Powell speeches are the big headlines in focus this week

Fed Chair Powell is scheduled to give two speeches this week, one this morning and another tomorrow afternoon. Next week we’ll get October inflation data, but this week markets are wondering if the recent uptick in unemployment is finally an indicator of the long-awaited economic contraction that markets have been prediction for months now. 

Recall, as interest rates were raised to combat price instability, the economist assumption from a purely mechanical perspective was that slower or negative growth would follow, including a contracting labor market i.e. unemployment. Over the last month or more, we’ve written about how headline economic data has been fairly stubborn, with headline growth and employment metrics really not reflecting a tight environment and markets subsequently trending downward on the assumption this all meant higher-for-longer interest rates. Fast forward to last week, where we saw potential weakness in the labor market, so naturally the market overreaction was to raise the expectation that we’re nearing an end to interest rate hikes. While there’s plenty of time for things to change, the CME FedWatch tool shows a 90% of market expectation of rates being held steady again during the December FOMC policy meeting.

Earlier, Bank of England Governor Andrew Bailey said flat-out that it is too early to discuss rate cuts, attempting to get in front of market expectations there. We’ll see if Powell says something similar this week.

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Credit card debt at all time highs and increasing

While we have to track and analyze the headline numbers, which, as we’ve said, look acceptable, but the under-the-hood dynamics of the economy consistently point to something concerning. It may sound counterintuitive at first, but increasing credit card balances usually precede higher growth, because it means consumers are spending. The problem is that debt balances are supposed to wax and wane, they go up because of economic activity, then people pay them off with the supposed higher incomes they’ll receive as a result of the greater economic activity. By now, most market observers understand this is not how the world has been working lately, with debt balances across the public and private spheres basically going straight up.

Credit card debt is extra concerning because it’s among the highest cost debt available, and because it almost always disproportionately impacts everyday people, as opposed to say companies and governments. A recent report from the NY Fed shows that credit card balances have recently hit all time highs, at over $1 trillion (chart below from CNBC), with delinquency rates rising and nearly 10% of borrowers in “persistent debt”, meaning they don’t pay off their balances, they either make minimum interest payments or can’t afford the payments at all. So, when we report that “growth is strong”, it really means more stuff is being made, but it does not factor in the financial health of the people making or buying the stuff.

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Chinese exports slow – another clue for global demand

Recently, we wrote about how certain parts of the economy can provide clues as to what’s really happening – for example we looked at the performance of shipping giant Maersk. Another similar clue that investors use is export data out of China, and yesterday data indicated that Chinese exports continue to slow – the sixth straight month of declines. This is important because as an export-driven economy, Chinese export activity is directly related to consumption elsewhere, for example the US. So if China is making and exporting fewer goods, it means that countries across the globe are demanding less. Related to the data, the price of oil dropped, as slower global trade means less demand for oil. This was after a strong summer run-up in the price of oil.

Crude oil WTI $/bbl