2018

Bank of England barking mad

The BBC reported earlier this month about the results of the Monetary Policy Committee (MPC): The Bank of England has indicated that the pace of interest rate increases could accelerate if the economy remains on its current track. Bank policymakers voted unanimously to keep interest rates on hold at 0.5% at their latest meeting. However, they said rates would need to rise “earlier” and by a “somewhat greater extent” than they thought at their last review in November. Economists think the next rate rise could come as soon as May. The value of the pound jumped by about 1% against both the… Read More

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The “Taper Tantrum” revisited

In the recent Booth School of Business conference in New York, a handful of authors, from academia and the markets, conclude: “Our procedure attributes most of the bond market selloff during the 2013 ‘taper tantrum’ to better economic news rather than to changing expectations for the end of balance sheet expansion,” the authors wrote. Independently, David Andolfatto in a blog post reaches a similar conclusion: Consumption growth turned positive in 2013.4, and continued to climb well into 2015. So while the tantrum may have contributed to the spike up in yields, the reason they stayed higher is because of an… Read More

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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… Read More

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January FOMC Meeting – Extended discussion of inflation forecasting

Following the staff presentations, participants discussed how the inflation frameworks reviewed in the briefings informed their views on inflation and monetary policy. Almost all participants who commented agreed that a Phillips curve-type of inflation framework remained useful as one of their tools for understanding inflation dynamics and informing their decisions on monetary policy. Unfortunately, they overlook the fact that Phillips Curves do not depict a structural relation. The Phillips Curve is not invariant to monetary policy behavior. In short, it is the Fed that creates the correlations between inflation & unemployment. The Lesson: Phillips Curve analysis is not a reliable… Read More

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The Week Ending Friday February 16th 2018 Bill Dudley called well the February wobble the week before last – small potatoes. The stock market recovery was underpinned by more “even better than expected” company results. The initial run of “even better than expected” company results had let to a severe overshoot in the S&P500 – until a supposedly good January wage growth figure spooked markets into thinking the Fed may tighten even faster. In addition, the quite generous fiscal spending deal and prospects for an even more generous longer-term spending plan, allied to the already agreed tax cuts, are worrying… Read More

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The Reagan Deficits, Growth, Long-term Yields, Inflation & the Exchange Rate. Implications for today?

The tax cut signed in December and the two-year budget deal passed on February 9, which served to focus attention on trillion dollar deficits, have affected markets. According to one analyst, reflecting the conventional wisdom: What if you ask the man on the street? Say you were one of those local news programs and left your air-conditioned office and went out on the street and interviewed people randomly, and asked them: “Why is it bad when we run big deficits?” I assure you that not one person would be able to answer your question. The answer, of course, is: it… Read More

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“Just one of those things”

John Fernald, Robert Hall, James Stock and Mark Watson (JF, RH, JS, MW) write “The Disappointing Recovery in U.S. Output after 2009”. The summary: U.S. output has expanded only slowly since the recession trough in 2009, counter to normal expectations of a rapid cyclical recovery. Removing cyclical effects reveals that the deep recession was superimposed on a sharply slowing trend in underlying growth. The slowing trend reflects two factors: slow growth of innovation and declining labor force participation. Both of these powerful adverse forces were in place before the recession and, thus, were not the result of the financial crisis… Read More

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My “funny inflation”

Resulting in “funny” headlines (with time stamps): Barron’s 9:26 AM: “Dow Drops as Too Much Inflation Rocks Stocks.” CNN Money 10:56 AM: “Stocks Shrug Off Inflation Data” The core CPI was 0.3% month-on-month, higher than expected (0.2%) and the highest in two years. Since it wasn’t as low as analysts were anticipating, that “confirms” the “boom hysteria”. David Beckworth put it succinctly: My prediction: Fed will be emboldened to raise rates & talk up more rate hikes. This tightening will cause inflation to drift back below 2%. And Fed officials will wonder once again why inflation remains low.

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Retail Sales: What a “boom” doesn´t look like

Retail Sales in January 2018 rose by a little over 3.5% year-over-year. That followed sharp downward revisions to December. The truth is that almost all the gain was registered during September to November – the hurricane boost. Month-over-month, retail sales declined in January after being revised to flat in December. It´s almost as if US consumers have taken two months off from spending. Obviously not. Rather, retail sales (just as several other statistics) captured the burst of activity triggered by the cleanup and recovery from the severe storms along the Gulf Coast in later summer 2017. In the seven months… Read More

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