December 2017

To link inflation and unemployment, you don´t need the Phillips Curve

Recently Joe Gagnon of the PIIE (Peterson Institute for International Economics) has used both the US and Japan to argue that there is no inflation puzzle. In other words, the Phillips Curve is alive and well. In the US piece, Gagnon writes: Some economists are puzzled over why US inflation has remained low while the economy has reached, or even exceeded, potential employment. Commentators have argued that central banks are wrong to place too much faith in the Phillips curve model, in which inflation responds to deviations from potential employment…, Yet inflation is behaving exactly as the Phillips curve would…...

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Bitcoin seems on an unstoppable tear. Rising from about USD 700 in January 2017, to about USD 11,000 in early December and now to about USD 15,000 as of mid-December, the cryptocurrency has ‘crushed its enemies, and seen them driven before it’. Many commentators claim Bitcoin is a bubble, after all, so the thinking goes, what do markets do but arbitrarily rise, and then randomly crash, causing havoc? Of course, Market Monetarists see things differently. We respect markets, fear them too, and completely reject the concept of a “bubble”. If the participants in the market decide Bitcoin is worth USD… Read More

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US Unit Labor Costs Q3 2017 Below Q4 2015 Level

While the US Federal Reserve manifests ever-rising hysteria regarding “tight labor” markets in the US, and Martin Feldstein warns of inflationary holocausts, unit labor costs have been….falling in the US. The Bureau of Labor Statistics reported Dec. 6 that Q3 unit labor costs fell 0.7% YOY. To smoothen short-term noise, the 4-quarter moving average of ULC year-on-year growth has moved into negative territory, a pattern consistent with post-recession periods, when productivity rises and labor compensation growth lags. Tellingly, unit labor costs are now below levels of Q4 2015. The untold story is not of rising wages but rather of US…...

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Week ending Friday December 8th 2017 Little market excitement this week as the S&P500 consolidated the strong 3% upward move to record levels that occurred over the prior two weeks. An impressive performance given the USD was steadily strengthening. At one point, a fall in the 10yr yield squeezed the 10yr-2yr spread to a 10-year low of 50bps, before ending the week where it started. New FOMC Projections out on Thursday with 25bps rate rise There is little interest in next week’s FOMC meeting where a 25bps rise is certain. The statement could provide some interest of course, but most…...

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The Employment Report: The Fed never “loses”

In his note the day before the employment report, Fed Watcher Tim Duy concluded: Bottom Line: The Fed would have an easier time paying attention to the weak inflation numbers if the economy was not operating near their estimates of full employment and clearly growing at a pace that will soon surpass those estimates. Consequently, a report near consensus expectations will tend to strengthen their resolve regarding further rate hikes. A report that falls short of consensus, however, would likely be deemed as noise given the generally solid path of economic activity this year. We now know that at least…...

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Stronger imports, a good sign for Q4 NGDP

You may have seen headlines on Tuesday, about how US imports for October jumped to “record highs”. For the month of October, nominal US imports increased to $45.2 billion, seasonally adjusted, up 5.8% year-over-year. The financial press are keen to write about trade reports, but almost without exception miss the implications of a widening or narrowing US trade deficit. The financial press, even prestigious outlets with expensive subscription fees, will claim that greater imports mean lower GDP. Witness, the Wall Street Journal on December 5th: “The U.S. trade deficit widened in October largely because of a slowdown in exports and… Read More

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The bane of the Zero Lower Bound

For more than 20 years, at a time when inflation had been low and stable for more than a decade, central banks began to discuss “Monetary Policy in a Low Inflation Environment”. Several conferences and papers on the issue followed. This one, from 2000, has a readable discussion and plenty of references. The abstract reads: One of the most striking macroeconomic phenomena in recent decades has been the achievement of rather low and more stable rates of inflation in many countries in the nineties. Consequently, the main goal of this paper is to offer an overview of the main policy…...

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Week ending Friday December 1st 2017 Dominating U.S. markets this week was the improved prospects for Trump-sponsored tax cuts. Equities loved the idea of corporate tax cuts even if the benefits ultimately are passed on to the consumer – especially for those corporates that pay corporate taxes. Mostly this is U.S. domestic-focused banks and small/mid-sized companies. Big tech, oil and pharma have many and clever ways to avoid corporate tax thanks to large overseas operations. One thing at a time That said, the tax package is not yet passed in Congress. Until the package is passed and is read by…...

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Faster NGDP Growth, what does it mean?

NGDP growth has accelerated in recent quarters. When we average NGDP and NGDI (Nominal Gross Domestic Income), we get, at a yearly pace, 5% for Q3, 3.7% for Q2 and 4% for Q1. Not jaw-dropping numbers, but the best run we’ve seen since 2014. It’s also worth looking at the figures in quarterly form, rather than just year-over-year, as inconvenient as it may be. It turns outs that the best way to predict NGDP growth, is to simply look at recent quarterly growth. In developing our forecast models, we found that sub-models that rely on only a single quarter of… Read More

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