August 2016

In the early part of the month there were tentative signs that the Fed would do something.  Bill Dudley, of the New York Fed, recognized that growth was weak and monetary policy only moderately accommodative. On August 15, John Williams of the San Francisco Fed published “Monetary Policy in a Low R-star World”: [M]onetary policy frameworks should be critically reevaluated to identify potential improvements in the context of a low r-star. Although targeting a low inflation rate generally has been successful at taming inflation in the past, it is not as well-suited for a low r-star era. There is simply… Read More

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In “Years of Fed Missteps Fueled Disillusion with the Economy and Washington”, Jon Hilsenrath gives his contribution to the “Great Unraveling” series. He starts off writing: In the past decade Federal Reserve officials have been flummoxed by a housing bubble that cratered the financial system, a long stretch of slow growth they failed to foresee and inflation persistently undershooting their goal. In response they engineered unpopular financial rescues, launched start-and-stop bond buying and delayed planned interest-rate boosts. “There are a lot of things that we thought we knew that haven’t turned out quite as we expected,” said Eric Rosengren, president of the… Read More

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July Personal Consumption Expenditure and Personal Income were both in line with expectations. Although June growth was revised up a tiny amount the trends of the last several months were unbroken. Nominal Expenditure has accelerated to 3.8% YoY but only financed by a lower savings rate due Personal Income running at a 3.2% trend. Perhaps confidence amongst consumers has risen, but that does not seem to be the case looking at surveys. While Nominal Disposable Income is running a bit closer to Nominal Personal Expenditure, Disposable Income per capita growth, is in line with nominal weekly wages at an ugly… Read More

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 Week ending Friday 26th August 2016 Markets had a largely directionless week until Friday and the big Jackson Hole symposium. New home sales had excited the market on Monday but by Wednesday pending home sales had heavily disappointed as had the many current month surveys. Triumph of hope over experience Hopes had been raised the week before by John Williams’ Economic Letter proposing some new thinking but then quickly dashed by William Dudley in an interview and by John Williams himself in a speech. Markets seemed to have picked up the vibe that nothing big would come from Jackson Hole… Read More

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Although July surveys and data appeared mixed, with manufacturing doing OK and services less well, August surveys are running remarkably poorly. First off was NY Empire State manufacturing and it was bad, even if in a volatile series. The Philly Fed was in line for manufacturing within a dull trend but its employment survey was very poor. Markit’s “flash” manufacturing PMI did not follow through on July’s strong data point. Richmond Fed had a very weak reading for manufacturing in an another admittedly volatile series. Its services survey fell back to zero. Today, the “flash” Markit services PMI was weak… Read More

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Week ending Friday 19th August 2016 Data took a back seat to FOMC members and group statements. They appeared to be in conflict not only with each other, as in the FOMC Minutes released mid-week, but even with themselves. The USD has remained weak while bonds have been merely volatile, apart from the short end. Equities have remained near the highs, bolstered by a good recovery in oil prices. The most significant dichotomy has been the USD weakness versus higher 12m interest rate expectations – a superficially puzzling phenomenon but maybe explained by the current and upcoming debates within the… Read More

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Stephen King (not the popular author) but HSBC’s senior economic adviser, elaborates on Larry Summers´ comments on San Francisco Fed president John Williams´ letter. King´s conclusion, however, in effect disparages the idea of NGDP Targeting. Maybe he doesn´t understand the concept: In these circumstances, the entire monetary policy framework is up for grabs. Shibboleths will have to be dispensed with. At zero rates, central banks may have to work increasingly closely with finance ministries, prioritising the need for co-ordinated action over the desire for independence. Inflation targeting may have to be ditched, perhaps replaced by nominal gross domestic product targeting:… Read More

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We were rightly excited by John Williams letter from San Francisco on Monday as we had already detected stirrings. We and many others were also equally right to wonder what was going on when JW reverted to type on Thursday. The JW-induced downward move in the USD Index stuck. The move down was against all major currencies but specifically against the JPY where it fell through Y100 to the USD for a while on Tuesday and more persistently on Thursday. The Japanese were repeatedly browbeaten by the US Treasury when their currency versus the USD had traded up to Y120. They did what they were told, pulling back… Read More

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CPI YoY disappointed the hawks for the third month in a row, and the fourth out of five. Although for many of them one month annualised is often a trend, the less obtuse will see three months of trending lower YoY CPI to just 0.9% as something concrete. Personally, I can’t get my ahead around the point of the trimmed mean CPI as the price level is the thing, not some kooky CPI that excludes stuff, but the hawkish inflation-phobes love it. However, the fact that we have heard a lot less about the trimmed mean assures me that it… Read More

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The Industrial Production and Manufacturing Production figures were a bit better than expected. The IndPro figures MoM were a 2nd positive month and allowed the YoY negative growth rate to shrink to just -0.5% . The Manufacturing Production figures were better than expected but not good enough to raise the rate of YoY growth which shrank again to just 0.4%. Capacity Utilization was a further bright spot. At the end of the day the figures merely confirmed the various surveys of July manufacturing that also suggested a decent month for the sector, at least that is what the regional Fed surveys… Read More

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