Marcus Nunes

Warning signs – Durable Goods Orders

While most economic indicators are backward looking, durable goods orders is one that provides clues about what might transpire going forward. That´s because it is about production that will take place in the months ahead. In general, it has conformed to the recent cycle that began in mid-2014. The up leg of this cycle, beginning in mid-2016, has been dubbed “synchronized global growth”. While Harvey & Irma may have helped push DGO (ex-aircraft to minimize volatility), beyond where it would “naturally” go, growth is weakening. The same pattern is visible in new orders for Nondefense capital goods ex aircraft, agood… Read More

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The Week Ending Friday April 20th 2018 A few interesting trends in the markets as 10 year bond yields climbed to three year highs. Are they being driven up by rising short term yields powered by rising Fed target rates or in expectation of higher nominal growth? The yield curve is flattening which would indicate a possible slowdown, except that the curve is flattening at higher levels, a good sign. Five-year breakeven (i.e. expected) inflation rates also continued to move above 2%. This move above 2% may not mean a lot as expectations stayed above 2% for many years despite… Read More

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The shape of a “late-cycle cyclical recovery”

That has been misdesignated “synchronized global recovery”. What we observe, however, is simply an “offset” to the previous slowdown. The pattern shows up in the IMF´s world growth data. It is also present in higher frequency global economic activity data – world industrial production & world trade. In both cases, the “recovery” seems to have run its course and danger, in the form of “trade wars” lurks ahead! In the U.S., the pattern also shows up. I´ll posit that the process is driven by nominal spending (NGDP) growth, in other words, by monetary policy. And is reflected in economic activity… Read More

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Doing quite well?

From MarketWatch: The U.S. economy is doing quite well right now, but it could falter over the next couple of years as the stimulus fades away, said Paul Ashworth, chief U.S. economist for Capital Economics, and the winner of the Forecaster of the Month award for March. Retail sales data were released today. “The story is not fine”. The panel shows that the August-September 2017 storms gave a boost to sales, mostly for replacement purposes.  That boost has petered out, despite fiscal stimulus. When you look at discretionary spending – on such things as Appliances & Electronics and Furniture –… Read More

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Looking at inflation as a “price phenomenon”

That´s what many analysts do, going into the details of price moves from pickles to trucks. The Fed many times falls into the same trap, but correctly restrains its “hiking impetus”: “All participants expected inflation on a 12-month basis to move up in coming months. This expectation partly reflected the arithmetic effect of the soft readings on inflation in early 2017 dropping out of the calculation; it was noted that the increase in the inflation rate arising from this source was widely expected and, by itself, would not justify a change in the projected path for the federal funds rate.”… Read More

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The Minutes quote that says it all

“Some participants suggested that, at some point, it might become necessary to revise statement language to acknowledge that, in pursuit of the Committee’s statutory mandate and consistent with the median of participants’ policy rate projections in the SEP, monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity.” As if for the past eight years at least, monetary policy had not been a restraining factor! The charts illustrate it vividly. [Note: FG= “Forward Guidance”, introduced by the Fed at the August 2003 Meeting]

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The sure-fire way of stabilizing the real economy or, “all roads lead to Rome”

At Vox, Walentin and Westermark write, “Stabilising the real economy increases average output”: The intro: The Great Recession has generated a debate regarding the potential effects on the long-run levels of output and unemployment of stabilising the real economy (e.g. Summers 2015). This issue takes on additional importance as the current economic situation in some countries, including the US, imply that there is a monetary policy trade-off between stabilising inflation and the real economy. In particular, the unemployment level is low at the same time as inflation is low. More generally, the question at hand is whether policymakers, in particular… Read More

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The Employment Report: Strong, Solid, or just Dull?

The report was weaker than expected. However, nothing in this report will cause the Fed any concern about their prevailing view of the economic picture in the US. Lower than expected jobs numbers were met by expected hourly earnings growth. What matters is that the predominant view at the Fed [although misguided] is that the economy is at or below the level of employment that keeps inflation in check. The charts depict what has been going on for the past two years, coinciding with the period the Fed became more obstinate about tightening. The top chart shows that during the… Read More

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Price Level targeting would not have avoided disaster in 2008

Raphael Bostic, Atlanta Fed president, is arguing for a change in the monetary policy framework, from inflation targeting (IT) to price level targeting (PLT) See here, here.& here. What I want to show is that, although PLT differs from IT in that PLT has a “memory”, it suffers from the same weakness, i.e. it is sensitive to supply (for example, oil) shocks. In addition, I argue that an alternative monetary policy framework, NGDP level targeting, also has memory but does not suffer from the supply shock sensitivity of PLT. Ten years ago, the FOMC was “laser focused” on inflation. In… Read More

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Bad Monetary Policy: small effect on inflation, strong impact on real growth

Some love to “data mine” for inflation. David Rosenberg, for example, twitted: Shh…don’t tell the Fed that its beloved core PCE deflator is running at 2.3% SAAR over the past 6 months (hottest in 7 years) and that the 3-month trend has shot up 2.8% — we haven’t seen this since Nov 2007. Yet another in the long list of late-cycle indicators. The fact is that for the last quarter century inflation has been tame and contained, early or late cycle. The panel below illustrates the implications of a bad monetary policy, here taken to mean a lower than ideal… Read More

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