news is, as global economy slows from ever sticky inflation, this could force businesses to cut back spending with costs going up, which could slow hire and even layoffs.

I spoke to a tech recruiter the other day; he told me usually contract workers are the first to let go. And he is seeing many contract staff being let go in the market.

This is a sign: the next step is a headcount reduction of permanent roles. 

The butterfly’s flap is scarier than the earthquake it causes

In Singapore, we are a large trade partner with the US. We also have many US MNCs here.

And more crucially, many local businesses do businesses with US MNCs here.

What I’m afraid the butterfly’s flap in the US, could cause an economic earthquake here.

When jobs are cut, people start worrying about their financial security. That’s what’s going to force property price in Singapore to fall.

If you recall, property prices went below HDB prices twice. People were either downgrading back to HDB, which pushed prices up, and getting rid of second property homes, which pushed private prices down.

Source: 99.co, URA data

What I’m saying here is inflation could remain high.

Rates could continue to go up.

There were talks about a recession in 2022. But this sure hasn’t feel like one yet this year.

I guess the true test comes when the Fed is forced to raise rates beyond their projected 4.6% rates.

Sometimes, investing can be simple. 

Willie Keng, CFA

Founder, Dividend Titan

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