Week ending Friday September 8 2017
A mostly slow week, dominated by impressive hurricane news updates, still there were some happenings on the macro-monetary front. Fischer out at the Fed, Trump and the Dems play nice, and a tug of war between yields and the USD in our forecast model.
NGDP forecast marches higher
There’s been a war between the yield curve and the currency markets in our market-driven NGDP forecast. So far, the currency markets are winning out, and the weak dollar, along with sporadic help from other market signals and revised NGDP for Q2, have moved the forecast to 4.1% as of September 8. This is really quite a high level, about as strong as the nominal growth outlook has been in years. The flipside to a market-driven forecast is that, if one thinks it is too strong, but that the methodology is sound, one would also say that markets are overvalued. We’re hesitant to question markets though, and while 4.1% is a great number for the Long Depression era, it’s well within experience. it just looks impressive when you’ve been stuck at 3.6% for years.
Yield Curve games
Longer-dated treasuries, the 5-year and 10-year, moved lower. Friday-to-Friday, the 5-year yield lost 1.73% to 1.63%. The 10-year fell from 2.25% to 2.16%. At this point the 5-year yield—which is a good proxy for market expectations of short rates in 5-years— has given back much of its “Trump bounce” gains. For perspective, note that the 5-year rose from 1.24% on November 4, 2016, to 2.60% on December 15, amid heightened expectations a ‘supply side reforms’. We are back to the bad old days of 1.6% 5-year yields.
The Future of the FOMC
The big news this week was that Stanley Fischer, the number two at the Fed behind only Chair Janet Yellen, will be stepping down early. The Rhodesian-born Fischer is an able economist and performed well as monetary steward in Israel during the crisis, but has been counter-productively hawkish at the Fed. Fischer’s departure is interesting as it makes the Fed a bit less hawkish. Further, politics-betting site PredictIt.com saw Yellen’s renomination probability rise from 20% on September 5, to 28% on September 9. It seems Fischer’s departure helped Yellen; she and Warsh now account for about 60% of the probability, leaving the door open to nearly anyone.
Debt Ceiling charade pushed off
Trump surprised everyone and worked out a deal with Democratic opposition leadership to link hurricane relief to a debt ceiling extension. This was minor legislation, but it shows Trump and the Dems have the ability to operate a legislative body, at least on terms favorable to the Democrats, more than can be said of the GOP establishment. This is such an unexpected development, that it’s hard to know what to make of it. Markets didn’t seem to take note in an obvious way either. Stocks kept moving sideways and the dollar kept weakening. A drop off in risk premium might explain the decline in yields this week, and why comovement wasn’t seen in other markets.