August 2017

PCE Inflation Report: The Fed ‘tricked’ again

Instead of climbing towards 2%, as the Fed is constantly “forecasting”, core PCE inflation has ticked down to 1.4% YoY while headline PCE inflation stayed pat (mostly because oil prices ticked up YoY). Being a monetary phenomenon, inflation has to be ‘motivated’ by monetary policy. Unfortunately, that´s something few seem to understand. Certainly the Fed doesn´t. I´m reminded of a piece by Martin Feldstein from March 2014. He wrote: Janet Yellen, like Ben Bernanke before her, believes that the Federal Reserve should communicate the reasons for its current policies and the strategy of its future policy actions. And so we…...

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GDP Report: Upward revision, but the ‘state of play’ hasn´t changed

When you look at annualized data, the GDP revision was ‘robust’: to 3% from 2.6%. On a year-on-year basis, however, it was ‘paltry’: to 2.2% from 2.1%, in line with what has been observed for the past 7 years. These marginal changes are far away from making a meaningful difference in the ‘state of play’, which remains dismal and depressed. The two charts weave a story. Since taking over the Fed in January 2006, Bernanke, the “inflation worrier”, soon allowed NGDP to slip below the level trend path. RGDP growth was soon impacted by the steep rise in oil prices…...

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Central Banks hide their incompetence

Heard at Jackson Hole: The cyclical recovery was gathering both pace and geographical breadth, thanks in part to the stimulus efforts of central bankers, the European Central Bank president said, adding that even if inflation remained low, the euro area economy was “gaining ground”. Maurice Obstfeld, chief economist of the International Monetary Fund, said in an interview with the Financial Times shortly afterwards: “We have multiple engines of growth propelling the world economy, and that is something that makes the momentum much more sustainable. It is a synchronized recovery, broader by far than anything we have seen for a decade.”… Read More

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Maybe it is all just a blip and it will settle back down to normal. Certainly, the markets are not betting on a surge in nominal growth when you look at FX, bond and equity markets. In fact, the surging EUR indicates money is tightening. Draghi tried to talk down the currency a few weeks ago and turned up at Jackson Hole determined to say nothing, like Yellen. Yet Yellen’s “nothing” was enough to send the USD down and the EUR up. Draghi’s “nothing” sent the EUR up further and the USD down further. Draghi’s “nothing” actually included a comment… Read More

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Yellen’s future at the Fed

The media conclusion, following remarks Fed chair Janet Yellen gave at the yearly Jackson Hole financial elite meet up, was that she does not expect re-nomination. Yellen’s speech defended banking regulations put in place following the Great Recession, gainsaying the current administration which seeks to relax the costly stress testing and capital evaluation large US banks must undertake. The chart below (from politics betting site PredictIt.com) shows how Yellen’s prospects for re-nomination have fallen. Yellen’s speech on Friday pushed her contract down from 31% to 23%. It’s a dubious business for mere mortals to try and interpolate the dynamics behind…...

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Week ending Friday August 25th 2017 After all we have said about the ECB over the last few weeks, it turns out that surprisingly strong nominal growth data may be putting pressure on the ECB to tighten and markets may really be thinking that it will, thus driving the EUR up and the USD down. 2017Q2 data surprises from Europe When Germany finally released its own GDP data for 2017Q2 it showed both an upward revision to NGDP and RGDP of around 0.7% and a remarkably strong Q2 annualised rate for NGDP of 5.7% that pushed up the YoY rate…...

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Durable Goods Orders: “Aircraft Blackout” (i.e. “Negative Noise”)

Durable Goods Orders: “Aircraft Blackout” (i.e. “Negative Noise”) What makes Durable Goods Orders a “high profile” indicator is that it can foreshadow significant changes in economic activity sooner than other statistics. That´s because it is about production that will take place in the months ahead. It is important to keep in mind, however, durable goods orders are highly volatile month-to-month due, in large measure, to sudden large changes in orders for defense goods and aircraft. In order to get a better reading of demand in the business sector we must strip those volatile components out. Doing so, we get a better…...

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Under the Hood – NGDP Sub model forecasts

Our NGDP forecast, more precisely, our estimate of the markets NGDP forecast, is not the result of a single model. As is more and more common, we keep a ‘stable’ of top models, and average the forecasts from them. The idea is that, once we narrow the basket down to only models that performed well in the past, it becomes hard to say which model is best, so we consider them all. Our current forecast of about 4% nominal growth over the next year results from averaging forecasts across five models. The basic picture—ignoring the details—is that Model 3 and…...

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Only half minded

In Draghi Urges Open-Minded Central Banking as Economy Changes we read: Mario Draghi said central banks must be open-minded on policy innovations as they prepare for future economic developments — even if that concept is not clear to everyone. In a speech that avoided any specific signals on the European Central Bank’s current deliberations, the institution’s president said officials must be “unencumbered by the defense of previously held paradigms that have lost any explanatory power.” He spoke to an audience of 17 Nobel laureates and 350 young economists in Germany, a nation which has been one of the stiffest critics of… Read More

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August 22 NGDP Update: Forecast lifts higher

August 22 NGDP Update: Forecast lifts higher The NGDP forecast has hiked from under 3.8%, up to 3.9% in dramatic fashion through late July. Well maybe not so dramatic, and the change is not so big, it is at least a consistent movement. What’s more, the forecast has mostly held at this level for the past week. The tenth-of-a-point run up has been driven by US dollar weakness and the potentially linked increase in the copper and oil price forecast inputs. The increase in copper and oil is however more than that explainable by a first order forex response. Copper…...

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