HVD, fam!

Keeping a weather eye on the horizon

Even though consumer inflation is still very low at 1.4% (ideally should be near 2%), it rose at the fastest pace in five months for January. Pretty much all of this was driven by a 7.4% increase in the price of gasoline. Prices for food from grocery stores and restaurants has increased by about 4% since the pandemic and indicates shortages of some types of foods and, importantly, the costs associated with dealing with the pandemic for sellers. Taking out food and energy (which tend to be pretty volatile), core inflation was flat. 

Moral of the story: The worry is that inflation will really ramp up once the economic recovery ramps up (after widespread vaccinations) and could reach as high as 2-2.5% even by the end of this year. Even though we’re looking for something around 2%, big changes in general tend to spook the market.

Shiver me timbers

New unemployment claims have kind of been stuck in a rut between 700k-1m for the last few months. Last week’s reading came in at 793k, slightly lower than the previous week’s 812k number. Unfortunately, the total number of people receiving some form of unemployment benefits jumped almost 2.7m to 20.44m. 

Moral of the story: The new stimulus being paid out by the government is fine and dandy but many people benefitting from these unemployment benefits are going to be in for a rude awakening when taxes come due. Unlike with employers who withhold taxes with every paycheck, the government doesn’t do the same with unemployment benefits, which are taxed just like any other income. Add in the capital gains taxes owed by stonk meme investors, the total tax surprise could be as big as $60b. Paying up for taxes means less money to spend on fun things, which means consumption could take a hit in the first half of the year. Since consumption accounts for over two-thirds of our economy….yikes. 

All hand hoy

Taking a moment to acknowledge that all my pirate speak is informed by The Pirates of the Caribbean franchise, tyvm Disney. Fed Chairman Jerome Powell seemed less than optimistic about the labor market. Even though unemployment has fallen from 14.8% at the peak in 2020 to 6.3% as of January, more than 10m people are still unemployed, which is about 4.4m higher than pre-COVID levels. According to Powell, this 6.3% unemployment rate is dramatically understating the actual situation because it fails to truly acknowledge the largest 12-month drop in labor force participation since 1948 and potentially includes a lot of data issues regarding misclassification of employment situations. Altogether, Powell believes the true unemployment rate is actually closer to 10%. 

Moral of the story: Given their dire assessment of the labor market, the Fed remains committed to supportive monetary policy for the foreseeable future and continues to urge the Federal government to provide supplementary supportive fiscal policy as well. Given the blue state of affairs in Washington, plus Janet Yellen at the helm of the Treasury, we’re likely to see continued stimulus across all fronts to help boost economic recovery. 

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