May 2018

Near term inflation expectations rising, Fed to clamp down even at cost of real growth

The Week Ending Friday May 18th 2018 What to make of the 10-year bond yields pushing over 3%. On the one hand, 300 bps is just an arbitrary number. Our NGDP Forecast is showing no sign of any dramatic shift in the rate of nominal growth. There has been a trend for us to show nominal growth around 4% instead of 3.5% for some time. Our NGDP Forecast takes in both recent trends in actual NGDP growth and a range of market indicators, not just 10-year bond yields. 30-year bond yields have not moved much. Oil prices have shifted up… Read More

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The US Federal Reserve wants a higher rate of unemployment, at least from reading missives from the San Francisco branch.  And slower economic growth. In its May 10 “Fed Views”, the San Francisco branch posits that 4.7% is the lowest “sustainable” unemployment rate, and 1.8% the maximum “sustainable” real GDP growth rate. “We estimate 2.8% GDP growth in 2018, a full percentage point above our estimate of the long-run sustainable growth rate,” reports the SF Fed. They add, “We expect unemployment to decline further this year and through 2019, and remain below our estimate of the long-run rate of 4.7%… Read More

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Things are so bad that the scales don´t register when it gets worse!

This morning, we witnessed the release of industrial production. A typical headline: U.S. industries pumped out more goods in April to meet growing demand from consumers and businesses, another sign the economy is gaining momentum. The so-called “momentum”, however, is just the “recovery” from a slump. The chart illustrates, comparing industrial production in 2014 – 2018 to what transpired around the recessions of 1990/91 and 2001. Note that this time around, the fall in industrial production was bigger and more protracted; nevertheless, there was no recession call. Why is that? One conjecture is that things were already so bad that… Read More

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Retail Sales: Not much solace

After the uplift in sales due to the August/September 2017 storms, things have calmed down, despite fiscal stimulus (tax cuts), something clearly indicated by sales ex auto & gas, a measure of core sales. A comparison with another late cycle period (late 1990s) is illustrative. At the 8:30 AM mark, the 10-year yield jumped. Was the retail sales signal that powerful? Will it last? Not likely.

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Under Governor Haruhiko Kuroda, the Bank of Japan has pursued a relatively strong quantitative easing program, and applied negative interest-rates on a large portion of bank deposits. The Japanese central bank buys 10-year Japanese government bonds (JGBs), when rates rise above 0%. The BoJ has also become the largest buyer of equities in Japan, though its purchases of ETFs. The central bank’s short-term policy rate is 0.1%, and the BoJ buys about $730 billion in bonds every year. The BoJ owns about 45% of the entire stock of JGBs. By the pedestrian and ossified standards of central-bankers, Kuroda is a… Read More

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The Week Ending Friday May 11th 2018 US equities stormed back up last week rising 3%, while the USD was volatile but ended up flat.  Bond yields and commodities were also flat. A reasonable result for nominal growth expectations after the previous week’s disappointment based on USD strength reflecting fears of, or itself being, excessive monetary tightening. The main economic news that partly drove the outcome this week was the weaker than expected Core CPI reading for April. Although hawks tried to claim it was due to some funny one-off movements markets ignored it altogether, thus allowing the great tech… Read More

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Now it´s used car prices and plane fares that “frustrate” the Fed

According to Bloomberg: U.S. consumer prices rose by less than forecast in April as costs for automobiles and airfares declined, reducing chances that inflation will run significantly above the Federal Reserve’s target in coming months. The “analytical” example comes from above; after all, didn´t the Fed just recently put the “blame” for low inflation on cellphone connections and drug prices? Until the Fed (and pundits) start analyzing inflation from a monetary (not interest rate), instead of from an unemployment or price perspective, not much will be accomplished. The idea that the stance of monetary policy is indicated by the level… Read More

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Echoes from the distant past show nothing has been learned

The discussion today: The unemployment rate dropped to its lowest level in nearly 18 years in April, feeding a debate that has long puzzled economists: How low can joblessness fall before a boon for the economy turns into a burden? Flash back more than twenty years. In 2001, Alan Blinder and Janet Yellen published “The fabulous decade – Macroeconomic lessons from the 1990s”. In chapter 6 “The Fed forbears and the Phillips Curve cooperates”, we read: The state of the U.S. economy looked superb at the start of 1996, and it just kept getting better over the ensuing years. The… Read More

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Australia, like the West Coast and some other regions of the US, or Canada and Great Britain, faces an explosion in house prices. The Reserve Bank of Australia recently issued a study concluding that in 2016 a whopping of A$488,944 of a typical A$1.16 million house price in Sydney was due to tight property zoning.  The RBA also says the zoning costs have been worsening. As bad as that is, I suspect the RBA actually understates matters, as they seem accept on face surging Sydney land values. But with an abundant supply of free-market housing, how valuable would Sydney land… Read More

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The Q1 unit labor cost figures, released last week, again are revealed as a drag on the US Federal Reserve putative 2% inflation target. The Q1 unit labor costs reading for the U.S is up 1.1% y/y and also up 0.8% from Q2…of 2016, reports the BLS via FRED. Yes, you read that right. Unit labor costs are close to flat-lining.  If the Fed wants to hit its 2% target, and if it wants wages to help it get there, it will have to find way to get wage growth up. Might one suggest stronger aggregate demand? “Labor Shortages” Back… Read More

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