Axios Markets

The trade deficit hit a record last year, as Americans attempted to ease pandemic-era sorrows by acquiring a mountain of consumer goods, Matt writes.

Driving the news: The trade deficit for the full year of 2021 hit a record $859 billion, 27% more than the previous year, as Americans bought cellphones, toys, games and household goods, the Bureau of Economic Analysis reported.

Why it matters: Some thought the pandemic — and recent supply chain snarls — might force a rethink of the consumption-heavy structure of the American economy, perhaps by boosting activity at American factories.

• But the trade numbers suggest COVID could actually amplify the economy's emphasis on consumption, at least for now.

How it works: The trade deficit is the gap between what the U.S. sells and what it buys from foreign countries. Typically when the trade deficit grows, it's because American consumption — a key driver of the economy — is relatively strong.

• That doesn't mean a large deficit is always a great thing, however. The growth of the U.S. trade deficit is closely connected to the deindustrialization that's taken place since the 1970s — and the loss of factory jobs.

State of play: The pandemic drove Americans to shift spending away from services — eating out, haircuts, trips to the movies — and toward goods — cellphones, home furnishings, cars, etc. — a lot of which are imported.

• That occurred, largely, because the government's pandemic-related stimulus checks ensured people had the money to spend.

Of note: U.S. exports also surged last year, rising 18.5% — just not as much as imports, which rose 20.5%.

Our thought bubble: A rather poetic symbol for the transformation of the American economy over the last 50 years is the self-storage space. These goods graveyards often occupy former factory buildings, which once churned out products and provided jobs.

• Today they're simply places to sock away excess junk. Hardly anybody works there.

What we're watching: The dollar. The greenback could strengthen this year if the Fed lift rates. (Here's why.) A stronger dollar makes U.S. exports harder to sell abroad and makes imports cheaper. That's a recipe for the trade deficit to get even bigger.

🚚 Canada's anti-vaxxers disrupted the auto supply chain. (Bloomberg)

🇺🇦 Japan is diverting gas to Europe, in case Russia invades Ukraine. (AP)

💸 The U.S. seized $3.6 billion in bitcoin it says was stolen by hackers. (NPR)

⛴ Shipping giant Maersk has record profit on economic rebound. (AP)

Brazil's stock market is emerging as an early winner in 2022, with its performance trouncing most other major indexes so far.

Why it matters: The rally in the Ibovespa underscores how commodity producers can benefit in an inflationary environment.

• Brazil is a major producer of raw materials like iron ore, soybeans and petroleum, and its markets are dominated by companies like energy giant Petrobras, and Vale, a massive iron miner.

Yes, but: The markets are not the economy. What's good for commodity companies — higher prices — can hurt elsewhere.

• Surging consumer prices have prompted Brazil's central bank to repeatedly raise interest rates, and that's helped push the country into a recession.

Want to bring down inflation? The great dilemma is this: The only real options are to be patient, or cause a recession, Axios' Neil Irwin writes.

Why it matters: It is a pick-your-poison environment for the Biden administration and the Federal Reserve, who face public discontent over economic conditions — and the risk that discontent would only get worse if the alternative was a new recession.

• The inflationary pressures from strained supply chains and labor shortages look likely to persist through 2022 and maybe beyond.
• But the measures that would be needed to bring inflation down more rapidly would risk sending the economy into a tailspin.

The big picture: In the decades after World War II, episodes of inflation have ended when the Fed took steps to tighten the money supply, causing recessions.

• In other words, companies can't hike prices and workers can't demand higher pay if the economy is contracting and more people are out of work.
• In the most extreme example, Fed chair Paul Volcker engineered a steep downturn in the early 1980s that ended the double-digit inflation of that era — but at the cost of double-digit unemployment that pummeled President Reagan's popularity.

This time around, the goal is a soft landing. The Fed is looking to move toward higher interest rates gradually, not with the kind of shock Volcker engineered.

Keep reading.

The next round of inflation chatter will kick 0ff tomorrow. Gird yourself, Matt writes.

• The Consumer Price Index for January will be released at 8:30am ET tomorrow.

State of play: Economists think it will show prices in January were up 7.3% compared to last year. If they're right, it'll be the fastest price rise since early 1982.

Why it matters: Inflation is the single most important issue for investors to understand this year.

• If prices continue to arrive higher than economists — and the Federal Reserve — expect, then the central bank could raise rates fast. That's something hardly anyone has been expecting.
• It was just such a realization — that the Fed was going to lift rates soon — that pushed the market to one of the ugliest starts on record this year. The S&P 500 was down by nearly 10% at times in January.
• It's since clawed back a fair bit and is about 5% lower.

What we're watching: The two largest drivers of the surprisingly high inflation in recent months have been the costs of shelter — up 4% in 2021 — and used cars — up 37%(!). Any big moves in those categories could translate into a big swing in the official reading on prices.