May 2017

Consumer expenditures recoil

Despite “uplifting” comments: Americans ramped up their spending in April at the fastest pace in four months, offering fresh evidence the U.S. economy is rebounding this spring after a lackluster winter. The truth is less cheerful, with year-on-year consumer spending growth following confidence down! And how did markets react to the inflation, confidence and comsumer spending releases? Stocks, Dollar and Long-term Yields all down, and leading at least one FOMC member to express doubts: “If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,” Brainard said in prepared…...

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2%? Maybe in 2025!

As someone said: “Inflation is not cooperating with the Fed!” Although San Francisco Fed Williams is sanguine: When you look at how the data relate to those two big goals I mentioned—maximum employment and price stability—they paint a very clear picture: The U.S. economy has fully recovered from the global financial crisis and the ensuing recession. In fact, the U.S. economy is about as close to the Fed’s dual mandate goals as we’ve ever been. When it comes to employment, economists generally view the natural rate of unemployment in the U.S.—by this I mean the level consistent with an economy…...

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Unpleasant rumblings in EUR land

As some debate raged in the corridors of the ECB about both Draghi’s successor and over when and how to end the QE for the EUR, the common currency remained strong, helping keep the USD weak. Draghi has been such a relative force for good at the ECB, boldly implementing QE and other measures to achieve the unachievable target of “less than but close to” 2% inflation that he will be missed if he goes. Sure, he hasn’t campaigned at all for a more sensible flexible inflation target, at least not publicly. He has slightly reinterpreted it as a sustainable… Read More

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Week ending Friday 26th May 2017 The biggest action of the week was in equities again, with a 1% rise over the week. The USD stayed low boosting prospective overseas earnings. The USD stayed low despite the threat that the release of the FOMC minutes in midweek might give evidence of actual plans to reduce the Fed balance sheet. In the end, the minutes just talked about how it would be done, rather than when. It also seems now as if the worse Trump’s troubles are the weaker the USD and the better for equities. How things change. FOMC Minutes…...

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Manufacturing going to pot

The Core Durable Goods Orders data for April released today showed a second month of MoM fall. The data for durable goods is echoing that seen in the surveys of manufacturing for both April and May.  The outlier appears to be the Industrial and Manufacturing Output figures for April, which showed surprising monthly strength. The picture is even more confusing given the fact that surveys of service sector confidence from the regional Feds and the PMIs seem to have picked up for May – see both the Richmond and KC Fed surveys this week. All the evidence points to subdued…...

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Yes, interest rates should be banned from monetary policy discussions

At the Mercatus Center, Thomas Raffinot has an important working paper: According to the conventional view, low interest rates are associated with “loose” monetary policy, leading to higher inflation, whereas high interest rates are associated with “tight” monetary policy, leading to lower inflation. Interest rates, however, are unreliable indicators of monetary policy: low interest rates could be the outcome of tight monetary policy just as high interest rates could be the outcome of loose monetary policy. In “Interest-Rates-Free Monetary Policy Rule,” economist Thomas Raffinot reassesses the stance of monetary policy based on a forward generalization of the Taylor rule without… Read More

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Minutes from FOMC Meetings are a fantasy!

From Participants’ Views on Current Conditions and the Economic Outlook: Although the incoming data showed that aggregate spending in the first quarter had been weaker than participants had expected, they viewed the slowing as likely to be transitory. They continued to expect that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term. In short, their plans for additional rate increases are unchanged. What they really want is to clamp down the economy. Let´s see what´s…...

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Japan has put together a string of five straight quarters of real growth, along with declining unemployment and minute amounts of inflation. Some have recently termed Abenomics “a big success.” If so, then worth noting is that Abenomics’ “three-legged stool” of fiscal reform, less regulation and expansive monetary policy has so far been carried out on one appendage: monetary policy. The foundation, buttresses and keystone of Abenomics has been quantitative easing.  Japan’s economic resuscitation can be laid at the feet of the Bank of Japan (BoJ), their central bank. The BoJ For the record, the BoJ has an open-ended program… Read More

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NGDP Outlook-May 21, 2017

The NGDP outlook has rebounded a bit from a low point for the current Quarter-2 of 2018 forecast that was seen in early May. Notably, the rebound preceded the recent volatility in US Equities. Recapping the recent moves in US equities: the S&P 500 tanked on May 17, falling about 1.7 percentage points. The drop seemed linked to perceptions of an impending “coup” against the Trump administration, raising expectations that the tax cut already priced into shares would be less likely to happen. However, once again it appears to be a case of media-made smoke, and shares rebounded on the…...

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In trying to “square the circle”, the Fed is courting disaster!

Tim Duy summarizes the problem as the Fed sees it: The Federal Reserve can’t catch a break on the inflation numbers, which are simply not helping in its drive to normalize monetary policy. Monetary policy makers have three possible responses to the weak inflation data. First, they can define down the extent of an acceptable miss on their target. Second, they can dismiss the numbers as transitory and focus instead on full employment. Third, they can rethink their estimates of full employment and the subsequent implications for the path of interest rates. Early indications are that the Fed will pursue…...

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