Consolidation

Week ending Friday October 13th 2017

Market indicators took a breather last week after a few weeks of sustained optimism had modestly lit up growth expectations and our NGDP Forecast. The Fed questioning its understanding of the economy, especially the drivers of inflation, is perversely positive for the inflation outlook. If markets do not believe that the Fed has a weakened belief in the Phillips Curve, then it is more likely that Phillips Curve-like outcomes will occur.

Markets

The very strong equity-reporting season was anticipate, so actual equity earnings reports are a bit on the disappointing side of things. Therefore, equities flat lined, but at the record levels recently achieved.

Bond yields fell back on Friday as the CPI inflation data showed yet another month of zero price pressures. No surprise to us given the Fed tightening bias but puzzling for the Fed and much of the market. Retail sales figures were confused, headline looked stronger than expected but underlying looked as weak as expected.

Sentiment

Some very diverging trends in the non-hard data from the week. The small business NFIB showed an unexpected, non-weather-related drop in confidence during September – more in line with what we would expect to occur. Consumers, on the other hand showed a remarkable rally in sentiment judging by the UMich surveys of current conditions and future expectations, admittedly for October.

Fed puzzlement is an action too

The battle remains between a puzzled Fed sending out signals that it is going to be less aggressive in monetary tightening because of its puzzlement at weak inflation and wage growth trends while still actively raising rates and beginning to cuts its balance sheet. Expectations normally trump actions, but are the changes in Fed expectations firm enough to achieve this goal? Market expectations of the Fed’s future actions always constitute an action but they are sometimes hard to divine in the absence of an NGDP Futures market.

ECB to spoil the party just as the music starts

The second biggest monetary bloc in the world, the EUR, also looks set to begin actively tightening its policy. A response to an apparently strong turn up in nominal growth in the EUR bloc since the start of the year.

The lack of economic integration in the bloc means some smaller, poor countries have been seeing some very rapid nominal and real growth even if the overall acceleration in growth rates has been both short-term and modest. The nominal growth rates (see first table below) in some central and east European economies are quite remarkable, while Irish nominal growth remains as whacky as ever. The real growth rates have also become much healthier (see second table below) – not unrelated!

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