Will the Fed ‘Scrooge’ things?

Week ending Friday December 22nd 2017

This week we had some additional light shed on the current big question for market watchers: “what will Q4 NGDP growth be?” This is a weighty question because the foremost statistical driver of future NGDP growth is recent NGDP growth, one, two, three quarters back. The cumulative, quarter-on-quarter growth (think of a 4-quarter moving average of quarterly growth) has tended to foretell growth in coming quarters, so getting a strong Q4 after strong Q3 and acceptable Q2 would bode well for 2018, while a weak read would dash our hopes of an enduring “Trump bounce”. Markets inform the NGDP outlook, but they do so only after reported NGDP figures give the basic take, at least this is how it looks statistically.

This week saw the release of Existing Home Sales, a GDP revision, Personal Income and a durable goods report.  The core signal from these reports is that growth in the fourth quarter, at least in October and November, was substantially stronger than growth in 2015 or 2016. The new Personal Income number is up 3.8% year-over year, the best read since November 2015, though still not impressive compared with numbers from the good ol’ days before Bernanke. We now have Industrial Production, Personal Income and Retail Sales for the first two months of the quarter; these reports cover the economy from both an industry and a household perspective and point to a likely strong quarter. This conclusion is consistent with the latest reading from the Atlanta Fed and New York Fed real GDP “nowcasts” which stand at 2.8% for Atlanta and 3.9% for New York. It’s worth noting that until recently, Atlanta had been over 3% as well.

In the beginning of 2017, we saw lots of “soft” data (sentiment surveys, expectations for orders) indicating growth might pick up, but “hard” data—measures of actual activity—were unremarkable. Now at 2017’s close, we are at last getting a few months of solid reads from “hard” sources. With a Christmas miracle or two, the trend will continue into 2018, enabled by low inflation. However, there is always the Fed to come in and ‘Scrooge’ things.

                                               The Fed deserves a ghostly Christmas visitation


Crypto currency rundown

Bitcoin and its schismatic offshoot Bitcoin Cash began a precipitous crash mid-week, falling from over $19k to around $11k for Bitcoin, before pulling back up to $15k. Bitcoin Cash swung from about $3.9k down to $2k and now is back around $3.6k. What does this all mean? We can’t say with confidence. The Efficient Markets Hypothesis suggests that crypto currencies are potentially extremely valuable, but as of yet there is no particular reason to think they are affecting the macro economy or reflecting information about its status. Indeed, it’s not even clear how crypto currencies will function in the future economy, but they sure are fascinating.

NGDP Outlook update

The NGDP outlook mirrors the general direction in economic data, moving on up. Our NGDP year-ahead forecast rose from about 4.1% on Monday, December 18, to about 4.2% as of Thursday, December 21. The rise was led by higher copper, oil and TIPS spreads, as well as higher 5-year yields, which gave the yield curve a steeper slope.

Frankly, this 4.2% nominal growth figure, produced by our statistical models, is likely too low for a “best” midpoint of the NGDP growth probability distribution. The recursive forecast process doesn’t anticipate how strong Q4 appears to be, and is thus probably too timid in subsequent quarters. We simply must accept that late 2017 is—and has been—a period of heightened uncertainty.

Will the Q4 GDP report lift the forecast higher? Or was the “Trump bounce” a transient phenomenon? If you know the answer to this question, you could make a nice return in the markets.


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