The Week Ending Friday April 6th 2018
Jerome Powell does not impress us so far. His autopilot rate rise in March seemed unnecessary, lacking any real rationale apart from the intellectually bankrupt “normalization” theme.
His speech on Friday moved markets little at first, but selling momentum in equities increased as trade war worries built a lethal cocktail of monetary tightening combined with falling growth expectations. Other market indicators were relatively quiet. Our new NGDP Forecast for 2019Q2 has not started well, having fallen back on the recent market wobbles.
Is Powell on opioids?
We gasped when he attributed the low Labor Force Participation Rate to the opioid crisis. What an old-fashioned conservative he appears to be. Did he not notice the collapse in the LFPR in 2008/9? Did the opioid crisis suddenly get worse during the recession? Of course not. It is pure adhockery.
Growth has apparently picked up enough to make him and the Fed fear growth getting out of control, leading to more rapid tightening that might cause a recession or worse.
It is very hard to see any growth pick-up, or PCE inflation that the Fed has until now said it was targeting. Perhaps Powell knows something we do not. Alternatively, is he going to change the target? Real growth may have picked up a touch recently to 2.5% but is hardly strong, and certainly not providing much if any real growth per capita, while nominal growth has not quite reached 4.5%. Meanwhile, Core PCE inflation remains very quiet.
Former doves going hawkish and Dudley retiring
With former doves, Brainard and now Evans going hawkish, there could be troubling times ahead. Once again, the Fed will need the calming, market-alertness, provided by the head of the NY Fed to steer them away from any potential collapse in nominal growth expectations. Sadly, here too, there is uncertainty as Bill Dudley retires from the role replaced by the (wrong) rule-bound John Williams.
Data shows better trends in total weekly pay
Economic news was provided by Thursday’s March payroll data. It was ordinary, especially on weak job creation, and so the market took it as dovish signal on monetary tightening. The Average Hourly Earnings figure was also a little weak and so markets saw no inflation.
While it was dull, we noticed that Average Weekly Hours did better, and YoY Average Weekly Earnings actually accelerated to 3.3% YoY for the All Employees version.
The longer running Production and Nonsupervisory Employees AWE data was down on the previous month but does seem to be trending higher. The difference between the two data sets is that professional and managerial employees are included in the broader measure, and they are doing very well. This is less good news for the equality measures but at least things are getting a bit better for all. Not quite what Trump has promised, though – and far too hot for the FOMC, apparently.
Next week sees what should be the less important CPI data, but maybe Powell watches it more closely. We can’t be sure. The Minutes of the FOMC meeting from March might shed some more light on precisely what is scaring the members.