Like last week, we’re seeing more inconsistent data. The retail sales number indicates a strong economy and a “higher for longer” Federal Reserve. The new manufacturing data indicates a weakening economy and a “pivot now” Fed. The most likely result is the Fed doing nothing for now. Taiwan Semiconductor ($TSM) guidance moves the market. And Bitcoin continues to defy both the bull and bear narratives leading both sides to declare victory.

This week, we’ll address the following topics:

• Retail sales better than expected. Does this mean “higher for longer”?
• Empire State Manufacturing Index is a disaster. Does this mean the Fed cuts sooner?
• Taiwan Semiconductor lifts the entire tech sector and market indexes.
• Post ETF approvals, Bitcoin neither crashes nor goes to the moon.
• Federal Reserve continues to do what they say they’ll do.

Ready for a new week of indeterminate economic data headlines? Let’s dive in:

1. Retail Sales Above Expectations:

December retail sales were up .6% vs November which was higher than the .4% estimate. Continued strong consumer spending can be attributed to higher wages, higher prices, higher employment, cash reserves from the lockdowns and government stimulus handouts, and lack of fear of too much debt (YOLO). The truth is the high sales are due to a combination of all of the above items in various combinations depending on the family. People are more likely to be employed with higher wages, and prices are up for everyone. While I wouldn’t recommend taking on unpayable debt, given the massive government debt, bank bailouts, student loan forgiveness/transfer, and dollar debasement, it’s easy to understand why some people believe there will be no meaningful consequences to spending themselves into bankruptcy.

Up 9 months in a row. Can’t stop the consumer.

DKI Takeaway:  Higher consumer spending related to higher wages is part of the wage/price spiral that’s concerned the Federal Reserve for the past two years. This result won’t cause the Fed to hike rates again, but more results like this could easily delay the first eagerly-anticipated rate cut.

2. Empire State Manufacturing Index is Bad:

The Empire State Manufacturing Index hit negative 43.7 this month. Anything below zero means contraction. This is a terrible number on both an absolute basis (worst since the Covid lockdowns) and on a relative basis (expectations were for negative 6.5). Despite high overall employment, manufacturing jobs and hours worked fell. The consumer continues to spend, but manufacturers appear to be reducing production to prepare for a recession.

The only two dips close to this were the Covid lockdowns and the 2008 financial crisis.

DKI Takeaway:  For yet another week we get divergent economic data. The upstream indexes like the producer price index and manufacturing index indicate lower prices, coming supply restrictions, and a likely recession. The downstream indexes like the CPI indicate rising prices, continued demand, and massive spending. The weak upstream indexes make the Fed more likely to cut rates sooner while the strong downstream indexes make the Fed more likely to pause for longer. DKI believes the Fed will hold rates steady at the next meeting. The market thinks that’s a 50/50 call (or so) right now.

3. Taiwan Semiconductor Guidance Lifts Tech Stocks:

Taiwan Semiconductor gave guidance for revenue gains of 20% for the upcoming year. After a bit of a slump in computer sales, this bullish guidance sent $TSM stock, the tech sector, and market indexes up for multiple days. The Covid lockdowns sent many people to buy computers for home offices which pulled forward demand. Taiwan Semi just let everyone know they were returning to high growth this year.

Still the best chip manufacturer in the world.

DKI Takeaway:  $TSM specified higher expected demand for high-end computers equipped to run new AI applications. This has also been the trend pushing Nvidia ($NVDA) stock higher. The one negative in the report related to low expectations for cell phone sales. Right now, most smartphones can run existing applications without trouble which reduces the incentive to pay for upgraded models.

4. Bitcoin Refuses to Acknowledge SEC Approval:

Last week, the SEC approved 11 Bitcoin exchange traded funds including the conversion of the Grayscale Bitcoin Trust ($GBTC). Bitcoin bulls celebrated the coming inflow of funds from traditional finance into a supply-constrained market. Bitcoin bears warned that the approval was “priced in” and that Bitcoin would crash post approval. Let’s look at the results year-to-date:

To me, this looks like normal Bitcoin volatility instead of an event.

DKI Takeaway:  Bitcoin ran up a bit into the announcement and promptly fell to about where it was about three weeks ago. The bulls are claiming victory because of the huge volume in the new ETFs. The bears are claiming victory because Bitcoin fell post approval. The price move here was neither the “to the moon” the bulls hoped for nor the “crash” predicted by many. If you want to score this one at home, we’ll call it a very slight win for the Bitcoin bears. However, this was a short-term win. DKI thinks we see a dollar price of $100,000 before seeing the $0 assigned by the “Bitcoin is worthless” crowd. What do you think?

5. The Federal Reserve Continues to Reduce its Balance Sheet:

Multiple rounds of quantitative easing blew up the Fed balance sheet to $9 trillion dollars which contributed to yet another asset bubble. When inflation accelerated in late 2021, the Fed committed to reducing its balance sheet (quantitative tightening). The intention was to take some liquidity out of the system as another way to fight inflation. While still too large, the Fed has reduced its assets to about where they were three years ago.

Still too high, but there has been material contraction.

DKI Takeaway:  The Fed is facing a problem. It needs to keep interest rates at the current level to help reduce inflation, but that will also create a need to print more dollars to pay additional interest expense. There’s a lot of speculation that when the Fed starts to lower interest rates that they’ll restart quantitative easing. With the stock market indexes at or near all-time highs and housing prices near all-time highs, the economy shouldn’t require a $9 trillion balance sheet to provide more liquidity. It would help if the Fed did less and let the market handle its own price discovery.

 

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