The US Current Wave of Infections Could be About to Peak

US

Key Points

• The Fed appointees, announced by the administration, tick its diversity boxes but may not bring much diversity to monetary policy thinking.
• There are tentative signs that the hospital staff shortage is easing, which could signal that we are getting close to the peak of the current wave of infections

Monday is Martin Luther King Jr. Day in the US, a federal holiday

Fed

There were few surprises in Fedspeak this week, the last before the pre-meeting blackout.  The tone remained hawkish, with Chair Powell’s hearings consistent with my expectations of a start to the hiking cycle at the March meeting and a mid-year start to QT2.  In addition, following the Dec. CPI I am now expecting 4 hikes in 2022, against 3 previously.

The view from in the Beige book was a tad less hawkish than those of FOMC members: ‘several Districts reported that businesses expectations for growth had cooled somewhat during the last few weeks’ and ‘some districts noted that price increases had decelerated a bit from the robust pace experienced in recent months.’  These won’t impact much of the FOMC hawkish stance, as the focus is clearly inflation rather than employment and the current weaknesses reflect in part, the impact of omicron which Fed believes will be short lived.

The administration announced 3 candidates to fill the 3 vacancies on the Fed Board, Sarah Bloom Raskin as vice chair for supervision and the academic economists Lisa Cook and Philip Jefferson as Governors. Raskin, a former Fed Governor and Obama Treasury official, is believed to favor tighter bank regulations and a more active role for the Fed in fighting climate change.  Her nomination was  praised by Senator Warren.  Jefferson worked as an economist in the Fed’s monetary affairs division for a year in the 1990s while Cook was a senior economist in the Obama administration Council of Economic Advisors.  Jefferson and Cook’s recent research focus has been inequality and poverty. 

Raskin, Cook and Jefferson tick the administration boxes on gender and ethnic diversity (Cook and Jefferson are African American) and have a liberal slant that will satisfy progressive democrats.  It is not clear however how much thinking diversity they will bring to monetary policy making.  Cook and Jefferson are PhD economists (from Berkeley and the University of Virginia respectively) and will join the 400 PhD economists already working at the Fed, though admittedly only 2 of these are African-Americans.

The pre-meeting blackout started on the week-end.

Data

Dec CPI continued to slowly decline as shown by a further decline in the trimmed mean and median CPI indices.  Dec retail sales showed a large negative surprise, that may well reflect omicron as well as that consumers brought forward their end of year purchases out of concerns over shortages.  In addition the decline is likely to also reflect slower growth in real household income now that government transfers are falling, employment growth is slowing and real wages remain flat.  These factors could also explain this week miss in U Mich. consumer confidence.

There was no let down of covid cases and test positivity or hospitalizations  this week (charts 1 and 5). 

Hospitalizations remain decoupled from cases but omicron fast growth in cases has led to hospital staff shortages on par with the winter 2020 spike, though the shortages seem to be easing (chart 4).  Hospitalizations in more immunized blue states remain similar to those of less immunized red states (chart 3).  And while workplace mobility and perceptions of economic policy uncertainty remain roughly stable, passenger air traffic has started to slow (chart 2).   In addition,  school closures rose further the week of Jan 10, from an already very large number of closures the previous week. 

This is a data light week.  The most important releases will be the NY and Philly Fed business surveys, and the TIC  where I agree with the consensus.  Other key data includes unemployment claims and real estate market data and the Conference Board leading economic indicators.

Events/Political Developments

President Biden job approval continues to slip in the polls, in part due to his handling of the economy and of the pandemic.  The Supreme Court this week blocked the administration vaccine or testing rule for large private businesses.  Meanwhile the US continues to experience an acute shortage of lateral flow tests.  The administration has announced that starting Jan. 19^th Americans would be able to order 4 free kits for each residential address.  President Biden election legislation and filibuster reforms were dealt a blow this week when centrist democratic Senators Manchin and Sinema refused to support them.  Negotiations with centrist senators on the Build Back Better bill made limited progress.

Links to New York Fed POMOs/TOMOs:  Repos, Treasury, MBS, CMBS

G20

The BoJ is holding its policy meeting this week and there are rumors that it could revise its inflation outlook. The ECB publishes its minutes and Lagarde, Holzman and Villeroy are speaking. The BoE’s Mann is also speaking.

Key data this week are mainly inflation in the UK, Canada and Japan and PMIs in Japan and Australia.

Links to BOJ Rinban , BOE OMO

COVID-19 Monitoring

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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