January 10, 2022
👋 Good morning! I hope everyone had a restful weekend. ☃️
⏱ Today's newsletter is 1,234 words, 5 minutes.
1 big thing: Tighter labor markets mean tighter money
Things change fast in a pandemic. And a rapidly changing economy has the Federal Reserve playing catch-up, Axios' Neil Irwin writes.
- Less than a month ago, the Fed made an abrupt pivot toward a more hawkish monetary policy stance. By the end of last week, the data was pointing toward an even faster withdrawal of stimulus.
Why it matters: Cheap money has become baked into the economy, so the Fed’s moves to take it away will bring risks of abrupt swings in markets that could spill back over into the economy.
By the numbers: Friday's jobs data are Exhibit A. While initial headlines focused on soft growth in payroll numbers, the report points toward a labor market that has become exceptionally tight, contributing to already high inflation.
- The unemployment rate is down to 3.9%. In the last economic cycle that level was not reached until May 2018 — at which point the Fed had already raised interest rates six times (now: zero).
- Wages are not only rising, but rising at an accelerating pace. Average hourly earnings rose 4.7% over the entire course of 2021, but at a 6.2% annual rate in the final three months of the year.
Between the lines: A simple way to look at the monthly jobs numbers is to look at whether employers added a lot of positions to their payrolls (good!) or not (bad!).
But which numbers matter most depends on the economic moment. For example, job growth numbers tend to be useful for detecting when the economy is falling into recession.
- Right now with inflation concerns paramount, indicators of labor market tightness — like the unemployment rate — are most likely to get the Fed's attention.
- Go deeper: A broad measure of underemployment (known as U-6) is also nearly back to its pre-pandemic level. It fell to 7.3% in December, compared to 7% in February 2020.
What they're saying: "No matter how you slice the data it’s hard to avoid the conclusion that the labor market is very tight," writes Michael Feroli of JPMorgan in a note.
- Futures markets agree, and now price in 70% odds of a March rate increase, according to CME Group, up from 36% in early December.
Yes, but: While the labor market overall is healing rapidly, the improvement is not uniform. The unemployment rate among Black Americans actually rose 0.6 percentage points in December, to 7.1% — and Fed leaders have said they aim to achieve broad and inclusive prosperity.
The bottom line: The labor market has gotten tighter, faster than most people, including at the Fed, thought possible just a few months ago. Now, policy is on track to follow suit.
2. Catch up quick
Consumers with lower credit scores obtained more credit cards last year, a vote of confidence from America’s banks in both the economy’s health and that of U.S. households. (WSJ)
Bond yields around the world are hitting multiyear peaks as investors prep for faster withdrawal of monetary stimulus by global central banks. (Bloomberg)
3. The SPAC boom hasn't guaranteed winners
Not all companies are fit to go public via SPAC, despite so many of them doing so, Axios' Kia Kokalitcheva writes.
Why it matters: While SPACs were quickly touted as a faster and better way for companies to go public, ultimately not all businesses that have chosen that route are meeting investor expectations.
The big picture: Nearly 200 companies have completed mergers with U.S.-listed SPACs since the beginning of 2021, across a range of sectors, including software, biotech, electric vehicles and sports betting.
- Still: SPAC stock redemptions started to pick up over the summer, with most in July at above 50%, signaling some investor discontent.
- There's also been an uptick in merger cancellations.
By the numbers: "For the 262 SPAC mergers that were completed during 2020 and 2021, the average stock price on Dec. 31, 2021, was $8.70, considerably below the average price of more than $10 per share at which the stocks traded at the time of the merger," says Jay Ritter, professor at the University of Florida Warrington College of Business, who used SPAC Research data.
- Only a quarter (65 out of the 262) traded above $10, although some were above $35 per share (e.g., Heliogen, Virgin Orbit and CompoSecure).
- "The average stock price decline during the post-merger ('deSPAC') period for the 2020-2021 cohorts is noteworthy, given that the stock market finished 2021 near an all-time high," adds Ritter.
Between the lines: Whether the SPAC’s sponsor had expertise in the target company’s expertise is one of the strongest indicators of post-merger performance, according to Wolfe Research.
- Similarly, companies merging with SPACs managed by top-ranking underwriters have also outperformed, according to a working paper by Ritter, Minmo Gahng and Donghang Zhang.
- Overall, researchers' findings reinforce the common refrain throughout this boom that an elite group of sponsors and target companies will emerge and continue to do well.
What to watch: Whether the SPAC rush continues, or if more companies opt for IPOs or to remain private.
4. Coal comeback
Coal-fired power generation in the U.S. jumped 17% in 2021 from the year before, underpinning an overall increase in emissions of planet-warming greenhouse gases, according to a new report from the climate consulting firm the Rhodium Group, Axios’ Andrew Freedman writes.
Why it matters: The report makes clear that the emissions trend puts the country further off course when it comes to meeting its emissions targets under the Paris Agreement.
- U.S. emissions increased 6.2% when compared to 2020 levels, but they still wound up at about 5% below that of the pre-pandemic year of 2019. The new report, released today and based on preliminary data, shows that emissions grew slightly faster than the economy did.
The big picture: Coal’s comeback of sorts has to do with market conditions, as natural gas prices hit more than twice their 2020 rate, largely due to lower production in the wake of the COVID-related oil price collapse in 2020, Rhodium stated.
- It was the first annual increase in coal generation seen in the U.S. since 2014. The overall trend has been a decline in coal use, and renewables have increasingly picked up more market share.
Meanwhile: Natural gas generation fell by 3% in 2021, while renewables increased by 4%.
- Renewables reached a new milestone, comprising 20% of U.S. electricity generation in 2021, the report found.
5. What we're watching this week
If new reports the first week of the year added fuel to the market's expectations for a March rate hike — as Neil wrote at the top of this newsletter — the upcoming week may all but confirm it.
What's happening: Federal Reserve chair Jerome Powell heads to the Senate Tuesday for a hearing to confirm his second term. It's not a policy hearing — but look for Senators to grill him about his changing views on inflation's stickiness.
- The last straw for continuing the loose policies may be the December inflation figures, due out Wednesday (Consumer Price Index) and Thursday (Producer Price Index). Even if monthly growth slows down, the year-over-year price gains may still provide cringe-worthy headlines alongside their pocketbook impact.
State of play: Economists' median expectations are for headline CPI growth of 0.40% during December, and 7.1% for the year (from 6.8% a month ago).
- Producer — or wholesale — prices will also give us a glimpse into the potential for future prices hikes that'll be passed on to consumers. The last PPI reading, for November, was the highest on record for annual growth.