June 2018

We delude ourselves

From the WSJ: A U.S. economic expansion that just became the second longest in the nation’s history seems to be accelerating, rather than slowing down. Atlanta Fed Bostic: Let’s begin with how the U.S. economy is performing at midyear. It appears to be in a pretty good place. Unemployment is at its lowest rate since the early 2000s, and inflation is running close to 2 percent. As I’ve said recently, the economy is about as close to target as we’ve seen over this expansion. That does not mean that the FOMC can go on recess until conditions change. I think… Read More

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Week Ending Friday June 22, 2018 A super quiet week in equities and bonds, with just a modest rebound in the USD during the week and in oil prices at the back end. This is somewhat surprising given all the trade tensions, but US markets seem to be taking the threat or even the actuality of tariffs in their stride. Emerging markets and heavily trade-dependent European ones like Germany are much more affected, as you would expect. The positive trends, if not levels, in the US are still driving matters, offsetting trade tensions and political news. It is hard to… Read More

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The Negative Yield Curve Haunts Global Economies

Market Monetarist and Mercatus Center scholar David Beckworth recently blogged that the “negative yield curve”—when short-term rates rise above long-term—is here already in some economies, and heading to the US. For the uninitiated, a negative yield curve has been a reliable precursor to recessions. Beckworth charts 2-year Treasuries vs.10-year: Ouch. David Glasner, proprietor of the always-thoughtful Easy Money blog, also treated the inverted yield curve, and his concluding money quote is this: Nominal GDP has been increasing at a very lackluster annual rate of about 4-4.5% for the past two years. Certainly, further increases in the Fed Funds target would… Read More

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The viewpoints of the world’s macroeconomists are becoming anachronisms, not updated for a global economy and housing costs. For starters, there are some storm signals out there in monetary-land; notably Far East investors are fearful of capital flight. “U.S. rate hikes have sorted emerging markets into winners and losers as investors pull capital from particularly unstable countries, though steep dollar debts may soon drag even Southeast Asia—fairly healthy so far—into the losers’ circle,” reported the Nikkei Asian Review. “The gap between key South Korean and US interest rates will widen further if the US Federal Reserve raises its key rate… Read More

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Week Ending Friday June 15, 2018 Equities flat over the week, a touch weaker after the FOMC meeting but nothing dramatic. Trade war worries were around, especially during Friday but ended up having little impact. The USD was stronger during the week, especially on Thursday, a fascinating day. The USD rose 1.5% initially due to much more dovish than expected ECB meeting that while confirming the end of QE also made it clear it would still be trying to keep policy bias towards easing. Rates were promised not to rise until at least late 2019 despite fears of an imminent… Read More

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Powell was different, but humdrum

Coming into his second post FOMC presser, Powell was more relaxed(?). The Bloomberg headline by Jeanna Smialeck seems an apt description: Powell Styles Himself a Fed Chairman for the People: Alan Greenspan famously said he had mastered the art of mumbling “with great incoherence” as Federal Reserve chair. Jerome Powell is attempting the opposite approach. “Because monetary policy affects everyone, I want to start with a plain English summary of how the economy is doing, what my colleagues and I at the Federal Reserve are trying to do and why.” He continued: As Chairman, I hope to foster a public… Read More

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CPI Report: No surprises

It came exactly as expected, with core CPI clocking 2.2%, so no significant asset price moves. The chart below compares core CPI and core PCE. These inflation gauges have been well behaved over the past several years. Note there is a 40 basis point gap between the CPI and PCE, implying that the May 2018 core PCE will remain below the 2% target. In fact, two or three years ago, inflation, by any gauge, was more ‘calamitous’ than now. Why, then, is the Fed so concerned about ‘overheating’? Maybe because it feels below 4% unemployment is harmful!  

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The Fed´s ‘model’ is screwed up

In Powell’s Fed Could Clear Up a Few Mysteries Puzzling Investors, we read: The Fed says unemployment is already running below the level that can be sustained in the longer run, but wages are crawling higher rather than taking off. What’s more, job growth hasn’t slowed down as much as you might expect in an economy with a big worker shortage. Fortunately, inflation is not a wage phenomenon. On the contrary, it is inflation that drives up wages. The late 1960s makes that clear. Note that wage growth only picks up after inflation has almost tripled! Comparing the late 1990s… Read More

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When ‘good’ is ‘terrible’

The headline: The Fed’s Biggest Dilemma: Is the Booming Job Market a Problem? Snipets: No question looms larger for Federal Reserve Chairman Jerome Powell than this: How low can the U.S. unemployment rate safely go? Only twice in the past half-century has unemployment fallen to its current rate of 3.8%—for a few years in the late 1960s and for one month in 2000. The ’60s episode spurred years of soaring inflation that would take a decade for policy makers to corral. The latter coincided with a technology bubble that, when it burst, caused the 2001 recession. It seems low unemployment… Read More

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Modest optimism returns but growth may not

Week Ending Friday June 8, 2018 Markets recovered some of their poise last weeks. Bond yields fluctuated but ended the week not much different from where they started and equities rallied reaching levels last seen in April. The back-on-again talks with North Korea beat the G7 discord, while expectations for the trade war merely fluctuated. Growth seems to be disappearing in US a bit, elsewhere a lot While NGDP growth in the US has appeared to accelerate into 2018Q1 with a high of 4.7% YoY, the best since 2015Q1, it isn’t quite that good. There were two very strong quarters… Read More

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