Archives for July 2023

• The Federal Reserve, or “the Fed,” is the central banking system of the U.S.
• The purpose of the Federal Reserve is to regulate banks, manage the country’s money supply, and implement monetary policy.
• The Federal Reserve System consists of three entities: The Federal Reserve Board of Governors, 12 regional banks, and the Federal Open Market Committee (FOMC).

To understand the Fed, you need to:

• Understand their role model.
• Have the relative economic data – data which are obtained from processing but which are not supplied raw as of July 2023.
• Higher costs for shelters (mortgage loans and consumer credit).
• Bring excess private liquidity in real terms to short-term investments in bills, taking away the money supply from banks which are forced to issue new mortgages.
• Data highlighting work pressure:
  • Ratio of open positions to unemployed – S&P 500 open positions/unemployed (BLS) June 26: 1.54. This figure should be read with caution because many open positions (high tech) cannot currently be filled. It is a very high figure indicating a very hot labor market – normal is 0.70 – in an all-time low situation of the unemployment rate at 3.6%.
  • The most important figure – the weekly earnings which represent the initial impact of monetary mass. Let’s look at the data – Total private nonfarm – June 23:
    • MONTH – Y/Y single worker in real terms – all employees and nonsupervisory: all employees +0.80% Y/Y, non-supervisory +0.86% Y/Y. It is the first positive month in real terms since May 21.
    • MONTH – Y/Y TOTAL worker in real terms – all employees and nonsupervisory: all employees +3.34% Y/Y, non-supervisory +3.26% Y/Y.
    • YEAR ENDING June 23 – Y/Y single worker in real terms – all employees and nonsupervisory: for real calculation, we used the CPI year ending – the average of the last 12 months of the CPI. All employees -2.16% Y/Y, non-supervisory -1.50% Y/Y.
    • YEAR ENDING June 23 – Y/Y TOTAL worker in real terms – all employees and nonsupervisory: for real calculation on USA, the CPI year ending – the average of the last 12 months of the CPI. All employees +1.73% Y/Y, non-supervisory +2.26% Y/Y.
    • YTD June 23 – Y/Y TOTAL worker in real terms – all employees and nonsupervisory: all employees +3.80% Y/Y, non-supervisory +4.21% Y/Y.
  • RISK INDEXES OF THE SYSTEM: S&P Experian indices – May 23:
    • First mortgage 0.49%
    • Second mortgage 0.30%
    • Auto Default 0.79%
    • Consumer Credits 0.71%
    • Bankcard 3.62% – slightly higher than the 2018 average at 3.40%

SUMMARY – SYSTEM FROM THE FED’S POINT OF VIEW – TOTAL WORKERS

• The money supply in real terms for consumption is largely positive for both all and non-supervisory employees.
• SINGLE WORKER: From June, it starts to be positive in real terms. The negative data year ending – 2bc – leads the single worker to be more cautious in new purchases based on the negative bad debts of the previous months. RISK INDEXES: Very low and the bankcard in line with 2017-18. Low to medium risk of the system.

Based on these data, for the FED which applies the classic system, the U.S. system is holding up the current level of rates and a further 25bp increase, draining liquidity but not creating excessive problems.

You have the view of the system from the point of view of the Fed based on official BLS and S&P data, which nobody has, except the Fed and the big companies who do not protest like me against Powell.

Note that the expected Y/Y CPI is 2.95-3.05, a sharp drop from 4.05 previous month. Calculation – CPI vs previous month +0.30% comparing Y/Y vs +1.374% June/May 22.

Provided by our in-house actively retired institutional economist and trader Filipo aka The Prof. More of these inside track views can be found in our ATS trading discord group by ATS EcoFin.