• 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.

The central point of both the US system and the equity market is the CPI. The three elements that interest the Fed to intervene are (according to Bernanke’s teachings at Princeton) currently managed by outdated “80s methods:

1. The short-term money supply:
   • M3, but it refers to Q2 and therefore is old data.
   • The total average weekly earnings – BLS Employment Report. This data shows that as of September 2022, on an overall level, total weekly earnings are year-over-year slightly negative in real terms, but at the individual level, the loss of purchasing power is 3.4%.
2. Consumption – BEA Personal Income. See the attached tables, which reveal that consumption in real terms as of August 2022 is negative year-over-year and year-to-date, both using the PCE and the CPI as deflators.
3. The CPI, which is our focus today.

View the Economic Analysis: https://algotradingsystems.s3.amazonaws.com/docs/V+studies.xls

One of the elements alerting us to new pushes or brakes on the CPI is the analysis of the CPI 3 months annualized – elaboration of the BLS CPI report Tab 3 – sheet 3. It is evident that it is a much faster sensor than the year-over-year measure. Demonstration:

• 3 months indicated strong and increasing pressures on the CPI in February 2021, while year-over-year detected it in May – sheet 3 line 72 and line 123.
• Let’s see the situation in 2022 to date – 3 months – line 123 and following:
• The maximum inflationary push 2021-2022 occurs in June 2022 at +12.26 annualized and then collapses at the end of Q3 September 2022 to 0.67.
• This indicates that at the US system level, the price system, TODAY, has been frozen, with sectors still showing strong increases and others strong contractions.

September 2022 – Q3 2022 – column E shows the weight on the CPI of the various sectors:

• Overall situation of frozen prices:
• Sectors that create a strong boost to CPI growth:
  • Food – weight 13.635% – +10.92 annualized. All sectors of food at home and away from home.
  • Energy services – Electricity – due to the high prices of inventories of production fuel.
• All items less food & energy – weight 78.12% – still high at 5.11 annualized but trending down from June 7.43. This figure is strongly conditioned by the shelter – line 152 – weight 32.47% on the CPI – which remains high and growing. Rent and Equivalent Rent (Mortgages) due to the increase in Fed rates.
• Sectors that offset the increases – Energy weight 8.24% – the decline in the CL of the “bad” Saudi.

FOOD:

• The strong push is due to two factors:
• Domestic and international agricultural production below demand. It is bad economic planning that cannot be resolved in the short term and cannot be resolved with interest rates.
• A high-cost US production that has significant consequences on manufacturers’ inventories.
• The fortune of Import prices – BLS Release – Food Feeds and Beverage – 3 months prices annualized September 2022 -9.14, June 2022 -1.90, March 2022 +21.16 – year-over-year September 2022 +3.43%, June 2022 +8.70%, March 2022 +13.62%. It is evident that at the import level there is a strong slowdown in prices. The boost in food is created in particular by Vegetables +20% 3 months annualized +15.50% year-over-year – lack of production. Prices are expected to drop with Southern Hemisphere harvests – December 2022 to April 2023.

SHELTER:

• It is the Fed’s own policy that creates the inflationary push.

Conclusion:

• The three elements that should guide the Fed’s monetary policy suggest CAUTION:
• A consumer with a loss of real purchasing power.
• Negative consumption in real terms, either using the PCE or the CPI as a deflator.
• Inflationary pressure created by food due to a lack of domestic production. The increase in production in the agricultural sector is possible but it takes time and investments. The prices of the sector do not respond to interest rates. The growing inflationary pressure created by the shelter – 34% of the CPI – the same Fed policy creates it.

The Fed has already decided on a rate hike of 0.50 / 0.75 in November 2022. The risk is that they will make the same mistakes as Volcker in the 80s that brought the country and the market into recession.

Due to the forecast for November and the Christmas period, it is very likely the bottom will be set before March 2023, and we can expect some type of V bounce or large volatile frothy rallies to continue.

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