Table 1

The massive drop in U.S. omicron cases through Feb. 8 echoes relatively healthy economic data reported by S&P Global Economics' U.S. real-time data tracker. In fact, the improving public health situation in the U.S., if it continues, points to a solid February outlook overall:

• Fewer weekly jobless claims in early February and robust weekly job postings point to a solid February jobs report.
• Our people-facing high-frequency indicators point to a slowdown in COVID-19-sensitive activity this quarter, though nowhere near as bad as previous waves.
• Consumer spending has stabilized at still-high rates, though price gains, not more products, likely explain the overall strength, as well as consumers' sour moods as a result of those price gains.
• On healthy private demand, business activity readings are solid, with supply-chain disruptions, not lessened demand, holding back production.
• Huge inflation readings on solid economic activity have not let up in February, with inflation expectations feeling a bit more "persistent."

With long-term inflation expectation indicators advancing to a decade high, the Federal Reserve has reason to be concerned that elevated inflation expectations are here to stay. The Jan. 26 statement highlighted "elevated levels of inflation," and Fed Chairman Jerome Powell's press conference also indicated these high prices could prove lasting. This would leave the U.S. bearing an impact, first from the high prices and later from the cure: higher interest rates in 2022 and beyond. With high inflation and the recent jobs strength fueling the Fed's policy rocket, we now expect the first of six 2022 rate hikes in March. A 50-basis-point hike this year is very likely, possibly as soon as March.

New COVID-19 Cases Drop As Mobility Stabilizes

COVID-19 cases in the U.S. plunged by 32% in just two weeks, to 235,000 per day (seven-day moving average) on Feb. 8 from a near-record high of 742,000 on Jan. 24. However, cases are still over twice the Dec. 1 level, keeping overall death rates high. Daily deaths climbed by 14% to 2,481 as of Feb. 8. They are now 17% above the Sept. 28 high but 27% below the Jan. 13, 2021, peak (see chart 1).

Nonetheless, omicron reportedly causes less severe illness than other variants, particularly for fully vaccinated people. As of Feb. 6, 64% of people in the U.S. are fully vaccinated, 76% have at least one dose of the vaccine, and 27% have received booster shots (versus 63.7%, 76%, and 25.7%, respectively, on Dec. 1).

The economy is certainly still feeling omicron. Lockdown measures put in place across the world will complicate supply-chain disruptions for goods and services. Oxford University's Stringency Index highlights that quarantine measures remain relatively high for many U.S. trading partners. Of the countries tracked, Germany and Italy reported the strictest measures, and the U.S. and U.K. the lowest.

But while U.S. stringency is relatively low, the Bureau of Labor Statistics (BLS) January jobs report showed hours worked declined by 0.2 percentage point to 34.5 hours. This likely stemmed from the large number of people who couldn't go to work because of COVID-19-related health issues for themselves or a family member (8.7 million didn't work in late December and early January, according to a January Census Household Pulse Survey).

Yet if cases continue to subside, as they appear to be doing, the economic impact from omicron will likely be transitory.

Chart 1

Chart 2

While the extremely high caseload has noticeably discouraged mobility for retail and recreation, the indicators we track appear to have stabilized above their recent low levels. According to Google Community Trends data, mobility in the U.S. was 18% below the pre-pandemic level on Feb. 7, from its low of 21% below the pre-pandemic level on Jan. 7. All state readings improved, with New York still showing the lowest mobility among the major states we track, at 28% below the 2019 average, and Arizona and Florida the highest, each 11% below the 2019 average (see chart 3).

The national average of seated diners also improved, up 6.8% from our Jan. 28 report to 17.6% below the pre-pandemic level as of Feb. 7 (see chart 4)--and much higher than in April 2020, when this metric dropped to 100% below the pre-pandemic level.

Travel activity has improved modestly since our last real-time report, though it remains below pre-pandemic levels. Restrictions on business travel seem to be holding back travel activity. The hotel occupancy rate edged up by 0.9 percentage point to 49.7%, below its 71.4% peak from July 2021 (see chart 5).

Not surprisingly, air traffic also improved since our last report, by 2.3% to around 22.3% below the 2019 level (see chart 6). This remains significantly above the reading in April 2020, when air traffic dropped to around 95% below the 2019 level.

Chart 3

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Chart 6

Consumer Confidence Plunges Amid Higher Prices

With extremely high prices at the checkout denting wallets, consumer confidence measures have crashed this month. The University of Michigan's Consumer Sentiment Index plunged to its lowest since October 2011 in its preliminary February reading, falling by 5.5 points to 61.7 (see chart 7). Both current and expectations readings fell to decade lows, though gloomy prospects for the future account for most of the drop. The biweekly Ipsos-Forbes Advisor U.S. Consumer Confidence Tracker rose by 3.8 points on Feb. 10 to 56.1 (from 52.3 as of Jan. 28) as virus fears ebb; it's well below its 2021 high of 62.4 from June (see chart 8).

Meanwhile, the jobs market is strong, with the January BLS jobs data defying omicron with 467,000 job gains. The unemployment rate ticked up to 4.0% from 3.9% in December, but for the right reasons--people got jobs, and even more people entered the workforce looking for work. Workers also enjoyed fatter paychecks in January, with average hourly wages up by 0.7% for the month and 5.7% over last January. Higher overall price gains will likely take a bite out of paychecks, however, with real wage growth closer to zero.

High-frequency data suggests this will only continue, with initial jobless claims falling to 223,000 in the Feb. 5 week (near its 52-year low of 188,000 in the Dec. 4 week) (see chart 9). Indeed job postings for the week of Jan. 21 supported the solid January jobs report, with the percentage change in job postings now 60.3% above the pre-pandemic level, drifting below its 63.5% record high from the Dec. 24 week (see chart 10). All job postings by major industry groups are well above pre-pandemic levels.

Chart 7

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Chart 9

Chart 10

The Johnson Redbook Same-Store Sales Index moderated to still-high rates in the week of Feb. 4, up 15% year over year, though this likely reflected higher prices for items bought rather than more purchases (see chart 11). The index remains well above pre-COVID-19 levels as consumer demand has remained strong, helped by healthy balance sheets with cumulative average household savings still $2.5 trillion over their 2019 average, suggesting spending activity will continue through 2022. Still, consumers will likely keep a critical eye on prices later this year as they look for deals or possibly trade down

Healthy private demand has likely supported business applications from U.S. corporations, which were 26% above their 2019 average for the week of Jan. 29, reversing the downward trend since March (chart 12). This increase in new business applications is led by the retail trade and transportation sectors.

Chart 11

Chart 12

A Pickup In Housing Activity Lifts Lumber Prices

The Mortgage Applications Purchase Index dipped to 282 in its Feb. 4 week, though this was within the 275-310 range since November. While 19% off its Jan. 15 high of 348, it has trended higher since dipping to 247.5 in the July 30 week (see chart 13).

Lumber futures prices, meanwhile, climbed by 13.2% to $1,160/1000 board feet on Feb. 8, below recent highs but still elevated by the hot housing market and supply-chain constraints exacerbated by storms in Canada (see chart 14). They are 32% below the May 2021 all-time high.

Chart 13

Chart 14

Other high-frequency pricing data since our Jan. 28 report was mixed. Gasoline prices, at $3.44 the week of Feb. 7, reached their highest since $3.46 the week of Sept. 8, 2014 (see chart 15). The Baltic Exchange Dry Index (BDI), at 1,508 on Feb. 8, is 12% above its 2019 average of 1,344 as it hugs the 2019 average (see chart 16). It's 74% below its Oct. 7 high. The BDI is tied to trade in commodities such as coal, iron ore, and grain--so more closely linked to China, Brazil, and India; the recent drop in freight rates was partly attributable to a slowdown in iron ore stockpiling in China.

The January Taiwan PMI fell 3 points to 56, with the backlog orders and new-orders subindices down by 1 and 7 points to 55 and 53, respectively. With Taiwan the leading producer of semiconductors, this suggests some softening of supply-chain disruptions, with conditions "less bad" rather than improved.

Raw steel capacity softened through Feb. 2 and is now just 1% above its 2019 average and 4.3% below its high of 85.3 from the week of Oct. 20 (see chart 17). The Industrial Metal Price Index has also trended lower since our Jan. 28 report, to 1680.13 on Feb. 8, after reaching a record high of 1710.52 on Jan. 21 (see chart 18). Congress' bipartisan infrastructure package helped keep prices high, with the Metal Price Index still 55% above its 2019 average despite the recent declines.

Chart 15

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Chart 17

Chart 18

Markets Could Wag The Fed

We now expect the Federal Reserve to raise rates in March in the first of six rate hikes this year. But it's not just a question of liftoff in interest rates--now, it's more a question of how high the Fed wants to fly its monetary policy rocket and how fast. And our reading of its recent statement is that the Fed is aiming for the stars in this cycle of monetary tightening.

It has good reason to fly high. The January U.S. Consumer Price Index (CPI), both total and core excluding food and fuel, surged by 0.6% over December, beating market expectations yet again. On a year-over-year basis, both total and core reached their highest rates since 1982. That was during the Great Inflation, when Paul Volcker was the chairman of the Federal Open Market Committee. We wonder how many pages current Fed Chair Jerome Powell will take from Volcker's book.

We suspect a number are already dog-eared. These explosive price gains make a rate hike of 25 basis points (bps) in March a slam dunk, and the possibility of a 50 bps rate hike that month is increasingly likely. While the Fed has indicated it would like to take a gradual approach, we expect a 50 bps rate hike at least sometime this year--possibly as soon as March.

Markets indicate they don't have the patience to wait. According to the CME FedWatch Tool, target rate probabilities for a 50 bps rate hike started at 25% on Feb. 10, before the CPI report was released. Soon after the explosive CPI release, chances of a 50 bps rate hike were 50%. By 2:30 p.m., after St. Louis Fed President James Bullard's comments, chances surged to 98.6%.

How high the Fed will fly its monetary rocket will depend on the economic data. High-frequency indicators through early February confirm pricing pressure remains extreme. With most long-term inflation expectation indicators in February at decade highs, the Fed has reason to be concerned that inflation expectations have proved "persistent," to quote the December minutes.

High-frequency long-term inflation expectations, already uncomfortably high, changed little through Feb. 8 and are just under their multiyear highs reached in the fall (see chart 19). The five- and 10-year inflation readings, at 2.07% and 2.42%, respectively, are not much lower than their January averages and their respective peaks of 2.33% and 2.53% (see chart 20). The University of Michigan Surveys of Consumers February preliminary reading also saw its 12-month consumer inflation expectations reading climb 0.1 percentage point to 5.0%, the highest since 2008. The five-year-out inflation expectations metric held at 3.1%, its highest since 2009.

However, the Survey of Professional Forecasters inflation expectations index declined by 0.1 percentage point in February to 2.2%, relatively close to the Fed's 2.0% target, which may give the Fed reason to stick with a 25 bps hike in March.

No matter how one cuts the data, surging price metrics on top of solid economic activity point to an aggressive monetary policy this year. How aggressive remains to be seen.

Chart 19

Chart 20

Table 2

Table 3