Juice The Stock Market And Destroy The Dollar!! (#GotBitcoin?)
Investors are ramping up wagers on the falling currency, believing the surge in coronavirus cases will hamper U.S. business activity and drive even more government spending. Juice The Stock Market And Destroy The Dollar!! (#GotBitcoin?)
The dollar has made a sharp U-turn this summer following a long rally, confounding many traders but potentially adding fuel to this year’s surprising stock-market rebound.
The ICE Dollar Index, which measures the dollar against a basket of other major currencies, in July notched its worst month in nearly a decade and recently hit a two-year low. The fall extended a reversal that began in late March, spurred lately by ballooning worries that mounting coronavirus cases will stall the U.S. economic rebound, even as growth accelerates in countries from China to Germany.
Big-name investors such as Ray Dalio and Jeffrey Gundlach have recently said publicly that the flood of U.S. government spending being injected into the financial system could eventually stoke inflation, eroding consumers’ purchasing power. Surging budget deficits tend to make investors less likely to hold a country’s currency. Fitch Ratings on Friday revised its credit rating outlook for the U.S. to negative from stable, though it maintained its top, triple-A rating.
At the same time, the currency’s slide is adding further support to the booming market rally, lifting stocks and commodities. A weaker dollar boosts multinational companies, which see their products get more competitive abroad and can more easily convert overseas profits into dollars. It also makes products and investments that are priced in the currency cheaper for overseas investors, supporting demand for a host of financial assets. U.S. stocks have climbed near five-month highs recently, while raw materials are paring much of their 2020 decline.
“These things are denominated in dollars, and the dollar is getting crushed,” said Christopher Stanton, chief investment officer of Sunrise Capital Partners. He expects the trend to continue and is directly wagering against the currency, betting on gains in the euro against the dollar and buying gold, which some investors are using as an alternative store of value. Gold recently climbed to all-time highs for the first time since 2011.
The dollar’s decline upends a yearslong climb that was fueled by bets that U.S. economic growth would outpace activity overseas and let the Federal Reserve keep interest rates among the highest in the developed world. Now, the coronavirus is forcing the central bank to keep rates near zero, slicing much of the gap between rates in the U.S. and other nations and limiting investor returns from holding the currency.
Despite the tumble, few on Wall Street believe the dollar is on the brink of losing its status as the world’s reserve currency, held in bulk by global central banks and used to finance most international transactions. The dollar remains relatively strong following its long climb, and analysts say economic data points like export growth justify the reversal. Dollar reserves also tend to increase when the currency weakens because it gets easier for central banks to add to their dollar assets.
Still, its reversal marks a key development for money managers. Investors this week will seek to gauge whether the U.S. economic recovery slowed last month by parsing the July jobs report and purchasing managers’ indexes. The next round of corporate earnings from companies, including Booking Holdings Inc. and Hyatt Hotels Corp., will also provide a window into the prospects for the bruised travel industry.
Firms that earn more money overseas could benefit if the dollar’s recent weakness persists. So could international markets—many have long trailed U.S. stocks, but with growth overseas poised to catch up to domestic economic activity, they are now in position to attract more capital.
“The other houses are now looking just as attractive,” said Nancy Perez, senior portfolio manager at Boston Private, which has recently increased its investments in shares of companies based in emerging markets in its asset-allocation strategies. “They have much more potential than the U.S.”
Hedge funds and other speculators are favoring everything from the Swedish krona to the Brazilian real, positioning for more dollar weakness. Net investor bets on a weaker dollar recently climbed to their highest level since April 2018, Commodity Futures Trading Commission data compiled by Scotiabank show.
“We are in a stage of very high momentum,” said Ed Al-Hussainy, senior interest-rate and currency analyst at Columbia Threadneedle Investments. He is betting that emerging-market currencies such as the Mexican peso and South African rand will extend their recent rebound. “Everybody is getting caught up in it.”
The latest drop in the currency comes with the euro surging Thursday to two-year highs against the dollar after European Union leaders recently agreed on a more-than-$2 trillion spending package.
The aid is bolstering investors’ faith in the bloc’s unity and economic recovery since European countries hadn’t spent as much previously. Many of the countries have also been more successful than the U.S. in containing the pandemic.
“There are now doubts about the idea that the U.S. would end the year in a better place than Europe,” said economist Brad Setser, a senior fellow at the Council on Foreign Relations.
Investors say that the economic picture could make this dollar slide longer lasting, with Fed programs also alleviating early-year dollar shortages in overseas funding markets. But some are still wary of reading too much into the recent drop, with November’s presidential election among the factors that could shift already volatile economic conditions.
Some analysts also question whether the weaker dollar will end up boosting exports and other economic data points given the scope of the global recession.
“It’s nearly impossible to figure out exactly what the numbers will end up being,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.
Yellen Ending Trump Dollar Tumult Promises Cheers In Markets
Now that President-elect Joe Biden has picked Janet Yellen as his Treasury secretary, currency markets are growing more confident that the U.S. government’s policy for the dollar will be more clear.
Donald Trump’s administration conjured chaos about the greenback, one moment threatening to intervene or otherwise fretting about the currency’s strength, then — often on the same day — taking a contradictory stance. From Bill Clinton’s administration through Barack Obama’s, the federal government adhered to the position that a strong currency is a reflection of the strength of the U.S. economy.
Prospects that Yellen will returning clarity on dollar policy may help stabilize the $6.6-trillion-a-day currency market that’s the backbone of global finance and commerce. Some traders are hopeful even though the former Federal Reserve chair and her new boss, Biden, are expected to take time to unfold their position on the greenback as they focus initially on fighting the pandemic and its economic damage.
“The Yellen appointment may formulate a more coherent policy for the dollar,” Ben Emons, head of global macro strategy at Medley Global Advisors, said in a note. “The reason is that during Yellen’s tenure as chair, Fed policy uncertainty fueled the strength of the dollar. Her experience and knowledge could see a better, formal setting around dollar policy.”
The U.S. Treasury secretary has historically been in charge of the dollar, with a unit in the department dedicated to foreign exchange policy.
But tradition went by the wayside under Trump. The president and his aides freely discussed the currency, often overstepping Treasury Secretary Steven Mnuchin, and the administration overall showed far less commitment to a strong dollar due to Trump’s obsession with U.S. trade deficits.
In July 2019, Trump and his top economic adviser, Larry Kudlow, publicly debated a U.S. intervention to weaken the currency after the European Central Bank signaled looser monetary policy, causing the euro to weaken against the greenback.
Within hours of each other, Kudlow said in a television interview that the administration had decided not to intervene, only to have Trump tell reporters that the idea was still under consideration.
Former Treasury Secretary Larry Summers says it’s time for the U.S. to return to the strong-dollar policy established during the Clinton administration.
“It would be unwise to appear actively devaluationist or indifferent to the dollar,” he said earlier this month in an open letter advising the next Treasury chief.
Yellen has in the past noted that a stronger dollar exacerbates the U.S. trade deficit and dampens growth, while a weaker currency does the opposite. She also in 2014 warned her then-Fed colleagues about the risks of commenting on the dollar.
“As a former Fed chair, Yellen also fully understands the impact she could have on markets,” Ian Katz, an analyst at Capital Alpha Partners, wrote in a note. “She will choose her words carefully. Investors shouldn’t worry that she will make off-the-cuff remarks that will spur volatility.”
Any policy changes under Yellen would coincide with growing consensus on Wall Street that the dollar has entered a period of prolonged weakness. A Bloomberg gauge of the greenback’s value just hit a 2 1/2-year low.
“Given that we see the dollar falling through Biden’s term, the issue of dollar policy could be of some significance,” Standard Bank’s head of foreign-exchange strategy, Steven Barrow, said in a note. “More than this, the era of almost non-existent foreign-exchange intervention by developed nations could be about to end as well.”
The U.S. last intervened in currency markets in 2011, along with international peers, after the yen soared in the wake of that year’s devastating earthquake in Japan.
The dollar has fallen more than 11% since March, as measured by the Bloomberg Dollar Spot Index.
Dollar bears have been emboldened by expectations that the Federal Reserve will keep rates near zero for years and that there will be diminished “haven” demand for the dollar given promising results for coronavirus vaccines.
That trajectory may continue with Yellen at Treasury, as she’s seen pushing to join Fed Chair Jerome Powell’s policy of lower-for-longer interest rates with extended, expansionary government spending.
Not everyone agrees Yellen will make strong pronouncements on dollar policy, since her focus will be on the domestic economy. Nine months into the pandemic, more than 6 million people still claim extended unemployment assistance and joblessness is again on the rise as U.S. coronavirus infections spike.
“Yellen is unlikely to forcefully articulate a specific policy on the dollar as she no doubt recognizes that domestic policies are far more important to the U.S. recovery and that trying to control or jawbone the exchange rate’s value should not be a major priority,” said Eswar Prasad, who wrote ‘The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance.’
Behind Every Record-Breaking Market Level Is The Fed’s Largesse
Each market milestone passed in 2020 is a reminder of the Federal Reserve’s extraordinary efforts to hold things aloft — and a belief that it’ll continue.
Consider today’s markets landscape. The dollar is the weakest since April 2018, pegged back by Treasury yields below 1%. That’s great news for emerging markets, and dollar bond sales in Asia have now topped $400 billion for the first time ever.
Global stocks are at record highs and copper is near a seven-year high. Even Bitcoin has hit new records. And there’s little denying that the Fed has had a lot to do with it.
The sweet spot for risk assets and the Fed may be one in which economies do well, but not too well — strong enough to prop things up, but not so hot that inflation starts to take off.
Strategists from firms like Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase & Co. expect markets generally to do well into 2021 as Covid-19 vaccines become available and the world economy continues to recover.
With prices already so stretched, it could all come crashing down if the economy becomes so hot that inflation takes off and the Fed starts to discuss taking its foot off the gas — or even raising rates.
For now, though, many strategists seem to be comfortable with the way things are going, sticking with Fed Chairman Jerome Powell’s assertion from June that “we’re not even thinking about thinking about” raising rates. The consensus among strategists is more stimulus, rather than less, and overnight index swaps aren’t pricing a Fed hike until late 2023.
“We believe the Fed is quietly monitoring the situation and will not allow the market to disrupt their lower-rates-for-longer approach,” said Anders Faergemann, a money manager at PineBridge Investments in London. “It would be too early to talk about or position for a taper tantrum.”
The Fed factor is rarely far from focus, especially if the economy starts roaring back as more people get vaccinated. It’s not impossible to imagine a sharp uptick in inflation as shoppers, who have been cooped up for months at home, start splurging on holidays and lavish celebrations of freedom.
In a note on Tuesday, Morgan Stanley economists led by Chetan Ahya listed domestic inflationary pressures and a “disruptive” change in Fed policy as among the top risks for emerging markets next year.
But that’s not the consensus view. Morgan Stanley is expecting a strong rebound in emerging markets powered by a weak dollar, low U.S. interest rates and the end of the pandemic.
“We can also be assured that the Fed will indeed be slow to normalize monetary policy,” wrote FX Strategist Kit Juckes of Societe Generale SA on Nov. 25. “They have promised to be, and probably won’t get enough inflation soon enough to make them change their minds.”
Markets Have Infinite Reasons To Be Cheerful
The $5.6 trillion of central bank stimulus means investors should keep faith in the recovery trade.
As we head toward the end of 2020, we’ve spent the final run-up to Christmas much as we have the rest of the year: worrying about Covid-19. The beginning of this week saw a switch into risk-off mode in financial markets as a fast-spreading new virus strain emerged in Britain and Western health systems remained under pressure. That has shaken confidence in a positive start for 2021.
But the momentum behind the global recovery trade will take some stopping. Now would be the time for investors to take advantage of any temporary setbacks and keep the faith that the pandemic will eventually dissipate.
Vaccine makers seem confident that their shots will cope with the new mutation, and if all else fails we can rely on central bankers to do whatever it takes to defend economies and markets.
Never has the traders’ mantra “Don’t Fight the Fed” been so accurate. There’s every indication it will be the same in 2021.
Some $5.6 trillion of stimulus has been pumped into markets by the major central banks since March, so it’s no coincidence that we end the year with record highs for U.S. Stocks and global bond yields close to all-time lows.
Ever since the global financial crisis, central bankers’ Quantitative Easing habit hasn’t been shaken off. This year has seen the biggest asset-price reflation ever. One thing is certain for 2021: There’s another generous helping already lined up.
The U.S. Federal Reserve confirmed last week that $120 billion of Treasury bond and mortgage-backed securities will be acquired per month, plus a smattering of other securities that may be added according to discretion.
That’s nearly $1.5 trillion over 2021, on top of the $3.3 trillion bought by the Fed in 2020. Add in all the U.S. fiscal stimulus as well, with a $900 billion package finally approved by Congress, and it’s safe to say there’s a favorable backdrop for investors.
The rest of the world isn’t leaving the heavy lifting to the Fed. The European Central Bank just added another 500 billion euros ($610 billion) to its pandemic response, bringing it up to a total 1.85 trillion euros stretching into 2022. The Bank of England has made another 150 billion pounds ($20 billion) of QE purchasing power ready for dispersal next year.
The Swiss National Bank took the news of being labelled a currency manipulator by the U.S. Treasury with the vow to renew its interventions (its purchases of foreign currency end up in equities and bonds). The Bank of Japan has bought more than 7 trillion yen ($70 billion) of equity-linked exchange-traded funds this year.
So globally there will be both the ongoing flow of new QE into the system and the benefits of central banks maintaining their huge existing “stock” of bond holdings. Ever higher balance sheets can only bolster asset prices. Analysis from the Bank of England shows that in the absence of bank lending — which creates new assets — all QE can do is inflate the value of existing assets. This is infinite money chasing finite assets such as stocks and bonds, and even Bitcoin.
Two things have been missing that have thus far impaired QE’s effect on economic growth. First, the transmission mechanism via banks into real-economy lending hasn’t been functioning properly; it’s been particularly lacking in the European Union. Second, there has been a noticeable absence of aggressive and focused spending from governments on measures that will lift economic output meaningfully.
Happily, the fiscal side of the equation is finally being addressed with the accelerated distribution of government spending packages kicking in next year across much of the world — notably in the EU with its groundbreaking 750-billion euro pandemic recovery fund. The coordination of monetary policy and fiscal stimulus should create a multiplier effect if done properly.
There are plenty of negatives still around, but my colleague Cameron Crise reminds us of an episode from the trading classic “Reminiscences of a Stock Operator,” where a crafty market veteran keeps repeating, “It’s a bull market, you know.”
The big money is made following the big trend not exiting on temporary setbacks. Keep in mind what the Fed and its many friends have in store next year.
Jerome Powell Says Constant Money-Printing Policy To Continue Indefinitely
Fed likely to hold interest rates near zero and continue asset purchases for some time, chairman says.
Federal Reserve Chairman Jerome Powell reaffirmed the central bank’s commitment to maintaining easy-money policies until the economy has recovered further from the effects of the coronavirus pandemic.
“The economy is a long way from our employment and inflation goals,” Mr. Powell said in testimony to the Senate Banking Committee, a statement he has repeated in recent weeks.
The Fed will therefore continue to support the economy with near-zero interest rates and large-scale asset purchases until “substantial further progress has been made,” a standard that Mr. Powell said “is likely to take some time” to achieve.
Mr. Powell delivered the Fed’s semiannual monetary-policy report to members of the committee Tuesday and is set to do the same Wednesday at a hearing of the House Financial Services Committee.
The hearings come as steady progress on vaccinations and multiple rounds of fiscal stimulus have brightened the economic outlook, the Fed chief noted. His remarks suggested, however, that improvement won’t prod the Fed to tighten monetary policy anytime soon.
“I think Powell was trying to make a very clear case that the Fed is committed to achieving a complete recovery,” said Michelle Meyer, head of U.S. economics at Bank of America. “While the news has been positive on that front when you look at the drop in virus cases and you look at some of the recent economic data, the Fed is certainly not ready to pivot on its policy stance.”
Daily coronavirus cases have fallen from their early January peak, and recent economic data including retail sales, industrial production, hiring and service-sector activity have indicated economic growth picked up in the new year after slowing in late 2020.
Consumer confidence in the U.S. rose in February for the second consecutive month as Americans grew more upbeat about current business and labor market conditions, the Conference Board reported Tuesday. Still, nearly a year after the crisis erupted in the U.S., the nation has about 10 million fewer payroll jobs than in February 2020.
Inflation also remains below the Fed’s 2% goal, a long-running worry among policy makers.
Rising U.S. Treasury yields in recent weeks suggest some market participants may have the opposite concern: that prices could start to rise faster than the Fed expects.
Mr. Powell said Tuesday that inflation could be somewhat volatile over the next year and might rise due to a potential burst of spending as the economy strengthens. But that, he said, would be a “good problem to have” in a world where economic and demographic forces have been pulling inflation down for a quarter of a century.
He said he wouldn’t expect inflation to reach “troubling levels,” and wouldn’t expect any increase in inflation to be large or persistent.
“Inflation dynamics do change over time but they don’t change on a dime, and so we don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics,” he said.
Mr. Powell painted a brighter picture of the economy Tuesday than the last time he appeared before lawmakers on Dec. 1. Covid-19 cases and deaths at the time were surging, parts of the country were tightening restrictions on activities and public vaccination campaigns hadn’t yet begun, prompting Mr. Powell to warn at the time that the outlook for the economy was “extraordinarily uncertain.”
“Once we get this pandemic under control, you know, we could be getting through this much more quickly than we had feared, and that would be terrific,” Mr. Powell said Tuesday. “But it’s not done yet. The job is not done.”
Mr. Powell said it will take more than lower unemployment to convince Fed officials that the labor market has recovered. The jobless rate was at 6.3% in January, down from a recent high of nearly 15% in April. Before the pandemic, the rate had fallen to a half-century low of 3.5%.
Mr. Powell said the Fed monitors several measures of the labor market’s health, including the percentage of the population that is employed. That share was 57.5% in January, down from 61% before the pandemic.
“When we say maximum employment, we don’t just mean the unemployment rate,” he said. “We mean the employment rate.”
The virtual appearances come as lawmakers are negotiating President Biden’s proposed $1.9 trillion coronavirus relief package, which prompted questions to Mr. Powell about his assessment.
The Fed chairman credited past rounds of fiscal assistance for helping to fuel a recovery that has been faster than many economists expected. But he declined to comment on Mr. Biden’s proposal or even say whether he thought more fiscal aid was needed.
Sen. John Kennedy (R., La.) asked Mr. Powell whether he would be “cool with” Congress not passing Mr. Biden’s stimulus package.
“I think by being either cool or uncool, I would have to be expressing an opinion,” Mr. Powell said. “As I’ve said, it’s not appropriate for the Fed to be playing a role in these fiscal discussions.”
While he reiterated his view that reducing the federal budget deficit would be necessary at some point in the future, he added that achieving a full economic recovery should be the higher priority right now.
With overnight interest rates near zero, the Fed has limited room to cut them further to provide more stimulus. Officials have often noted that Fed tools such as low rates and bond-buying are poorly suited to provide targeted relief to the parts of the workforce and economy hardest hit by the pandemic.
These include women and minorities, low-wage workers and hard-hit sectors including tourism, hospitality and leisure.
Mr. Powell also faced a number of questions related to financial stability, in particular about the risks that very low interest rates could fuel asset bubbles and cause inflation to take off.
A quarterly financial-stability review by Fed staff economists in January characterized the “vulnerabilities of the U.S. financial system as notable,” with asset valuations seen as elevated, particularly in corporate bonds, according to minutes of the Fed’s policy meeting last month. That reflected more concern than expressed in the staff’s previous assessment, in November, which characterized asset valuations as moderate.
Mr. Powell played down such risks at a press conference after that meeting, saying that the Fed’s main priority should be to address the economic distress caused by the pandemic. “I would say that financial stability vulnerabilities overall are moderate,” he said then.
The Fed’s semiannual report delivered Tuesday said that business leverage “now stands near historical highs” and that insolvency risks at small and midsize firms remain considerable.
Noting that asset bubbles triggered recessions in 2001 and 2007-09, Sen. Pat Toomey (R., Pa.), the top Republican on the panel, asked Mr. Powell if he sees a link between elevated asset prices and the Fed’s easy-money policies.
“There’s certainly a link,” Mr. Powell said. “I would say, though, that if you look at what markets are looking at, it’s a reopening economy with vaccination, it’s fiscal stimulus, it’s highly accommodative monetary policy, it’s savings accumulated on people’s balance sheets, it’s expectations of much higher corporate profits…. So there are many factors that are contributing.”
Third Covid-19 Stimulus Package Could Revive Inflation In 2021
Economists surveyed by WSJ expect 5.95% GDP growth, fastest in nearly 40 years.
The nearly $1.9 trillion relief package that passed Congress on Wednesday is projected to help propel the U.S. economy to its fastest annual growth in nearly four decades, reduce poverty and revive inflation.
The legislation—following trillions of dollars in federal aid last year and arriving amid rising Covid-19 vaccination rates—prompted economists surveyed by The Wall Street Journal in recent days to boost their average forecast for 2021 economic growth to 5.95%, measured from the fourth quarter of last year to the same period this year. That was up from their 4.87% projection last month and would be the U.S. economy’s fastest since a 7.9% burst in 1983.
The analysts also lifted their forecasts for inflation and job growth from last month’s survey. The new poll found that they expected consumer prices would rise 2.48% by December from a year earlier and projected that employers will add an average 514,000 jobs a month over the next four quarters.
Some economists warned they might be underestimating the bounce to come. “The impact of the $1.9 trillion relief package could well ignite faster growth than we anticipate,” said Constance Hunter, chief economist at KPMG.
President Biden’s Covid-19 aid bill adds to considerable tailwinds that have already produced a faster-than-expected recovery from last year’s collapse in economic activity amid restrictions to contain the coronavirus.
These include roughly $4 trillion in spending that Congress authorized last year to combat the pandemic, easy-money policies by the Federal Reserve and—most important—an expected reopening of businesses and schools as the population is vaccinated against Covid-19.
“It’s unprecedented,” Oxford Economics chief U.S. economist Gregory Daco said of the fiscal response to the pandemic. He expects the latest legislation to add 3 percentage points to U.S. GDP growth this year, and between 3 million and 3.5 million jobs.
The new outlook, if it materializes, would defy policy makers’ and business executives’ expectations last year that the economy’s path was likely to resemble Nike’s “swoosh” logo—a sharp drop followed by a long and grueling recovery.
It also contrasts starkly with the aftermath of the previous recession, when employers shed 8.7 million jobs between 2008 and 2010, and took more than six years to add them back.
The coronavirus pandemic led to the loss of 22 million jobs between February and April of last year. Nearly 13 million of those jobs have been recovered. Treasury Secretary Janet Yellen said Monday that she expects the U.S. labor market will return to its pre-pandemic health by next year.
“There are no benefits to enduring two historic economic crises in a 13-year span, except for one: Our mistakes are fresh in our memories. We can learn from them,” Ms. Yellen said in a speech Tuesday, outlining the case for a more muscular fiscal response than occurred after the 2008 financial crisis.
The U.S. recovery is also expected to underpin a stronger global comeback. The Organization for Economic Cooperation and Development said the latest aid package, along with faster vaccination, could increase U.S. GDP growth by 3 percentage points to 6.5% in 2021, measured year over year, and help drive demand for U.S. trading partners, including Canada, Mexico, China and euro area countries.
The aid package includes another round of $1,400 stimulus checks for most Americans, extends enhanced jobless benefits through September and provides billions to help schools reopen and accelerate vaccine production and distribution.
It also includes provisions aimed at supporting low-income families, including an enhanced child tax credit, rental assistance and additional funding for food stamps—provisions that Columbia University researchers estimate will cut child poverty in half this year.
The economy has shown recent signs of a pickup, due in part to pandemic aid that Congress authorized at the end of last year and vaccine distribution. Household income rose 10% in January, priming the economy for rapid growth, and consumer spending climbed 2.4%, the first gain in three months. Employers added 379,000 jobs last month, primarily in the leisure and hospitality sector, after cutting jobs at the end of 2020.
“We were probably already on pace for a pretty good economy, assuming everything with the pandemic broke our way,” said Wendy Edelberg, an economist and senior fellow at the Brookings Institution, who didn’t participate in the Journal survey. “This bill absolutely provides a lot of insurance around that.”
Ms. Edelberg said she thinks the bill’s biggest impact could come at the end of 2021 and carry into 2022, as households that faced fewer financial constraints begin to spend down their savings and social-distancing measures presumably end.
She projects the economy will grow 7% this year and 4% in 2022 before returning to much more modest growth in 2023.
“The challenge policy makers will face and people in the economy more generally is how to manage the slowdown,” she said.
The forecasts aren’t without risk. Economists surveyed by the Journal warned that a mutation of the virus resistant to available vaccines, or a slowdown in the pace of vaccinations, could alter the outlook.
The looming demand surge has also fueled concerns that high inflation could follow, forcing the Federal Reserve to raise interest rates in response. That could deal a setback to the economy and labor market before a complete recovery is achieved.
“There’s a real possibility that within the year, we’re going to be dealing with the most serious incipient inflation problem that we have faced in the last 40 years,” former Treasury Secretary Lawrence Summers said in late February.
Fed officials acknowledge that annual inflation is likely to jump in the coming months, as the economy picks up and ultralow readings from March and April of 2020 fall out of 12-month price indexes. There is also a possibility that a spending surge after the economy reopens, or supply-chain bottlenecks, could cause some prices to rise faster than normal.
But decades of slowing inflation—the consequence of globalization, technological advances and aging populations—in rich countries prompted the Fed last year to ditch its longtime practice of raising interest rates to pre-empt higher prices. Now, policy makers plan to wait until inflation hits their 2% target and is expected to remain above it for some time before they will contemplate interest-rate increases.
Of the economists surveyed, 80.6% said they expect inflation to rise above the Fed’s 2% target for a period of time due to the latest relief package. But 85% also don’t see the Fed raising interest rates until 2022 or later.
Economists in the Journal survey said they see annual inflation rising to 2.8% by the middle of this year, then falling gradually after that.
“Inflation will reach levels rarely experienced over the past decade, at close to 3% in mid-2021, but uncontrolled overheating isn’t likely,” Mr. Daco said.
It’s Time To Talk About The Bogeyman In The Market: Inflation
Central banks unlikely to react to higher prices triggered by supply disruptions, FTSE Russell’s Lawlor says.
Financial markets have become obsessed with the possibility of faster-than-normal inflation this year as economies reopen from Covid lockdowns. But inflation is a nuanced concept, so what different types of price rises should we expect? And most importantly, what does it all mean for markets in 2021? Joining the “What Goes Up” podcast this week to discuss this and other timely market topics is Philip Lawlor, head of global investment research at FTSE Russell.
Some Highlights Of The Conversation:
“This is all about temporary base effects and supply disruption hitting a pickup in demand. The risk is that this is going to hit an economy where the labor market is not going to see wage growth. We’ve still got some structural headwinds in terms of the labor market as we work through this Covid impact.
And I think the central banks are quite right to most probably just say, `we’ve got to err on the side of caution and just wait to see how this works its way through.’
“Of course, if that leads to a structural shift and we do get that being reflected in a pickup in growth, then they need to respond more aggressively. But don’t act too quickly because that will create what we call a policy mistake. “
Fed Rate-Hike Wagers Put On Back Burner As Blackout Begins
Federal Reserve rate-hike expectations have been aggressively reduced over the past two weeks in the eurodollar futures market, just as policy makers enter their usual silent period before their April 28 decision.
The rapid repricing has removed around 15 basis points of rate increases from the December 2022 eurodollar futures contract. This shift away from fully pricing in a 25-basis-point rise has prompted Citigroup Inc.’s Jason Williams to fade the move and target fresh bets on a steeper curve.
It is a “puzzling move” that conflicts with the legitimate chance for a quicker-than-expected cycle of rising rates, the strategist wrote in a note Friday.
“The tail risks exist because there is a good chance that core PCE will trend well above 2% over the next one to two years, which may necessitate a more rapid hiking cycle,” Williams wrote. “We don’t think the bull flattening trend is sustainable in the front-end of the curve in the short-run.”
The emergence of a new bullish posture across the front-end has also recently been seen in the eurodollar options market. Friday saw a sizable upside mid-curve play targeting additional Fed easing priced into September 2022 eurodollar futures, which open-interest data confirmed as a new position.
A surprise rally in Treasuries in the face of robust economic data helped flatten the U.S. yield curve last week. Five- and seven-year maturities saw strong demand, suggesting aggressive bets on Fed rate hikes seen earlier in the year were being pared back.
Still, economic data in the next two months are unlikely to dent expectations for longer-dated inflation, according to Williams. There’s also a risk of more hawkish communication from the Fed this summer, especially about the so-called tapering of monetary support, he said.
Based on the history of how the curve has tended to behave around Fed programs, a bull steepening phase may come next, which would mean lower rates but a steeper curve, Williams wrote.
The strategist suggested clients could use the options market to place a trade known as a conditional bull steepener to profit from the return of some rate-hike speculation.
That would consist of buying bullish call options on June 2023 99.625 Eurodollar futures and selling 2024 99.00 equivalents, he wrote in the note.
Record Iron Ore Prices Have Rusty Underpinnings
Politics and capacity constraints are behind the surge in iron ore prices but neither will necessarily play out how investors think.
Iron ore prices have jumped to new highs on steel supply concerns in China—and politics. That might not last.
Iron ore futures on China’s Dalian exchange rose 10%—the daily trading limit—Monday to a record high.
The rally comes against the backdrop of buoyant commodity markets. Copper prices, for example, have also notched record highs as the metal is seen as a beneficiary of the transition to renewables and electric vehicles. Goldman Sachs analysts called the red metal the “new oil” last month.
Concerns about supply seem to have driven the latest gains in iron ore. China indefinitely suspended a strategic economic dialogue with Australia on Thursday, signaling no end in sight for the worsening relationship between the two countries.
Australia is by far the world’s largest iron ore producer while China is the biggest consumer. Last week, China also stepped up measures to curb capacity at local steel mills to prevent “blind investment.” The expectation is that this could drive stockpiling of iron ore and steel before the coming restrictions kick in.
The short-term supply and demand situation for many commodities is indeed out of kilter, partly because of the pandemic. The supply disruptions caused by Covid-19 and heavy rainfall, for example, have affected iron ore production in Brazil, the second-largest iron ore producer. Demand, however, has remained strong in China, which has recovered from the pandemic.
The imbalance might linger for a while, but a fundamental shift toward a tighter Chinese market over the long run looks more questionable. If futures prices are moving higher because investors expect Aussie iron ore to become scarce on the mainland for political reasons, they will probably be disappointed.
There is a reason why China hasn’t imposed any sanctions on Australian iron ore even though it has done so for other goods, such as lobsters and coal, since last year. More than half of China’s iron ore imports come from Australia, and it is hard for the country to source enough from other countries—unless it radically curbs its total steel demand.
The move to scale back steelmaking capacity, if successful, might reduce demand for iron ore over the medium term, which would weigh on prices once the stockpiling rush is over. And slowing credit in China as policy makers dial back last year’s stimulus efforts could take the edge off rising steel demand later this year too.
It is a buoyant market for commodities everywhere these days—but this particular rally might add up to less than meets the eye.
Corn Is the Latest Commodity To Soar
Prices have risen roughly 50% in 2021, and a bushel costs more than twice what it did a year ago.
America’s biggest cash crop has rarely been more expensive. Corn prices have risen roughly 50% in 2021 and a bushel costs more than twice what it did a year ago.
Corn has been one of the sharpest risers in the broad rally in raw materials that is prompting companies to boost prices for goods and fueling concern among investors that inflation could hobble the post-pandemic economic recovery.
Lumber prices have shot to more than four times what is typical, pushing up home prices and obliterating renovation budgets. Copper, a cog of industry found throughout the home and in electronics, hit record prices Friday. Crude oil hasn’t cost so much since 2018 and soybeans are trading at their loftiest level since 2012.
With corn climbing toward a record, Americans can expect to pay more for all sorts of items at the grocery store as well as at the gasoline pump. Corn is a key ingredient in making products ranging from tortilla chips and chicken wings to bourbon and Coca-Cola. About 40% of the U.S. crop is blended into motor fuel.
Analysts say high corn prices are lifting makers of fertilizer and farm equipment while helping consumer products and food companies justify their own price increases. U.S. farmers, who are seeding fields for a big autumn harvest, are also benefiting.
Bushels for delivery this month ended Monday at $7.48, down 3.2% from Friday when futures hit their highest level since 2012. Back then drought withered the Midwest crop and pushed prices to a record of $8.31.
More actively traded futures for December delivery, a price gauge for the crop being planted between western Ohio and North Dakota, settled Monday at $6.09 a bushel.
Farmers have a few factors to thank for high prices.
China is on a corn-buying binge while racing to fatten millions of hogs to replace the pigs it had to kill during an outbreak of African swine fever before the pandemic. China is expected this year to import about four times what it normally buys from abroad, most of it from U.S. farmers.
Corn-growing regions of South America are parched. Brazil expects a meager safrinha, or second crop, which will reduce its export. In Argentina, the Paraná River is too shallow for fully loaded boats to pass from the country’s interior to Atlantic shipping lanes.
At home, the reopening economy means more drivers and greater demand for the corn that becomes ethanol and is blended into gasoline.
On Wall Street, new trading rules allow speculators to make larger bets than ever on agricultural commodities while exchange operator CME Group Inc. this month widened by 60% the threshold for daily price swings in corn futures.
Investors have pumped money into commodities, a popular move aimed at offsetting inflation risk elsewhere in their portfolios. Open interest in agricultural commodity futures, a measure of trading activity, rose last month to a record $315 billion, according to JPMorgan analysts.
David Martin, chief investment officer with Martin Fund Management, said the New York commodity trading firm began placing bullish bets on corn prices last fall and is currently trading derivatives with an eye toward even higher prices. “If the weather isn’t pristine…there’s going to be massive shortages,” he said.
Wagers that corn prices will rise—by hedge funds and other speculators—outnumber bets on a decline 17 to 1, according to the Commodity Futures Trading Commission data.
Near-term corn prices that are much higher than those later in the year are unusual and indicate a market short on supply, analysts and traders say. Grain elevators in Iowa, Oklahoma and elsewhere are offering premiums to futures prices, according to trading firm StoneX Group Inc.
“The market is basically telling farmers and elevators and anyone else who stores grain to sell. Sell now,” said Craig Turner, a commodities broker at Daniels Trading in Chicago.
U.S. farmers are holding back a lot of corn in hopes of even higher prices, said Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc.
There hasn’t been a big corn rally in years, and when prices have risen it is usually because of poor harvests.
Some farmers are hoping to make up for losses sustained when they sold low during last year’s market panic. Others are flush with subsidies showered on growers during the trade war with China and can afford to gamble, said Peter Meyer, head of grains and oilseeds analytics at S&P Global Platts.
“Rather than pick a high, what I’m trying to do this year is give clients a window where we think selling will finally enter the market because there’s no selling in the market at the moment,” Mr. Meyer said.
Nick Ehlers, who splits his 3,000 acres in eastern Iowa between soybeans and corn, has been hanging on to some of last year’s corn harvest, which was diminished by a derecho windstorm, and has hardly sold any of his current crop. He’s plotting options trades that would set a price floor for his corn while enabling him to capture higher prices.
“Usually we have a rally on weather in July,” he said.
Tyson Says Labor Shortage Hits Poultry Prices
Tyson Foods Inc. warned it’s struggling to meet rebounding chicken demand because of a worker shortage and slow hatchings, even as a strong beef market will boost overall sales.
The biggest U.S. meat company is seeing robust demand as the world economy mends from the pandemic, and it’s raising prices across businesses to pass through higher animal-feed costs and other expenses.
That will help make up for thinner returns in chicken, where labor tightness means that plants are operating at about 80% of capacity. Tyson also said it can’t maximize profit in its pork unit because of a dearth of skilled labor to strip down carcasses.
“It takes about six days right now to get five days’ worth of work done,” Chief Operating Officer Donnie King, who is also group president of the poultry business, told analysts on a conference call Monday. “So, it’s impacting capacity and cost.”
King also said Tyson was changing a male breeder chicken after a downturn in hatchings that will persist until next year. “Quite frankly we made a bad decision on” the male chicken, King said.
Meat companies initially were slammed by the coronavirus last year as thousands of U.S. food-plant workers got sick and hundreds died. Absenteeism at Tyson’s meat plants is about 50% higher than it was prior to the coronavirus pandemic as workers struggle to find childcare, have higher-paying opportunities elsewhere or rely on federal stimulus checks, King said.
“People just aren’t coming to work,” he said.
The Springdale, Arkansas-based company expects fiscal full-year revenue of $44 billion to $46 billion, according to a statement Monday. In February, it said revenue would be at the upper end of $42 billion to $44 billion. Tyson’s adjusted earnings during its fiscal second quarter that ended April 3 were $1.34 a share, compared with the $1.12 average of analysts’ estimate.
“We’re seeing substantial inflation across our supply chain, which will likely create margin pressure during the back half of the year,” Tyson Chief Executive Officer Dean Banks said in the statement.
Consumers so far appear willing to absorb higher costs that food manufacturers are passing along.
Stephens Inc. analyst Ben Bienvenu said Tyson has “a very solid setup over the next year” with the company moving out of a trough and “squarely positioned to benefit from post-Covid reopening demand.”
Sales were $11.3 billion, up from the $11.2 billion analysts had expected. While prices of beef, pork, chicken and prepared foods all rose during the quarter, volumes declined.
Worker illness and deaths prompted shutdowns at factories last year as measures such as temperature scanners and plastic dividers were installed to protect employees. Meanwhile, retail sales of meat soared as consumers prepared more meals at home. Now, with the global economy reopening, workers are scarce. Pilgrim’s Pride Corp., the second-biggest U.S. chicken producer after Tyson, recently said it was installing more automation at poultry plants due to the worker shortage.
Still, prospects are for protein demand to increase in the short- and long-term. Tyson in April opened its first new poultry plant in 25 years and last week announced a new vegan burger and other plant-based foods as the company seeks to compete with vegetarian-friendly upstarts including Beyond Meat and Impossible Burger.
“Given the nature of our business, demand for food and protein may continue to shift amongst sales channels and experience disruptions, but over time we expect worldwide demand to continue to increase,” the company said.
Tyson shares, which have climbed about 22% this year, swung between losses and gains on Monday, falling as much as 3.6% and rising 0.7%.
Soaring Raw Material Cost May Delay A New U.S. Chicken Plant
The cost of raw materials is so high right now that the third-largest chicken producer in the U.S. is considering shelving plans to build a new processing plant — even as the company struggles to keep up with demand.
Sanderson Farms Inc. is one of the first companies to signal it could pause plans for expansion as the price of everything from lumber to steel skyrockets, driving up construction costs.
“I need a plant to open up next week, but it is not a good time to be building,” Chief Executive Officer Joe Sanderson said. The company, which had planned to begin construction on a new facility during the first half of 2021, will “look very hard” at building costs given the market for raw materials, he said.
Lumber prices rose to new records this past year before softening this week, with many wood products quadrupling in value amid a surge in home building and renovations. Steel prices have also hit all-time highs, with the domestic benchmark price up almost 50% this year.
“It’s more lumber than it’s steel and concrete,” Sanderson said Wednesday at the BMO Farm to Market virtual conference. “Steel and concrete go up all the time. Every complex costs more than the last one, but it’s lumber right now” that’s giving the company pause.
The timing is unfortunate, with the economic recovery also boosting demand for chicken to the point that Sanderson can’t take on any more orders without expanding.
“We’re totally sold out and we’ve had people call us to service them and we cannot take on anymore business, and that’s not a good place,” Sanderson said Tuesday at the Goldman Sachs Global Staples Forum.
Cars Keep Getting Pricier and the Commodity Boom Makes It Worse
Cars are back in vogue courtesy of the pandemic. They’re also getting more expensive, thanks in part to surging commodity prices.
Many of the essential ingredients for automakers, such as copper, steel and aluminum, are hitting or approaching record highs this year as the lagging supply can’t keep up with stimulus-driven demand. The Bloomberg Commodity Spot Index jumped to its highest since 2011, with metals up 21% so far this year.
Should the current rally morph into a supercycle, rising car prices could forebode inflation across the board. Analysts at JPMorgan Chase & Co. estimate the price of an auto’s raw materials have climbed 83% in the year through March. Those pieces typically make up about 10% of the cost of building a vehicle, meaning the price tag for a $40,000 car would have to increase 8.3% to offset the rally, analysts for the bank wrote.
“We’re definitely feeling the commodity headwind,” Jim Farley, chief executive officer of Ford Motor Co., said last week. “We’re seeing inflation in a variety of parts of our industry, kind of in ways we haven’t seen for many years.”
Carmakers usually struggle to pass on higher costs, but demand is booming as major economies reopen and many consumers continue avoiding public transportation. The global semiconductor shortage also is inhibiting production, keeping inventory tight and driving up vehicle prices.
In the U.S., car supply is so limited that rental companies are resorting to buying used vehicles at auction rather than new ones.
The main contributor to higher commodity costs hitting the industry is the steel needed for chassis, engines and wheels. The metal’s recent rally has smashed records as China — by far the biggest producer — took measures to curb output.
The boom in copper prices adds to the costs of electric vehicles just as the industry implements an energy transformation to meet tighter emissions standards. EVs use nearly 3 1/2 times more copper than gas guzzlers because of the larger amount of wiring inside, according to consultancy Wood Mackenzie Ltd.
The increases may hurt automakers like Tesla Inc. and Volkswagen AG that are trying to make EVs more price-competitive with traditional cars.
They also may encourage automakers to explore alternative chemistries for their EV batteries. The majority of cells use some combination of lithium, cobalt and nickel, which have jumped a minimum of 47% each in the past 12 months.
Ford and BMW AG were among those investing $130 million this month in battery startup Solid Power Inc., which is working on cells that would remove the need for those metals, leading to a 10-fold decline in power pack costs.
“They are looking to spread that risk,” said Caspar Rawles, head of price and data assessments at Benchmark Mineral Intelligence. “There is no hedging for lithium or cobalt.”
BMW expects headwinds from rising commodity prices of as much as 1 billion euros ($1.2 billion) for the year, Chief Financial Officer Nicolas Peter said Friday during an earnings briefing. The luxury-car maker singled out rhodium, steel and palladium as particular worries in the coming months.
Longer term, BMW is working to be less exposed to price squeezes in key raw materials. From 2025, the automaker plans to produce vehicles on a new architecture that will allow recycling of materials such as steel, aluminum and plastics to make new cars.
“We’re seeking partnerships” to refine the necessary technologies, BMW CEO Oliver Zipse said.
Jeep maker Stellantis NV — formed from the merger of Fiat Chrysler and PSA Group –- said it needed to recover some of its higher costs, and the marketplace is supportive, so far.
“It’s hard to imagine a better environment with which to pass through the impact of supply shock and price inflation to consumers who are effectively lining up to take delivery of their new car off the car carrier,” analysts at Morgan Stanley wrote in a note. “It’s a seller’s market in autos.”
Inflation Accelerates Again In June As Economic Recovery Continues
Higher used auto prices continue to push consumer-price index up, along with increases for new autos, airline fares and apparel.
U.S. inflation continued to accelerate in June at the fastest pace in 13 years as the recovery from the pandemic gained steam and consumer demand drove up prices for autos, airline fares and other items.
The Labor Department said last month’s consumer-price index increased 5.4% from a year ago, the highest 12-month rate since August 2008. The so-called core price index, which excludes the often volatile categories of food and energy, rose 4.5% from a year before.
The index measures what consumers pay for goods and services, including clothes, groceries, restaurant meals, recreational activities and vehicles. It increased a seasonally adjusted 0.9% in June from May, the largest one-month change since June 2008.
Prices for used cars and trucks leapt 10.5% from the previous month, driving one-third of the rise in the overall index, the department said, marking the third straight month of big price increases amid a supply shortage of vehicles. The indexes for airline fares and apparel also rose sharply in June.
Consumers are seeing prices rise for numerous reasons, as the U.S. economic recovery picks up. Richard F. Moody, chief economist at Regions Financial Corp., said the main driver of June inflation was booming demand that outpaced the ability of businesses to keep up. Another factor, he said, was the recovery in prices for air travel, hotels, rental cars, entertainment and recreation—all services hit hard by the Covid-19 pandemic.
“Demand is coming back very rapidly, and businesses are normalizing prices in the sense that they are making up for declines” earlier in the pandemic, he said.
Supply shortages and higher shipping costs also continue to drive rapid increases in goods inflation. Prices of goods, excluding food and energy, saw the two biggest monthly increases on record in April and May, Mr. Moody said.
Rising prices reflect robust consumer demand boosted by widespread vaccinations, the ending of many business restrictions, trillions of dollars in federal pandemic relief and ample household savings. Stronger demand also has pushed employers to seek more workers and pay higher wages, as they struggle to hire.
U.S. gross domestic product rose 6.4% at a seasonally adjusted annual rate in the first quarter. Economists surveyed by The Wall Street Journal in July expect the Commerce Department to report that the economy grew at a 9.1% annual rate in the second quarter—poised for the GDP’s best year since the early 1980s.
Annual inflation measurements are being amplified by comparisons with figures from last year during Covid-19 lockdowns, when prices plummeted because of collapsing demand for many goods and services. This so-called base effect is expected to push up inflation readings in June, dwindling into the fall.
Compared with two years ago, overall prices rose 3% in June. Overall prices jumped at a 9.7% annualized rate in the three months ended in June, on a seasonally adjusted basis, faster than the 8.4% pace in May.
Much of the increase in June was driven by factors that are likely to subside in coming months, including the semiconductor chip shortage that is reducing the supply of autos and the post-reopening surge in consumer demand. Accelerating prices for new and used cars and gains in prices for lodging and transportation services, which includes car and truck rentals, contributed the vast majority of the core CPI increase.
But prices of goods and services less directly influenced by these trends are picking up too. For example, rents are now rising at a pace slightly faster than before the pandemic. Stripping out those more temporary contributions, the core index nonetheless rose at a pace that would normally be considered relatively healthy though not enough to signal a worrisome pickup in inflation, said Alex Lin, U.S. economist at BofA Global Research.
More companies are passing on higher labor and materials costs to consumers. Many also are raising prices for the first time in years, as demand surges following pandemic-related business restrictions.
Ryan L. Sumner and Michelle Fox of Fenix Fotography LLC in Charlotte have been operating at maximum capacity for several months shooting photographic portraits for people looking for new jobs, working remotely and starting new businesses. Mr. Sumner said they raised prices in February by about 20% and last week by nearly 17%, the first price increases in about 15 years.
The first increase didn’t put a dent in their business or alleviate burnout that the couple was experiencing because of unrelenting demand. They are interviewing to add a second photographer. “One of the things we’re looking at is limiting availability…because it’s been a lot for a small firm to handle. Where we’re at is, we either have to raise prices or add staff—or both,” Mr. Sumner said.
Policy makers are watching June’s reading to gauge the magnitude of what many expect to be several months of robust inflation after a year of anemic price pressures during the peak of the pandemic. Whether the inflation surge is temporary is a key question for the U.S. economy and financial markets—and the Federal Reserve’s easy-money policies aimed at helping the economy through the pandemic.
Another factor is consumer expectations for higher inflation, which can affect economic decisions in households, as consumers are more willing to accept higher prices because they expect them to rise. The rate of inflation the median consumer expects five to 10 years from now hit 2.8% in June, up slightly from last year but in line with the average for the last 20 years, according to the University of Michigan Survey of Consumers.
Jay Bodenstein, 73, of The Villages, Fla., has been conscious of rising prices for food, rent, gasoline, auto insurance, healthcare and travel. He said that he and his wife, Sandy, have been going out to dinner less in part because of higher prices and because they are increasingly anxious about the Delta variant of the coronavirus.
The Fed, in a report released Friday, reiterated its view that inflation has risen because of bottlenecks, hiring difficulties and other largely transitory factors related to the economy’s rebound from the pandemic. Most officials, in projections released last month, believe inflation will decline to around 2% over the next two years. Still, a sustained, large increase in inflation could compel the Fed to tighten its policies earlier than planned—or to react more aggressively later—to achieve its 2% average inflation goal.
Many economists now expect higher inflation to stick around while slowly easing. Those surveyed by the Journal in July estimate on average that annual inflation, measured by the CPI, will ease to 4.1% in December. Annual inflation for 2019—ahead of the pandemic’s start in March 2020—was 1.8%, on average.
The distortions from the semiconductor shortage and post-reopening disruptions, though ultimately temporary, may persist throughout the rest of the year, said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. That could make it harder for the Fed to hold fast to its commitment to keep monetary policy loose.
“The longer these effects last, the more challenging it will be to stick with a transient view, even though…ultimately price pressures are likely to be temporary,” she said.
Some 47% of small businesses indicated that they raised average selling prices in June, the highest share since 1981, according to a survey conducted by the National Federation of Independent Business, a trade association.
Many consumers are willing to pay higher prices than they might normally be after spending more than a year cooped up at home, said Ms. Farooqi.
“Right now what you have, especially among people who didn’t lose their jobs and get to go on vacation, is, ‘My tolerance is a little higher right now,’” she said.
The Cost Of Living Posts Biggest Surge Since 2008, U.S. CPI Shows, As Inflation Spreads Through Economy
The cost of used cars accounted for more than one-third of the increase, but prices for food, energy, clothing, plane tickets and hotels also rose sharply.
The numbers: The cost of living leaped in June by the largest amount since 2008 as inflation spread more broadly through the U.S. economy, raising fresh questions about whether the spike in prices will subside as quickly as the Federal Reserve predicts.
The consumer price index climbed 0.9% last month, the government said Tuesday. The cost of used cars accounted for more than one-third of the increase, but prices for food, energy, clothing, plane tickets and hotels also rose sharply.
The increase easily exceeded forecasts. Economists polled by The Wall Street Journal had estimated a 0.5% advance.
The rate of inflation in the 12 months ended in June climbed to 5.4% from 5%. The last time prices rose that fast was in 2008, when oil hit a record $150 a barrel.
Another closely watched measure of inflation that omits volatile food and energy also rose 0.9% In June. The 12-month rate increased to 4.5% from 3.8% and stood at a 29-year high.
This core rate is closely followed by economists as a more accurate measure of underlying inflation.
Big Picture: The rapid recovery in the economy has had an unwanted side-affect: higher inflation.
Businesses can’t get enough supplies or labor to keep up with surging sales, forcing them to pay higher prices for almost everything. In turn, they are trying to pass those extra costs onto customers.
The Federal Reserve has insisted for months that widespread shortages will fade away once the U.S. and global economies return to normal.
Ditto for inflation. The central bank has repeatedly referred to the sharp increase in prices as “transitory” and predicted inflation would taper off toward its 2% target by next year, using its preferred PCE price barometer.
Yet even the Fed admits it was caught off guard by how high inflation has risen. There’s a risk inflation could stay higher for longer than it expected, according to minutes of the Fed’s most recent strategy session.
So far most investors have been unruffled, though the latest CPI is likely to stoke fresh worries.
Key details: The cost of used vehicles soared a record 10.5% in June following outsized gains of 7.3% in May and 10% in April. That category alone accounted for more than one-third of the increase in overall consumer prices last month.
These price increases won’t last long, however. Automakers are rushing to produce more new cars and trucks and eventually the market for used vehicles will revert to normal.
The cost of gasoline also rose 2.5% last month and was another big contributor to inflation. Gas prices are up 45% in the past year.
More worrisome was the largest increase in food prices since 2011, excluding the first few months of the pandemic. Higher food prices suggest some inflation is spreading more broadly through the economy.
Still, much of the increase in consumer prices last month was concentrated in goods and services whose prices fell sharply in the early stages of the coronavirus pandemic last year. Not just used vehicles, but airfares, hotels and restaurant menus.
These price increases are likely to subside soon, giving support to the Fed’s argument that the surge in inflation will prove temporary.
The cost of two other major consumer expenses, shelter and medical care, have also been rather tame. Rents have risen less than 2% in the past year and the cost of medical care has increased less than 1%.
What they are saying? “The spike in inflation still looks to be primarily Covid-related and temporary as outliers continue to drive much of the upward push in prices,” said Nationwide senior economist Ben Ayers. “But the effects of the recent jump could linger for consumers for some time with above-average costs extending into 2022.”
“Is the ‘transitory’ debate over?” asked senior economist Jennifer Lee of BMO Capital Markets. “The answer is no, the transitory debate is far from over. In fact, it got a little hotter.”
Market Reaction: The Dow Jones Industrial Average and S&P 500 were fell in Tuesday trades. The yield on the 10-year U.S. Treasury TMUBMUSD10Y, 1.397% note was little changed, however.
Prices paid by U.S. consumers surged in June by the most since 2008, topping all forecasts and testing the Federal Reserve’s commitment to sticking with ultra-easy monetary support for the economy.
The consumer price index jumped 0.9% in June and 5.4% from the same month last year, according to Labor Department data released Tuesday. Excluding the volatile food and energy components, the so-called core CPI rose 4.5% from June 2020, the largest advance since November 1991.
Used vehicles accounted for more than a third of the gain in the CPI, the agency said. The outsize increase was also driven in large part by the pricing rebound in categories associated with a broader reopening of the economy including hotel stays, car rentals, apparel and airfares.
Expectations that those increases will normalize help explain the Fed’s view that inflation is transitory.
“Inflation surprised substantially to the upside in June but, once again, owing to outsized increases in prices in a few categories,” said Michelle Meyer, head of U.S. economics at Bank of America. “This reinforces the idea of transitory inflation.”
In the bond market, however, some investors saw the data as putting more pressure on the Fed. The Treasury yield curve flattened as the above-forecast reading emboldened traders to bet that the central bank will tighten policy in early 2023.
With inflation, from the Fed “we are told the story is transitory but the increases are going faster and for longer,” John Ryding, chief economic adviser at Brean Capital said on Bloomberg Television. “We just had a monthly increase that was about double what was expected.”
The median forecasts in a Bloomberg survey of economists called for a 0.5% gain in the overall CPI from the prior month and a 4.9% year-over-year increase. The S&P 500 declined after the report.
The report also may add to challenges for the Biden administration in getting Congress to approve trillions of dollars of additional fiscal spending in coming years. Republicans have been highlighting the jump in inflation as a reason to reject such new plans.
A White House official said the report was consistent with the administration’s view that the spike in inflation is related to post-reopening bottlenecks in economy.
The year-over-year figures have shown outsize gains in recent months partly because of so-called base effects — the CPI retreated from March through May of last year during the pandemic lockdowns. While the annual figures are expected to peak, it’s not yet clear how much moderation will occur over the coming months.
In the three months through June, the core CPI increased at a more than 8% annualized rate, the fastest since the early 1980s.
Household spending on merchandise, fueled in part by government stimulus, has left businesses scrambling to fill orders while facing shortages of materials and labor. That dynamic is contributing to higher costs, which often feed through to consumer prices.
Meanwhile, the lifting of pandemic restrictions is propelling purchases of services like travel and transportation, another contributor to inflationary pressures.
Prices paid for new and used vehicles rose from a month earlier by the most on record., That said, those categories each make up less than 4% of the overall CPI.
The cost of food away from home jumped 0.7% on a month-over-month basis, the largest gain since 1981.
In earnings reports Tuesday, companies including PepsiCo Inc. and Conagra Brands Inc. noted cost pressures in their supply chains. Conagra has already raised prices and said it will continue to do so — and that those hikes will eventually help the firm’s profit margin.
Fed Chair Jerome Powell has said that recent price increases are the result of transitory reopening effects, though more recently acknowledged the possibility of longer-term inflationary pressures. Sustained constraints in the production pipeline, along with a pickup in wages, raise the risk of an acceleration in consumer inflation.
Economists have been watching to see whether price pressures broaden out to categories other than those that are just now rebounding after pandemic-related lockdowns.
Shelter costs, which are seen as a more structural component of the CPI and make up a third of the overall index, rose 0.5% last month, the most since October 2005. The gain was driven by a 7.9% jump in hotel stays.
Wage growth rose steadily through the second quarter, but higher consumer prices are taking a toll. Inflation-adjusted average hourly earnings fell 1.7% in June after slumping 2.9% a month earlier, separate data showed Thursday.
Figures out Tuesday from the National Federation of Independent Business showed 47% of small-business owners, the largest share since 1981, reported higher selling prices in June.
Consumers are anticipating higher prices in the near-term. Median inflation expectations for the coming year increased to series high 4.8% in June, according to the New York Fed’s Survey of Consumer Expectations.
Sky-High Feed Prices Are Pushing Dairy Farmers Over The Edge
Megadairies are taking over as small operators struggle to survive.
Eric Vanstrom stuck by his dairy cows through a recession, a trade war and a global pandemic that forced him to dump milk into manure pits. This year, though, he’s finally had enough. The thing that’s putting him over the edge: exorbitant grain prices.
One weekend in early June, the Kennedy, New York, farmer and his wife loaded 46 milking cows into livestock trailers and sent them off to an auction house. Some went to other dairies. Others ended up at slaughterhouses, to be turned into ground beef. They were so expensive to feed and so unprofitable that he wasn’t even sad to see them go.
Vanstrom’s predicament is an increasingly common one. The corn and soybeans that dairy cows eat are seeing a historic rally, fueled by drought in key producing countries and China’s massive purchases of grain to feed a rapidly expanding hog herd. From the U.S. to Ethiopia, farmers say soaring costs are putting their businesses in peril, to the point that they’re thinking of exiting altogether.
“For a lot of cows, they’ll just have a career change, from happy cow to happy meal,” said Mary Ledman, global dairy strategist at Rabobank.
Pricey feed is imparting renewed force to the industry’s transformation, fueling the growing dominance of megadairies, which milk tens of thousands of cows and are better positioned to weather the volatility of an increasingly global market.
Though consolidation may boost efficiency and keep consumer prices in check, it’s also forcing small and mid-sized operations around the world out of business. President Joe Biden’s executive order to promote competition across American industries likely won’t have a major impact on dairy companies, according to broker StoneX Group Inc., with many of the agriculture-related directives aimed at the meat and poultry industries.
“If you see feed prices shooting up as they are now, that might be the thing that pushes you over to say, ‘It’s probably not a good idea to keep going,” said James MacDonald, an agricultural economist and visiting professor at the University of Maryland.
The small dairy is an iconic symbol of American rural life and values like honesty and hard work. Marketers have eagerly tied the wholesomeness of such a life to milk itself, with idyllic scenes of pastures and cows on packaging.
With consumers increasingly willing to pay a premium for dairy products with organic and sustainable credentials, milk from megafarms faces competition on grocery shelves. Still, there’s little doubt that small operations are becoming rarer.
Low milk prices have long plagued dairy farmers, and thousands have left the industry in the past five years. The pandemic, however, turned out to be a lifeline for many. As Covid-19 forced schools and restaurants to shut down, leading to canceled orders, governments around the world swooped in with emergency aid and bought up dairy products. Prices rebounded, and the farms that survived came out of the crisis better than expected.
Now, though some long-running aid programs are still in place, others have ended. With soaring feed prices, more dairy farmers are calling it quits again. Wisconsin, a bellwether for the industry and state known for having thousands of smaller operations, has already lost 177 dairy herds this year and sits at a record low in data going back to late 2003.
Though President Biden’s executive order aims to help small farmers whose profits have dwindled as multinational companies increasingly dominate, there’s little in the directive that would aid the dairy industry specifically, according to Nate Donnay, director of dairy market insight at StoneX Group.
Pricey feed isn’t the only cost becoming more burdensome for dairy farmers. Pretty much everything that goes into running a farm has become more expensive, from labor to fertilizers, and wild weather bringing everything from drought to floods isn’t helping.
Cody Nicholson Stratton and his husband run a fifth-generation family farm in Humboldt County, California. Because the region’s usually lush green fields have been parched this year, the couple knows they’ll be short on feed. They’ve sold off about 20 of their 120 cows and cut their sheep flock in half. More cuts could be in the horizon.
“It’s a beautiful mess to have a drought coming on top of all of the struggles that went with Covid,” Nicholson Stratton said.
Meanwhile, bigger farms are also getting even larger and more productive. So even as small farms flee the industry, consumers may see a benefit in the form of lower dairy prices. The U.S. Department of Agriculture expects milk production to reach 228.2 billion pounds this year — up 2.2% from 2020 — as more cows toil away at larger operations.
Consolidation is also underway in Asia. China’s dairy cow inventories have fallen to less than 6 million from a high of 14 million in 2013 as small farms were replaced by larger farms, many of which are run by major corporations like Yili Group and China Mengniu Dairy Co.
In places like Australia, other business lines are just proving more attractive. Despite a more favorable production outlook for the country’s agricultural industry at large, record high beef prices have prompted some producers to transition away from dairy into the meat industry, while robust land values have encouraged others to sell their farms altogether, national services body Dairy Australia said in its latest outlook.
Meanwhile, in Ethiopia, farmers across the board are struggling. Fekensa Degefa, a computer science graduate with a small dairy farm outside the capital Addis Ababa, wants to expand his 13-animal herd to the hundreds, but the high costs of inputs — mainly feed prices — are a constant concern.
“We are barely covering our costs,” Fekensa said.
In the U.S., the number of licensed dairy herds had already more than halved between 2002 and 2019, according to MacDonald’s analysis of USDA figures, with the decline of small operations concentrated in Minnesota, New York, Pennsylvania, and Wisconsin. He expects the country will lose dairy farms at a rate of 5% to 6% this year, faster than the historical trend of about 4%.
Back in Upstate New York, Vanstrom is moving on, even though he grew up milking cows and for years all roads led him back to them. In college, while studying abroad, he even dropped out of classes to work at a dairy.
Now, that’s behind him. He and his wife are selling meat from their beef cattle directly to consumers at farmers’ markets, bringing in $30,000 in 2020 and projecting more for this year. Although he’s turned the page, he keeps tabs on neighbors still battling to make ends meet.
“I see no future for small dairy farmers. To work that hard, seven days a week, 365, never get time off and to have nothing to show for it,” Vanstrom said, “it’s horrible.”
Lumber Wipes Out 2021 Gain With Demand Ebbing After Record Boom
Lumber, which at one point was among the world’s best-performing commodities as the pandemic sent construction demand soaring and stoked fears of inflation, has officially wiped out all of its staggering gains for the year.
Prices at Monday’s close are now down 0.6% for the year as demand eases and supply expands in response to earlier gains. The rally turned a common building product into a social media sensation and a flash point in the debate over U.S. monetary policy. At one point, lumber futures were trading as high as $1,733.50 per thousand board feet, more than quadruple the level of a year earlier.
Lumber’s drop is among the most dramatic examples of the easing in commodity prices after rallies in raw materials from copper to corn earlier this year fueled concern that rising costs would undercut the economic recovery. U.S. Federal Reserve Chair Jerome Powell last month cited lumber’s decline as evidence that price pressures will cool as supply bottlenecks from the reopening economy are worked out and stimulus fades.
“The sheer expense has taken many people out of the market,” said Jamie Greenough, investment and commodities futures adviser for brokerage PI Financial in Vancouver.
Lumber for September delivery fell 5.6% Monday to $712.90 per thousand board feet on the CME.
Prices have declined on rising inventory levels and a “significant drop” in lumber demand at large retail stores, where do-it-yourself home renovators typically make their purchases, said Westline Capital Strategies Inc. Chief Executive Officer Greg Kuta, whose Ohio-based firm specializes in lumber-trading strategies. Lower renovations have made more wood available for home builders to buy, which has helped to pressure prices lower, Kuta said.
The market has even shrugged off more than 300 simultaneous wildfires and rail car gridlock in major producing region British Columbia in Western Canada.
Still the current price level is historically high. Since the 1990s, lumber futures have mostly traded between $200 to $400 per thousand board feet, with the exception of 2018 when they shot above $600. This “massive corrective free fall” indicates the market is resetting to reflect supply-demand expectations for the rest of the year, according to Kuta.
Historically high prices for lumber threaten to keep housing costs high in North America for the foreseeable future. Lumber prices are undergoing a “paradigm shift” and are in the process of determining a new and much higher average price level as a result,” Kuta said.
“I think lumber futures prices will continue to see severe, two-sided volatility vacillating in a more extreme price range of $550 to $1,200 for the remainder of 2021,” Kuta said in an email. “But any attempt to break back above the $1,000 level should be aggressively sold by lumber producers.”
Lumber prices could find a “near-term floor around $700–$800 before moving higher again ahead of the fall construction season,” citing “a very disruptive fire season” as a likely upside catalyst for prices, ERA Forest Products Research said in a June 30 note.
Paul Quinn, an analyst for RBC Capital Markets, said it is typical for prices to drift lower during the summer months, make a small rally in September, and drop again in November.
“We think 2022 spring prices will see a similar run as 2021, though likely not as high given the incremental capacity adds,” Quinn said, noting that new home construction demand is still accelerating. “We still expect prices will be higher than long-term averages going forward.”
It’s Time To Consider Evasive Action On Inflation
With U.S. consumer prices rising the most since 1981, it looks dangerous to dismiss this as transient.
A Change in the Mood Music
There’s a first time for everything. My generation arrived in the workforce just as inflation was ceasing to be a serious problem (at least in much of the West). Since the early 1990s, consumer price inflation has stayed firmly under control. There have been undulations and oscillations, and times when the risk of inflation needs to be taken into account.
But there’s never been a time when my generation of 50-somethings had to deal with inflation as something that’s real and matters. For people younger than me, the notion becomes ever more abstract and hypothetical. Anyone who knows any basic economics understands the concept, but it has ceased to be a driving force in politics or the economy. There have been plenty of other ills, but not rising consumer prices.
That’s over. Whichever way you look at it, official U.S. data suggest inflation is the highest in 30 years, and rising. It’s plenty possible, indeed likely, that this will prove a transitory phenomenon. But for now it’s real and undeniable, and we have to deal with it. Thus, a wave of people under 60 have discovered the delights of digging through the entrails of official inflation data. It’s made for a fascinating but confusing day.
I have an ongoing attempt to keep track of all of this. The latest update of the Authers Indicators inflation heat map is here. We’ve updated it in light of the new data. Now to venture into the thickets of the latest debate. Brace yourself for charts.
First, and most importantly. Inflation is up, a lot. This is true whether you take the “headline” number (the best attempt of the Bureau of Labor Statistics to gauge the overall increase in average living costs), or the “core” number which excludes food and energy — not because they aren’t important, but because they are driven by factors largely beyond the control of monetary policy.
Headline inflation was momentarily higher when oil nearly hit $150 per barrel in summer 2008. Other than that, both measures show inflation at its highest in almost 30 years, but not clearly yet entering a new range.
As is widely known, there has been a massive increase in the price of used cars, for reasons related to pandemic shortages. So the bureau handily publishes an index that excludes this, and also shelter (the single biggest component). After excluding everything that might make inflation look OK, you get this:
It reduces the number, but still shows the worst spike in almost 30 years. There are other ways of looking at the “core.” The index has many components. Some will rise only once every two or three years, creating big bumps. So, you can measure the core by excluding the biggest outliers in either direction, whatever they are, and taking the average of the rest. This “trimmed mean” still renders inflation of almost 3%, as high as it’s been in three decades barring the 2008 oil spike.
Another alternative is the New York Fed’s measure of “underlying inflation,” which is fiendishly complicated but involves disaggregating the bureau’s data, looking at plenty of other measures, and seeking out the underlying trend. The latest number for June hasn’t been published yet; as of May this measure showed a sharp rise to 3%, and it’s a fair bet that it will now be right at the top of its range.
But it’s interesting that this measure, first of all, provides a smoother pattern (without a spike in 2008), that it shows inflationary pressure rising a bit ahead of the pandemic, and that it is influential over monetary policy. A significant rise in underlying inflation, so measured, has tended in the past to lead the Fed to tighten. Doubtless many in the markets expect the same again.
Now we can go further. Steven Englander, foreign exchange strategist at Standard Chartered Plc, tried calculating the core while removing the “reopening” sectors that showed the greatest impact from the recession — new and used cars and trucks, car and truck rentals, other lodging away from home including hotels and airline fares.
These factors account for 12% of core inflation, but were responsible for almost two-thirds of June’s increase. This is the outcome, expressed in month-over-month rather than year-over-year terms.
It startled me that this number was so different from the trimmed mean. Englander’s own suggestion is that price increases have “fatter tails” than decreases — in other words there are examples of components suffering 100% inflation over a year, but precious few examples of 100% deflation (unfortunately for us consumers).
If we go with the straight median level of inflation, from all the categories pursued by the BLS, we get an outcome much lower than the trimmed mean.
I’m still a tad concerned that we may be overstating the impact of the pandemic, because there are still some sectors where it is having an obvious and probably temporary deflationary effect. For example, medical equipment and supplies is -6.3%, probably due to a post-pandemic glut, admission to sports events is -7.2%, and college tuition is “only” +0.4%. This is its second lowest reading since the series started.
Englander acknowledged the point but noted correctly that these sectors are very small. He conceded “there is danger in being too clever in slicing up CPI.” After all, the Fed did in the 1970s spend much time trying to show that there was no inflation.
With this caution in mind, let’s continue. We all know that there were significant “base effects” from the pandemic — prices fell early last year, so an increase back to normal now will look like serious inflation. The index hit bottom in May last year, so base effects will now start to drop out of the equation, but there are ways to deal with them while we wait.
The Council of Economic Advisers (in the White House, who evidently have an interest in making inflation not look too bad), offered this version, which annualized inflation since February last year, the last pre-pandemic month. Doing this leads to significant reductions in core inflation, but still leaves it above 3% now.
Another way of dealing with base effects is to look at annualized price changes over the last six months. That gives a more accurate idea of the current trajectory. On this basis, core inflation is now at 6.2%, and the headline rate is at 7.2%, according to Mickey Levy of Berenberg Capital Markets.
The White House put together its own bespoke index of pandemic-affected services, listed in the chart below. The index is still 2% below its pre-pandemic level, but it has increased 16% since bottoming in February this year. So it will take well into next year for these effects to wash through.
The White House also produced this handy chart that shows once pandemic-affected services and vehicle-related components are excluded, month-on-month core inflation actually fell this month and last. So that’s all right then.
Away from the most specific pandemic effects, the greatest concern is over shelter, which accounts for roughly a third of the index. Shelter inflation rose to 2.6% this month, and it has climbed at an annualized 3.5% over the last six months.
House prices are increasing, which means that shelter inflation (based on actual and imputed rents, which I’m not going to get into here) is likely to rise in due course. Shelter is now center stage of the inflation debate; if it takes off, it will have effects. On that note, this chart put together by RealPage is concerning. As homes are vacated and new leases signed, it shows rents rising by 14.6%.
Meanwhile, occupancy is unusually high. Landlords like to have some accommodation in reserve, and deter tenants by raising prices. At present, tenants are taking the high rents offered in a way not seen since the turn of the century.
Where does all this leave us? There is no decisive evidence yet in either direction. It seems dangerous to dismiss this as transient inflation at this point. It’s also way too soon to be sure that this will lead to a secular increase in inflation.
Beyond these imponderables, there are two crucial unanswered questions. First, we need to know whether people actually spend the money in their bank accounts after the pandemic. Will aggregate demand take off as many hope, but people who dislike inflation now fear? This is Levy’s take.
The second crucial question is whether workers really will try to use their clout to raise wages, and if so whether they will be successful. Higher real wages would be a boon for society — but could also drive inflationary psychology. This is the comment of TS Lombard’s Steve Blitz.
The critical issue for inflation trend is not inflation expectations but wage expectations. Until people expect higher wages going forward, they will see high prices in their forecast, but not engage in borrowing to buy in advance – the backbone of any inflationary process.
We had new survey evidence on this from the National Federation of Independent Business, whose monthly report on small businesses is widely respected as a leading indicator. This found the highest proportion of small businesses raising prices since 1981.
It also found that the proportion saying they were finding vacancies hard to fill remained at an all-time high. That augurs well for anyone hoping for a higher-paying new job.
But Blitz counsels caution. Looking at the guts of the report, the proportion planning to raise prices is far higher than that planning to raise wages. This would obviously be good for profits, but arguably not as damaging for inflation in the long run. And yes, it won’t exactly be great for workers.
Looking at another survey, from the Conference Board, Blitz shows that the proportion of workers expecting a raise in the next six months is rising, but still isn’t as high as it has often been over the last decade. It’s perfectly possible that workers will grow more bullish and push harder, but that hasn’t happened yet.
Englander of Standard Chartered drew up a measure of inflation covering “deep services” that are particularly labor-intensive — personal, education and communications, recreation and medical care services. These make up 13% of the basket, and as the chart shows their inflation is very low. If the most important driver of underlying inflation comes from wage demands, he hypothesizes that it would show up here. And, at least to date, it hasn’t.
But there’s always an argument against. Capital Economics points to the rate of voluntary job-quitting, which is a great leading indicator of wage pressure. The quit rate dropped a little in the last month, but it is still consistent with a sharp increase in wage pressure.
As for markets, prices are driven by more than inflation. But on the face of it, current prices imply far higher confidence that inflation will soon be over than is warranted by a dispassionate look at the facts.
As I said at the outset, we are out of practice at this, but the last time core inflation was this high, the Fed funds rate was 4.75%, and the 10-year Treasury was yielding more than 7%. We aren’t going back to those levels anytime soon — but maybe a little more evasive action on inflation would be a good idea, while we all learn how to deal with it?
While writing a blog post on the most alarming NFIB prices report since March 1981, I thought I’d dramatize it by mentioning what was number one at the time. Unfortunately, it turns out that in the U.S., it was REO Speedwagon’s Keep On Loving You. The video is if anything even more toe-curlingly awful than the song. The year’s biggest pop song was Bette Davis Eyes by Kim Carnes, a darn good song, but there were also number ones by Air Supply, Hall and Oates, Rick Springfield and Eddie Rabbitt. Ugh.
Back home in England, 1981 was the year of classics like the Specials’ Ghost Town, and Tainted Love by Soft Cell. But unfortunately number one at the end of March was This Ole House by Shakin’ Stevens, which only sounds good if you’ve just sat through some REO Speedwagon.
Not long after, Making Your Mind Up by Bucks Fizz, that year’s Eurovision winner, started a long stay at the top of the charts. And Ultravox’s great nouveau romantic anthem Vienna was famously thwarted from reaching number one by Joe Dolce’s Shaddap You Face. People actually went into record shops and spent money to buy a vinyl disc with this song on it. Why?
When we look back on the past, particularly our youth, we remember the best that was around, and filter out the dross, which is just as well. Maybe things these days aren’t as bad they seem.
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