Bad news is bad news
With few exceptions, this week’s economic data showed continued weakness. Inflation data indicated by the producer price index and retail sales both came in lower than expected. In addition, industrial production and housing data continued their downward trend. Contrary to this, jobless claims, one indicator of the health of the labor market, came in slightly better than expected. Over the last year, markets have been focused on economic data through the lens of what they may mean for Federal Reserve policy. Hence, weak economic data has been generally met with market rallies in hope of a pause or pivot to the Fed’s interest rate hikes. This week, for the first time in a while, we witnessed markets selling off on weak economic data. As we have discussed over the last several quarters, markets seem to have shifted focus from inflation to weakness in the economy. We will see if this is the beginning of a new trend.
Japan Central Bank punts
This week, the Bank of Japan (BOJ) was widely anticipated to announce a change to its Yield Curve Control policy. As we have written about in the past, Japan was the sole G7 country not to hike interest rates last year. When the BOJ unexpectedly widened the band of their Yield Curve Control policy in December, most participants expected this to mean a policy change at this week's meeting. Despite inflation coming in at 40 year highs, the BOJ decided not to do anything. This is important to pay attention to because Japan has been engaged in loose monetary policy longer than other developed countries. Many believe that how their policy evolves going forward has implications on the rest of the world. For now, Japan remains the most indebted developed nation, with public debt at 266% of GDP.
Debt ceiling drama
While widely anticipated to be an issue in 2023, the US seems to have reached its debt limit sooner than expected. This sets up a battle between Democrats and Republicans over spending. In 2011, a similar dynamic led to the first-ever downgrade of US govt debt and market volatility. While most of what we are about to witness in Congress over the coming weeks and months is theater for constituents, what is important is the $31 trillion dollars of outstanding debt, double what it was less than ten years ago. While still about half the ratio to GDP than that of Japan, it is accelerating, especially if accounting for unfunded liabilities like social security. What is also important is that given the current level of interest rates, debt service is becoming a significant annual expense.