Axios Markets

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February 09, 2022

πŸ‘‹ Hello folks! Emily here. It's Wednesday and we're bringing you all kinds of charts, so get ready.

  • But first, in the spirit of this midweek moment, I need to get over the hump of owning up to an error I made yesterday. I told you a million more men than women entered the job market in January, but the monthly comparison was not accurate due to how the BLS re-weights population data at the start of the year. Read more here.
  • Sorry about that. I'm grateful for smart readers who wrote in to keep us on our toes, so keep the emails coming! Write us at [email protected].

OK, on to the show...

Today’s newsletter is 957 words, 4 minutes.

1 big thing: Americans bought a lot of stuff

Illustration of a shopping cart overloaded with boxes

Illustration: Sarah Grillo/Axios

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 β€” and recent supply chain snarls β€” 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 β€” a key driver of the economy β€” 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 β€” and the loss of factory jobs.

State of play: The pandemic drove Americans to shift spending away from services β€” eating out, haircuts, trips to the movies β€” and toward goods β€” cellphones, home furnishings, cars, etc. β€” 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% β€” 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.

Bonus chart: U.S. trade deficit

U.S. annual trade deficit, 1992-2021
Data: FactSet; Chart: Kavya Beheraj/Axios

2. Catch up quick

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

πŸ‡ΊπŸ‡¦ Japan is diverting gas to Europe, in case Russia invades Ukraine. (AP)

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

β›΄ Shipping giant Maersk has record profit on economic rebound. (AP)

3. Charted: Brazil stocks boom

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

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 β€” higher prices β€” can hurt elsewhere.

4. Patience vs. recession

Illustration of an outstretched arm holding one green and one red arrow-shaped balloon

Β Illustration: Sarah Grillo/Axios

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 β€” 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 β€” 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.

5. On deck: fresh inflation data

Source: U.S. Bureau of Labor Statistics; Chart: Axios Visuals
Source: U.S. Bureau of Labor Statistics; Chart: Axios Visuals

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 β€” and the Federal Reserve β€” expect, then the central bank could raise rates fast. That's something hardly anyone has been expecting.
  • It was just such a realization β€” that the Fed was going to lift rates soon β€” 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 β€” up 4% in 2021 β€” and used cars β€” up 37%(!). Any big moves in those categories could translate into a big swing in the official reading on prices.