New boss, new thinking

The Week Ending Friday February 23rd 2018

A very quiet week in most markets as the futures driven US holiday weakness was replaced by much better markets later in the week – reflected by our NGDP Forecast. While equities and bonds were flat it was against the background of a USD recovering strongly up 2% on the week and at the same time 5yr Breakeven Inflation consolidating the prior week surge finishing back above 2% for the first time in four years.

Signs of change in Fed thinking?

The Minutes of the January FOMC meeting appeared early in the week and seemed to provide some evidence of more realism on the pros and cons of Inflation forecasting than has been seen for a long time. You could see it was Yellen still in charge as everyone had to pay homage to the false Phillips Curve, but as the discussion progressed more than a few expressed doubts.

Then on Friday, the Federal Reserve provided some, for once, thoughtful written testimony ahead of the Chair appearing before Congress for the semi-annual pow-wow. As well as rehashing the usual stuff about full employment and coming wage pressure, the report was honest enough to suggest some serious doubts about exactly how tight labor markets really are and explaining how little wage pressure there is in the economy.

Laughably, they also tried to claim that the lack of recovery in the labor force participation in recent years was somehow part of a declining longer-term trend, thus ignoring the calamitous drop during the 2008/9 crash as Bloomberg reported it without irony:

The report noted that the labor force participation rate, a measure of what percent of the working age population either has a job or is looking for one, has been mostly unchanged over the past four years, “representing an important cyclical improvement relative to its declining trend.”

Still progress is in small steps. And with Yellen’s departure, even more progress might be possible once the old shibboleths can be discarded.

Little news but good news

February surveys were good. A very strong Markit PMI, especially the Services component, was complemented by a strong KC Fed Manufacturing and Composite indexes. The snowy weather in January may have led to some weakness in activity as also indicated by the weak Existing Home Sales data. There was no other economic news.

A lot more news coming

Next week is much more exciting with more February surveys plus data for January data (including  the PCE Price index) and for February with the payrolls on Friday. There is also the sight of Jerome Powell personally testifying in Congress as Chairman – on Tuesday in the House.

We also get the second estimate of 2017Q4 GDP, which includes the NGDP based on income, NGDI, (as opposed to the expenditure method of the more well-known series). We prefer the NGDI for longer-term trends in NGDP, and they have a marked influence in our NGDP Forecast.


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