The markets' post-election reactions -- higher stocks, Treasury yields and dollar -- have been based in part on expectations of pro-growth policies under the Trump administration. The boost to the economy may be smaller and take longer to occur than the markets now expect, however, providing a fundamental reason for the corrections -- lower stocks, Treasury yields and dollar -- that technicians say are coming. Nonetheless, the extent and timing of the policies may not get full market attention until we get closer to the January 20th start of his administration.
Trump's proposal for cutting individual taxes is an example. He wants to cut tax rates and eliminate the ObamaCare 3.8% surtax on capital gains/dividends and investment income as well as the Alternative Minimum Tax and most of the Estate Tax.
Timing
1. It should take a number of months before tax legislation gets through Congress.
a. There could be changes to Trump's proposal, particularly since it differs somewhat from the Republican Congressional tax plan and runs counter to Republicans' desire to cut the Federal deficit. Hearings and debate could delay implementation.
2. The lower tax rates -- particularly at the upper end -- could
spur more risk taking and work effort. This supply effect would likely
take time to develop.
3. The other parts of his plan would not show up until final tax payments are made in 2018.
Magnitude of Impact
1. The lower tax rates would boost disposable income quickly. But, with much of the reduction at the upper income levels, a good share of the freed-up income will likely be saved rather than spent -- reducing the boost to economic activity. However, the elimination of the Estate Tax for most everyone could lift spending by those who were saving to meet a "bequest" goal.
a. Democrats are likely to complain about the
distributional aspects of his proposal. Ideas to make the tax code more
progressive could be
counter-productive if they discourage economic activity -- which would hurt lower-income people.
2. Part of the spending would be on imports, also reducing the boost to US economic activity.
3. But, a small boost to consumption is not
undesirable at this time, given that the economy is close to
full employment and growing near trend.
4. Given the likely limited near-term boost to the economy and the absence of a need to do so, the Trump proposal's main rationale may be the longer-term incentive for risk taking and work effort. But, the magnitude of this impact is anybody's guess.
Monday, December 26, 2016
Thursday, December 8, 2016
Stock Rally Likely To Continue Past Next Week's FOMC Meeting
There are several reasons why the stock market rally will likely continue after the widely expected 25 BP Fed rate hike next Wednesday (December 14). In broad terms, they are /1/ a strong economy, /2/ a Fed emphasis of a gradual further tightening in 2017, and /3/ expectations of Trump's fiscal and economic policies. These reasons should propel the rally at least into January. They also should keep upward pressure on Treasury yields and the dollar, but -- thanks to low inflation -- the upward pressure may be modest.
1. Strong Economy:
a. Both the NY Fed and Atlanta Fed's models are now projecting about 2.5% (q/q, saar) for Q416. While moderate from an historical perspective, this pace is above trend. It is also stronger than the 0.9% Real GDP Growth Rate in Q415 when the Fed last tightened by 25 BPs.
b. Initial Claims have averaged 255k so far in Q416, slightly lower (and thus stronger) than the 259k Q316 average. Continuing Claims have been on a downtrend since September, after stalling from April through August.
c. The ECRI Leading Index has risen sharply in the past few weeks, suggesting a further pickup in GDP Growth into Q117.
ECRI Leading Index (level, July Through November)
2. Gradual Fed Tightening in 2017:
a. NY Fed President Dudley said this week that he favored a gradual approach to tightening.
b. Uncertainty about the scope of fiscal policy changes should keep the Fed cautious until there is more certitude. This will likely happen by next Spring or Summer. So, the Fed should fade from the markets' forefront in early 2017.
c. The Fed is likely to emphasize a gradual approach in the Statement and in Yellen's post-meeting press conference, the same as it has done in the recent past.
d. But, there could be some narrowing in the 2017 range of "dots" from September's 1.1-1.8% range. An upward adjustment in the lower bound of this range is the most likely change, but the consensus expectation of 2-3 more hikes in 2017 should remain intact.
3. Trump's Policies:
a. There are 3 main issues: /1/ the magnitude of the tax cut, /2/ the extent and speed of deregulation, and /3/ the approach taken on foreign trade.
b. The Republican dislike of large Federal Budget Deficits could limit the size of the tax cut. In Congressional testimony earlier this month, Yellen cautioned about overdoing fiscal stimulus now that the economy is close to full employment. But, she did not mention that it would fit with her idea of running a hot economy to stimulate stronger productivity gains.
c. The Trump Administration's presumably pro-business/less regulatory approach should be a factor preventing the sharp slowdown in GDP Growth seen after the December 2015 Fed rate hike. Obama's renewed shift to executive orders in Q415 likely was partly responsible for the slowdown.
c. A move toward bi-lateral trade agreements in order to push other countries to eliminate tariffs would be a positive for the US economy and the dollar. A trade war, however, would be bad. I wonder whether Trump's telephone call to the Taiwanese president was part of a strategy to "soften up" the Chinese government ahead of such trade negotiations.
1. Strong Economy:
a. Both the NY Fed and Atlanta Fed's models are now projecting about 2.5% (q/q, saar) for Q416. While moderate from an historical perspective, this pace is above trend. It is also stronger than the 0.9% Real GDP Growth Rate in Q415 when the Fed last tightened by 25 BPs.
b. Initial Claims have averaged 255k so far in Q416, slightly lower (and thus stronger) than the 259k Q316 average. Continuing Claims have been on a downtrend since September, after stalling from April through August.
c. The ECRI Leading Index has risen sharply in the past few weeks, suggesting a further pickup in GDP Growth into Q117.
ECRI Leading Index (level, July Through November)
2. Gradual Fed Tightening in 2017:
a. NY Fed President Dudley said this week that he favored a gradual approach to tightening.
b. Uncertainty about the scope of fiscal policy changes should keep the Fed cautious until there is more certitude. This will likely happen by next Spring or Summer. So, the Fed should fade from the markets' forefront in early 2017.
c. The Fed is likely to emphasize a gradual approach in the Statement and in Yellen's post-meeting press conference, the same as it has done in the recent past.
d. But, there could be some narrowing in the 2017 range of "dots" from September's 1.1-1.8% range. An upward adjustment in the lower bound of this range is the most likely change, but the consensus expectation of 2-3 more hikes in 2017 should remain intact.
3. Trump's Policies:
a. There are 3 main issues: /1/ the magnitude of the tax cut, /2/ the extent and speed of deregulation, and /3/ the approach taken on foreign trade.
b. The Republican dislike of large Federal Budget Deficits could limit the size of the tax cut. In Congressional testimony earlier this month, Yellen cautioned about overdoing fiscal stimulus now that the economy is close to full employment. But, she did not mention that it would fit with her idea of running a hot economy to stimulate stronger productivity gains.
c. The Trump Administration's presumably pro-business/less regulatory approach should be a factor preventing the sharp slowdown in GDP Growth seen after the December 2015 Fed rate hike. Obama's renewed shift to executive orders in Q415 likely was partly responsible for the slowdown.
c. A move toward bi-lateral trade agreements in order to push other countries to eliminate tariffs would be a positive for the US economy and the dollar. A trade war, however, would be bad. I wonder whether Trump's telephone call to the Taiwanese president was part of a strategy to "soften up" the Chinese government ahead of such trade negotiations.
Friday, December 2, 2016
November Employment Report Should Not Stop a December Fed Hike, But...
The November Employment Report should not stop Fed officials from tightening by 25 BPs in December, but should reinforce their desire to emphasize a gradual approach to next year's tightening. Such a combination at the December FOMC Meeting should be a positive for stocks and possibly for Treasury prices, but a negative for the dollar.
The bottom line of the Report is that the US economy is growing at or above trend, albeit likely only in the moderate 2.0-3.0% (q/q saar) range, in Q416. Both the strong and weak parts of the Report appear to be exaggerated by technical or temporary factors.
1. The +178k m/m increase in November Payrolls was boosted by a 22k jump in Government Workers. Most of the latter jump was outside of education and likely consisted of temporary election workers. These should reverse in December.
2. Private Payrolls -- more indicative of the economy than are Total Payrolls -- rose only 156k after they rose only 135k in October. Both are below the 170k 12-month average ending in November. So, they suggest a downshift in the underlying trend of job growth.
3. Even with this downshift, job growth is enough to put the Unemployment Rate on a downward path -- as evidenced by the drop in the Unemployment Rate to 4.6%.
a. The drop could be lagged effect of the strong 3.2% Q316 Real GDP Growth. The traditional model relating the Unemployment Rate to GDP Growth shows both the current quarter's and past quarter's GDP Growth impact the current quarter's change in the Unemployment Rate.
b. While Street Economists may emphasize that the drop in the Unemployment Rate to 4.6% in November was "due" to a decline in the Labor Force, it is more likely that the composition of the Rate -- Labor Force and Civilian Employment -- was influenced by the small sample nature of the Household Sample. The Sample just happened to consist of people who fell out of the labor force. The Unemployment Rate, itself, cancels out this small sample bias, so its decline
4. The low -0.1% m/m Average Hourly Earnings was likely largely a result of calendar factors and thus exaggerates weakness.
a. These factors point to a 0.3% m/m increase in December.
b. The y/y fell to 2.5% from 2.8% in October. But, it remained in the 2.5-2.8% range seen since May. If the m/m rebounds to 0.3% in December, the y/y will bounce back to 2.8-2.9%.
The bottom line of the Report is that the US economy is growing at or above trend, albeit likely only in the moderate 2.0-3.0% (q/q saar) range, in Q416. Both the strong and weak parts of the Report appear to be exaggerated by technical or temporary factors.
1. The +178k m/m increase in November Payrolls was boosted by a 22k jump in Government Workers. Most of the latter jump was outside of education and likely consisted of temporary election workers. These should reverse in December.
2. Private Payrolls -- more indicative of the economy than are Total Payrolls -- rose only 156k after they rose only 135k in October. Both are below the 170k 12-month average ending in November. So, they suggest a downshift in the underlying trend of job growth.
3. Even with this downshift, job growth is enough to put the Unemployment Rate on a downward path -- as evidenced by the drop in the Unemployment Rate to 4.6%.
a. The drop could be lagged effect of the strong 3.2% Q316 Real GDP Growth. The traditional model relating the Unemployment Rate to GDP Growth shows both the current quarter's and past quarter's GDP Growth impact the current quarter's change in the Unemployment Rate.
b. While Street Economists may emphasize that the drop in the Unemployment Rate to 4.6% in November was "due" to a decline in the Labor Force, it is more likely that the composition of the Rate -- Labor Force and Civilian Employment -- was influenced by the small sample nature of the Household Sample. The Sample just happened to consist of people who fell out of the labor force. The Unemployment Rate, itself, cancels out this small sample bias, so its decline
4. The low -0.1% m/m Average Hourly Earnings was likely largely a result of calendar factors and thus exaggerates weakness.
a. These factors point to a 0.3% m/m increase in December.
b. The y/y fell to 2.5% from 2.8% in October. But, it remained in the 2.5-2.8% range seen since May. If the m/m rebounds to 0.3% in December, the y/y will bounce back to 2.8-2.9%.
Sunday, November 27, 2016
Near-Term Economic Outlook and the Markets
The consensus view of the economic outlook is supportive of further gains in stocks and further upward pressure on Treasuries and the dollar through December. In particular, consensus looks for above-trend 2+% Real GDP Growth in Q416, with evidence to be seen this coming week from an uptick in the November Mfg ISM and a modest speedup in November Payrolls. While these expectations cannot be dismissed, there is some contrary evidence. Also, some possible offsets in next week's reports could mitigate the impact on Treasuries and the dollar while sustaining gains in stocks.
Mfg ISM (due Thursday, December 1)
1. Consensus is for an uptick to 52.1 from 51.9. There is no obvious risk, but even a consensus-like print would be consistent with only modest economic growth.
2. The regional surveys are mixed, with none having a solid relationship with the Mfg ISM.
3. Seasonals favor an increase, but they did not provide the correct signal in October.
November Employment Report (due Friday, December 2)
1. Consensus is for a speedup in Payrolls to +174k m/m from +161k in October. But, the risk is for smaller increase, as hiring may have remained subdued ahead of the elections.
a. Continuing Claims point to a slowdown in November Payrolls. Their second difference between Payroll Survey Weeks correctly predicted speedups/slowdowns in Payrolls in 6 of 10 months this year -- all correct predictions but one since April. Weather effects could have interfered with the relationship in the first 3 months of the year.
2. Consensus is for a steady 4.9% Unemployment Rate. But, the risk is for an uptick, if an improved outlook draws in more people to the labor force. An uptick would support a gradual pace of Fed tightening, as the increased capacity of the labor market would allow the economy to grow faster than trend without spurring inflation.
a. An improvement in the November Conference Board Consumer Confidence Index (expected by consensus), due Tuesday, would support this risk. The Unemployment Rate moved in the same direction as the jobs component of this confidence survey in each of the past two months.
3. Consensus is for +0.3% m/m Average Hourly Earnings, staying high even after the +0.4% in October. The risk is for +0.1% m/m.
a. Calendar considerations suggest a 0.1% m/m print.
b. The last two times AHE rose 0.4% m/m, it was followed by 0.1% in the subsequent month.
Q4 Real GDP
1. There is not enough evidence yet to have a confident estimate of Q4 GDP Growth.
2. So far the evidence is mixed: Stronger: /1/ Motor Vehicle Output/Sales, /2/ Residential Construction, /3/ Business Equipment Spending. Weaker: /1/ Net Exports, /2/ Inventory Investment.
3. The latest model estimates from the Fed are: Atlanta: 3.6% (q/q, saar), NY: 2.5%. But, the Atlanta Fed model was last updated on Wednesday (November 23) -- before the release of preliminary data for the October Trade Deficit and Wholesale/Retail Inventories on Friday (November 25). These preliminary data were weak. It is not clear whether the NY Fed model took them into account.
Mfg ISM (due Thursday, December 1)
1. Consensus is for an uptick to 52.1 from 51.9. There is no obvious risk, but even a consensus-like print would be consistent with only modest economic growth.
2. The regional surveys are mixed, with none having a solid relationship with the Mfg ISM.
3. Seasonals favor an increase, but they did not provide the correct signal in October.
November Employment Report (due Friday, December 2)
1. Consensus is for a speedup in Payrolls to +174k m/m from +161k in October. But, the risk is for smaller increase, as hiring may have remained subdued ahead of the elections.
a. Continuing Claims point to a slowdown in November Payrolls. Their second difference between Payroll Survey Weeks correctly predicted speedups/slowdowns in Payrolls in 6 of 10 months this year -- all correct predictions but one since April. Weather effects could have interfered with the relationship in the first 3 months of the year.
2. Consensus is for a steady 4.9% Unemployment Rate. But, the risk is for an uptick, if an improved outlook draws in more people to the labor force. An uptick would support a gradual pace of Fed tightening, as the increased capacity of the labor market would allow the economy to grow faster than trend without spurring inflation.
a. An improvement in the November Conference Board Consumer Confidence Index (expected by consensus), due Tuesday, would support this risk. The Unemployment Rate moved in the same direction as the jobs component of this confidence survey in each of the past two months.
3. Consensus is for +0.3% m/m Average Hourly Earnings, staying high even after the +0.4% in October. The risk is for +0.1% m/m.
a. Calendar considerations suggest a 0.1% m/m print.
b. The last two times AHE rose 0.4% m/m, it was followed by 0.1% in the subsequent month.
Q4 Real GDP
1. There is not enough evidence yet to have a confident estimate of Q4 GDP Growth.
2. So far the evidence is mixed: Stronger: /1/ Motor Vehicle Output/Sales, /2/ Residential Construction, /3/ Business Equipment Spending. Weaker: /1/ Net Exports, /2/ Inventory Investment.
3. The latest model estimates from the Fed are: Atlanta: 3.6% (q/q, saar), NY: 2.5%. But, the Atlanta Fed model was last updated on Wednesday (November 23) -- before the release of preliminary data for the October Trade Deficit and Wholesale/Retail Inventories on Friday (November 25). These preliminary data were weak. It is not clear whether the NY Fed model took them into account.
Wednesday, November 23, 2016
Treasury Market Sell-Off Overdone?
The sharp sell-off in the long end of the Treasury market since the election is attributed to fears of the inflationary implications of the expansionary fiscal policy and trade policies espoused by Trump. There are reasons to think that these fears have been overdone.
1. President-Elect Trump has been pulling back from extreme statements he made during the campaign. Perhaps a better sense of reality, constraints or responsibility are behind this pull-back. While most of these new positions so far have negligible direct, near-term implications for the economy or markets, the same factors behind them could restrain the more market-important size of tax cuts he is expected to propose. In particular, the Republican concern about the size of the Federal deficit -- underscored by Yellen in her latest Congressional testimony -- could put a lid on the amount of tax cuts.
a. Balancing tax rate reductions by eliminating some tax deductions could have distribution problems. The mortgage deduction, for example, is important to middle class taxpayers. This deduction already is largely phased out for upper income people.
2. It is difficult to see a significant pickup in inflation in the next 6 months or more as long as the dollar stays strong. While the consensus view is that Trump's desire to restrain imports will lead to higher inflation, this effect could be mitigated by the consequent narrowing in the trade deficit lifting the dollar further.
a. The October Core PCE Deflator, due November 30, is likely to print a modest 0.1% m/m, keeping it at 1.7% y/y.
b. This low inflation print probably will not stop the Fed from hiking by 25 BPs in December. The Fed's forward guidance will be the important new information. My guess is that it will retain the expectation of 2-3 hikes in 2017. But, Yellen could temper it by saying that the path will be very gradual in her post-meeting news conference -- which could mean the next hike would be in the Spring or Summer. This combination could temper longer-term inflation expectations in the Treasury market while leaving the stock market unscathed. It might be the event that triggers a rally in the Treasury market.
1. President-Elect Trump has been pulling back from extreme statements he made during the campaign. Perhaps a better sense of reality, constraints or responsibility are behind this pull-back. While most of these new positions so far have negligible direct, near-term implications for the economy or markets, the same factors behind them could restrain the more market-important size of tax cuts he is expected to propose. In particular, the Republican concern about the size of the Federal deficit -- underscored by Yellen in her latest Congressional testimony -- could put a lid on the amount of tax cuts.
a. Balancing tax rate reductions by eliminating some tax deductions could have distribution problems. The mortgage deduction, for example, is important to middle class taxpayers. This deduction already is largely phased out for upper income people.
2. It is difficult to see a significant pickup in inflation in the next 6 months or more as long as the dollar stays strong. While the consensus view is that Trump's desire to restrain imports will lead to higher inflation, this effect could be mitigated by the consequent narrowing in the trade deficit lifting the dollar further.
a. The October Core PCE Deflator, due November 30, is likely to print a modest 0.1% m/m, keeping it at 1.7% y/y.
b. This low inflation print probably will not stop the Fed from hiking by 25 BPs in December. The Fed's forward guidance will be the important new information. My guess is that it will retain the expectation of 2-3 hikes in 2017. But, Yellen could temper it by saying that the path will be very gradual in her post-meeting news conference -- which could mean the next hike would be in the Spring or Summer. This combination could temper longer-term inflation expectations in the Treasury market while leaving the stock market unscathed. It might be the event that triggers a rally in the Treasury market.
Sunday, November 13, 2016
Thinking About Trump, the Fed and the Markets
The markets are repricing as they absorb the implications of Trump's victory. For stocks and oil, the repricing is sectoral as well as macroeconomic in nature. For Treasuries, the backup in yields reflects a greater risk of aggressive fiscal policy and stronger economic growth/inflation ahead. There is unlikely to be any significant unwinding of these market moves before he takes office in January. Even weaker economic data should have limited impact, given prospects of large tax cuts and infrastructure outlays ahead.
But, once Trump gets into office and fleshes out his policies, the markets could act quite differently. In broad terms, the biggest threat to the economy would likely be a trade war resulting from his desire to protect US jobs. In contrast, the biggest boon to the economy could be the combination of large fiscal stimulus and a cautious Fed. Here are a couple of scenarios.
Negative for Stocks, Positive for Treasuries
1. Trump's approach to help sustain US jobs in a global economy -- one of his main campaign promises -- could lead to a trade war if he goes with pushing for large tariffs. A trade war would raise prospects of a global recession. Obviously, the US job situation would worsen in this case.
2. The risk of large tariffs cannot be dismissed.
a. Policy approaches short of large tariffs probably would not save US jobs. Even if companies are "persuaded" to keep factories running in the US, they would be undermined by competitive pressures from non-US companies operating in low-cost countries.
b. One idea -- although no one has mentioned it -- is to use tax policy to lower labor costs. For example, corporate taxes could be cut by at least doubling the deduction for labor costs. This would be an alternative to a cut in corporate tax rates. This would go only part way to preserving jobs, however, since the wage differential between the US and other countries is probably too large to be offset this way. Also, the tax subsidy could increase demand for labor and result in a bidding up of wages -- offsetting the tax subsidy And, the dollar could strengthen, making imports cheaper.
Positive for Stocks, Negative for Treasuries
1. With so much uncertainty about how the Trump administration will proceed to implement its policies, a cautious Fed monetary policy would be reasonable. And, at least one Fed official has said that the Fed will wait for awhile to hike again if it does so in December.
a. Recent US economic data have not been strong enough to hold back the Fed from a December hike, but this week's October CPI release could be important if it is soft.
b. If the Fed hikes, its forward guidance -- either as shown in the "dots" or in Yellen's post-meeting press conference -- will be more important.
2. A slow pace of Fed tightening along with fiscal stimulus would fit with Yellen's speculation about the desirability of "running a high-pressure" economy." Her idea is that this could spur higher productivity growth. The Fed could delay further tightening until H217 in this scenario.
3. The boost to economic growth could be less than expected, however, as a result of higher longer-term Treasury yields, a stronger dollar, and the spillover to imports.
But, once Trump gets into office and fleshes out his policies, the markets could act quite differently. In broad terms, the biggest threat to the economy would likely be a trade war resulting from his desire to protect US jobs. In contrast, the biggest boon to the economy could be the combination of large fiscal stimulus and a cautious Fed. Here are a couple of scenarios.
Negative for Stocks, Positive for Treasuries
1. Trump's approach to help sustain US jobs in a global economy -- one of his main campaign promises -- could lead to a trade war if he goes with pushing for large tariffs. A trade war would raise prospects of a global recession. Obviously, the US job situation would worsen in this case.
2. The risk of large tariffs cannot be dismissed.
a. Policy approaches short of large tariffs probably would not save US jobs. Even if companies are "persuaded" to keep factories running in the US, they would be undermined by competitive pressures from non-US companies operating in low-cost countries.
b. One idea -- although no one has mentioned it -- is to use tax policy to lower labor costs. For example, corporate taxes could be cut by at least doubling the deduction for labor costs. This would be an alternative to a cut in corporate tax rates. This would go only part way to preserving jobs, however, since the wage differential between the US and other countries is probably too large to be offset this way. Also, the tax subsidy could increase demand for labor and result in a bidding up of wages -- offsetting the tax subsidy And, the dollar could strengthen, making imports cheaper.
Positive for Stocks, Negative for Treasuries
1. With so much uncertainty about how the Trump administration will proceed to implement its policies, a cautious Fed monetary policy would be reasonable. And, at least one Fed official has said that the Fed will wait for awhile to hike again if it does so in December.
a. Recent US economic data have not been strong enough to hold back the Fed from a December hike, but this week's October CPI release could be important if it is soft.
b. If the Fed hikes, its forward guidance -- either as shown in the "dots" or in Yellen's post-meeting press conference -- will be more important.
2. A slow pace of Fed tightening along with fiscal stimulus would fit with Yellen's speculation about the desirability of "running a high-pressure" economy." Her idea is that this could spur higher productivity growth. The Fed could delay further tightening until H217 in this scenario.
3. The boost to economic growth could be less than expected, however, as a result of higher longer-term Treasury yields, a stronger dollar, and the spillover to imports.
Sunday, November 6, 2016
Return to the Fed
Once the dust settles in the markets after Tuesday's Presidential elections -- and there could be a lot of dust -- attention will likely turn more fully to the possibility of a Fed rate hike at the December 13-14 FOMC Meeting. It would seem that Fed rhetoric has painted officials into a corner, with failure to tighten then risking to further damage their credibility. As Atlanta Fed President Lockhardt said last week, the bar to not tighten is high. And, the market probability of a December Fed rate hike is high.
But, there is still no guarantee that the Fed will hike rates in December. Vice Chair Stan Fischer's speeches have become slightly less hawkish. He has recognized that some apparently strong data, such as the 2.9% Q316 Real GDP Growth, was less than meets the eye (about 1% pt of it came from a jump in soybean exports to China. The September Trade Balance showed that the jump was unwinding). And, he has pointed out that the Unemployment Rate has not fallen this year despite sold Payroll gains, acknowledging Fed Governor Brainard's point.
Looking ahead, the upshot is that weak US economic data could be more important than strong data with regard to shifting the odds of a December rate hike. In particular, I would pay attention to the weekly Initial Unemployment Claims and the November Core CPI.
1. A move-up in Initial Claims to 270k+ would signal the likelihood of slower growth in economic activity in Q416. Initial Claims were 265k in the latest week.
Initial Claims Real GDP Growth
(level, 000s, avg) (q/q % change, saar)
October 258
Q316 259 2.9
Q216 268 1.4
Q116 269 0.8
Q415 270 0.9
2. A Core CPI print of 0.1% m/m in November, as in October, would underscore that inflation is not a pressing matter for the Fed.
Core CPI
(m/m pct change, sa, avg)
October 0.1
Q316 0.2
Q216 0.2
Q116 0.2
While a 25 BP hike in December would likely be downplayed by many Street economists as being small, I believe it would be more significant than just itself. A hike would increase the odds that the Fed will carry through with its forward guidance of 3 more hikes in 2017. Markets thus could react to a larger degree than might be expected from just a 25 BP hike -- as was the case after the December 2015 Fed hike. To be sure, other factors could have been at play that hurt economic growth in H116, as well, such as President Obama's executive orders. How the new Administration's fiscal policy unfolds will be important next year.
a. Note that Fed officials have emphasized that forward guidance has been effective in countering the zero-bound restriction on lowering the funds rate. But, they have been relatively mute regarding the restrictive implications of forward guidance that involves tightening.
But, there is still no guarantee that the Fed will hike rates in December. Vice Chair Stan Fischer's speeches have become slightly less hawkish. He has recognized that some apparently strong data, such as the 2.9% Q316 Real GDP Growth, was less than meets the eye (about 1% pt of it came from a jump in soybean exports to China. The September Trade Balance showed that the jump was unwinding). And, he has pointed out that the Unemployment Rate has not fallen this year despite sold Payroll gains, acknowledging Fed Governor Brainard's point.
Looking ahead, the upshot is that weak US economic data could be more important than strong data with regard to shifting the odds of a December rate hike. In particular, I would pay attention to the weekly Initial Unemployment Claims and the November Core CPI.
1. A move-up in Initial Claims to 270k+ would signal the likelihood of slower growth in economic activity in Q416. Initial Claims were 265k in the latest week.
Initial Claims Real GDP Growth
(level, 000s, avg) (q/q % change, saar)
October 258
Q316 259 2.9
Q216 268 1.4
Q116 269 0.8
Q415 270 0.9
2. A Core CPI print of 0.1% m/m in November, as in October, would underscore that inflation is not a pressing matter for the Fed.
Core CPI
(m/m pct change, sa, avg)
October 0.1
Q316 0.2
Q216 0.2
Q116 0.2
While a 25 BP hike in December would likely be downplayed by many Street economists as being small, I believe it would be more significant than just itself. A hike would increase the odds that the Fed will carry through with its forward guidance of 3 more hikes in 2017. Markets thus could react to a larger degree than might be expected from just a 25 BP hike -- as was the case after the December 2015 Fed hike. To be sure, other factors could have been at play that hurt economic growth in H116, as well, such as President Obama's executive orders. How the new Administration's fiscal policy unfolds will be important next year.
a. Note that Fed officials have emphasized that forward guidance has been effective in countering the zero-bound restriction on lowering the funds rate. But, they have been relatively mute regarding the restrictive implications of forward guidance that involves tightening.
Sunday, October 30, 2016
Next Week's Main Developments
Here are some thoughts on the main developments that are likely to impact the markets in the coming week. While I think most of the developments will ultimately result in lower Treasury yields and dollar, as well as higher stock prices, uncertainty ahead of the Presidential election should restrain any market move as well as impart volatility during the week.
FOMC Meeting -- Market Neutral
1. No one expects the Fed to hike on Wednesday, and it is unlikely that the Statement will change significantly. So, while the door will remain open for a December rate hike, that's likely to be about all one will be able to conclude from the Statement.
2. The evidence since the September FOMC Meeting was dovish, on balance:
a. The Unemployment Rate ticked up to 5.0% in September, underscoring the point Yellen made in her news conference that better labor market conditions are eliciting an increase in labor supply and thus accommodating stronger demand without undue inflation pressures -- which was a key reason the Fed did not hike rates at the September FOMC Meeting.
b. The September Core CPI slowed to 0.1% m/m, which should hold down the Core PCE Deflator to 0.0-0.1% m/m with a decline in the y/y to 1.6% from 1.7%, due Monday.
c. The Q316 Employment Cost Index -- a major indicator of labor cost inflation -- remained at 0.6% q/q for the 2nd quarter in a row. The y/y was steady at 2.3%, although up from 2.0% in 2015.
d. While Q316 Real GDP Growth sped up to 2.9% (q/q, saar), about 1 percentage point of it resulted from a jump in US soybean exports to China -- which could be one-off, in which case it will subtract from Q4 GDP Growth. An underlying 2.0% pace in Q316 is an anemic bounce after the 1.1% H116 Real GDP average.
Key US Macroeconomic Data -- Mostly Softer
1. I think the risk is for a counter-consensus decline in the October Mfg ISM, due Tuesday.
a. The Phil Fed Mfg Index points to a decline. It correctly predicted the direction of the Mfg ISM in 6 of 9 months this year. This is a better tracking record than any other manufacturing survey, including the Market US Mfg PMI. Although the latter rebounded in October after it fell in September, the bounce-back was likely catch-up to the increase in the Mfg ISM in September.
b. The damage of the stronger dollar on manufacturers could be one of the fundamental factors behind a decline in the Mfg ISM.
c. Seasonal factors boost the m/m change in the October Mfg ISM by 0.4 pt less than they did in October 2015.
2. The Chicago PM - which is based on a broader sample than just manufacturing -- also has a 6 of 9 month tracking record with the Mfg ISM so far this year. Chicago PM comes on out Monday.
3. I think the October Employment Report risks printing weaker than or in line with consensus.
a. Consensus is for a speedup in Payrolls to +175k m/m from +156k in September. I think Payrolls may stay around 150k. While the Unemployment Claims data improved in early October, they are not a reliable predictor of speedups/slowdowns in Payrolls. A downside risk that I see comes from the potential for employers to delay hiring until after the Presidential election -- hiring delays would not have impacted the Claims data. Also, I think there is a possibility that economic growth is slowing somewhat. And, it is possible that the jump in Private Payrolls in September was just an offset to their sharp slowdown in August. If so, October Private Payrolls should slow. Evidence for these risks could be the drop in "Jobs Plentiful" in the October Conference Board Consumer Confidence Survey. October Payrolls show no tendency to pull back from trend in past Presidential election years, however.
b. Consensus is for a dip in the Unemployment Rate to 4.9% from 5.0% in September, and cannot be ruled out. A decline in the Rate is suggested -- counter-intuitively -- by the weaker jobs components of the Conference Board Consumer Confidence Survey. Also, the un-rounded Rate was 4.96% in September, so a small decline would round down to 4.9%. Note that a 4.9% print should still be viewed as providing slack in the labor market, since it would be the same level the Fed had seen in the September FOMC Meeting.
c. Consensus is for 0.3% m/m in Average Hourly Earnings, after AHE came in lower than expected at 0.2% in September. Calendar considerations support a 0.3% print, but these considerations were in effect in September, as well -- and did not dominate the print. Note that calendar considerations point to a 0.1% m/m AHE (and decline in the y/y) in November.
Oil Prices and the Dollar -- Bearish for Dollar
1. Oil prices are likely to sink further on Monday, after OPEC failed to reach agreement to cut production at this week's meeting. A drop in oil prices could push down the dollar, as it should reduce the "transactions" demand for this global currency. The dollar also could be held down by this week's US economic data, if my expectations for them turn out correct.
Presidential Election -- Volatility
1. Headlines regarding Clinton's emails and the latest polls will likely be the focus in this last full week before the election.
FOMC Meeting -- Market Neutral
1. No one expects the Fed to hike on Wednesday, and it is unlikely that the Statement will change significantly. So, while the door will remain open for a December rate hike, that's likely to be about all one will be able to conclude from the Statement.
2. The evidence since the September FOMC Meeting was dovish, on balance:
a. The Unemployment Rate ticked up to 5.0% in September, underscoring the point Yellen made in her news conference that better labor market conditions are eliciting an increase in labor supply and thus accommodating stronger demand without undue inflation pressures -- which was a key reason the Fed did not hike rates at the September FOMC Meeting.
b. The September Core CPI slowed to 0.1% m/m, which should hold down the Core PCE Deflator to 0.0-0.1% m/m with a decline in the y/y to 1.6% from 1.7%, due Monday.
c. The Q316 Employment Cost Index -- a major indicator of labor cost inflation -- remained at 0.6% q/q for the 2nd quarter in a row. The y/y was steady at 2.3%, although up from 2.0% in 2015.
d. While Q316 Real GDP Growth sped up to 2.9% (q/q, saar), about 1 percentage point of it resulted from a jump in US soybean exports to China -- which could be one-off, in which case it will subtract from Q4 GDP Growth. An underlying 2.0% pace in Q316 is an anemic bounce after the 1.1% H116 Real GDP average.
Key US Macroeconomic Data -- Mostly Softer
1. I think the risk is for a counter-consensus decline in the October Mfg ISM, due Tuesday.
a. The Phil Fed Mfg Index points to a decline. It correctly predicted the direction of the Mfg ISM in 6 of 9 months this year. This is a better tracking record than any other manufacturing survey, including the Market US Mfg PMI. Although the latter rebounded in October after it fell in September, the bounce-back was likely catch-up to the increase in the Mfg ISM in September.
b. The damage of the stronger dollar on manufacturers could be one of the fundamental factors behind a decline in the Mfg ISM.
c. Seasonal factors boost the m/m change in the October Mfg ISM by 0.4 pt less than they did in October 2015.
2. The Chicago PM - which is based on a broader sample than just manufacturing -- also has a 6 of 9 month tracking record with the Mfg ISM so far this year. Chicago PM comes on out Monday.
3. I think the October Employment Report risks printing weaker than or in line with consensus.
a. Consensus is for a speedup in Payrolls to +175k m/m from +156k in September. I think Payrolls may stay around 150k. While the Unemployment Claims data improved in early October, they are not a reliable predictor of speedups/slowdowns in Payrolls. A downside risk that I see comes from the potential for employers to delay hiring until after the Presidential election -- hiring delays would not have impacted the Claims data. Also, I think there is a possibility that economic growth is slowing somewhat. And, it is possible that the jump in Private Payrolls in September was just an offset to their sharp slowdown in August. If so, October Private Payrolls should slow. Evidence for these risks could be the drop in "Jobs Plentiful" in the October Conference Board Consumer Confidence Survey. October Payrolls show no tendency to pull back from trend in past Presidential election years, however.
b. Consensus is for a dip in the Unemployment Rate to 4.9% from 5.0% in September, and cannot be ruled out. A decline in the Rate is suggested -- counter-intuitively -- by the weaker jobs components of the Conference Board Consumer Confidence Survey. Also, the un-rounded Rate was 4.96% in September, so a small decline would round down to 4.9%. Note that a 4.9% print should still be viewed as providing slack in the labor market, since it would be the same level the Fed had seen in the September FOMC Meeting.
c. Consensus is for 0.3% m/m in Average Hourly Earnings, after AHE came in lower than expected at 0.2% in September. Calendar considerations support a 0.3% print, but these considerations were in effect in September, as well -- and did not dominate the print. Note that calendar considerations point to a 0.1% m/m AHE (and decline in the y/y) in November.
Oil Prices and the Dollar -- Bearish for Dollar
1. Oil prices are likely to sink further on Monday, after OPEC failed to reach agreement to cut production at this week's meeting. A drop in oil prices could push down the dollar, as it should reduce the "transactions" demand for this global currency. The dollar also could be held down by this week's US economic data, if my expectations for them turn out correct.
Presidential Election -- Volatility
1. Headlines regarding Clinton's emails and the latest polls will likely be the focus in this last full week before the election.
Sunday, October 23, 2016
Next Week's Important US Economic Data
The advance report on Q316 Real GDP, due this coming Friday, could be important. Consensus is for 2.5% (q/q, saar), which would be a pickup from 1.4% in Q216 and 1.1% on average in H116. It also would be well above the 1.7% pace viewed by many, including Fed staff, as trend.
Some Street Economists, like those at Goldman Sachs, base their expectation of a December Fed rate hike at least in part on such a strong Q3 GDP print. Goldman Sachs' estimate, the last I saw, was at 2.7%. So, a near-consensus print could solidify these expectations. But, if Q3 Real GDP comes in at the Atlanta and NY Fed's nowcast model projections of 2.0-2.2%, the market probability of a December hike could be dampened.
All these forecasts could change significantly ahead of Friday's report, however. This is because the Commerce Department will release September data for inventories, trade deficit, new home sales, and durable goods shipments between Tuesday and Thursday. In July, when Commerce began releasing the data for the third month of a quarter ahead of the advance GDP report, forecasts of the latter were marked down.
a. Note that this earlier release of what had been "missing data" in the advance GDP report aims at reducing the size of the subsequent GDP revision. So, the advance print now should be viewed as more reliable than it had been before the change in procedure.
Another interesting report this week will be the October Conference Board Consumer Confidence Index, due Tuesday. The jobs components of this report have a tendency not to move intuitively with the Unemployment Rate. For example, in September the jobs components improved, but the Unemployment Rate rose. It is possible that a better view of the job market brings people back into the labor force (and vice versa), boosting labor supply more than employment.
a. Consensus is looking for the Confidence Index to fall to 101.5 from 104.1 in September. A decline in Confidence would raise the risk of a decline in the October Unemployment Rate from 5.0% in September.
Some Street Economists, like those at Goldman Sachs, base their expectation of a December Fed rate hike at least in part on such a strong Q3 GDP print. Goldman Sachs' estimate, the last I saw, was at 2.7%. So, a near-consensus print could solidify these expectations. But, if Q3 Real GDP comes in at the Atlanta and NY Fed's nowcast model projections of 2.0-2.2%, the market probability of a December hike could be dampened.
All these forecasts could change significantly ahead of Friday's report, however. This is because the Commerce Department will release September data for inventories, trade deficit, new home sales, and durable goods shipments between Tuesday and Thursday. In July, when Commerce began releasing the data for the third month of a quarter ahead of the advance GDP report, forecasts of the latter were marked down.
a. Note that this earlier release of what had been "missing data" in the advance GDP report aims at reducing the size of the subsequent GDP revision. So, the advance print now should be viewed as more reliable than it had been before the change in procedure.
Another interesting report this week will be the October Conference Board Consumer Confidence Index, due Tuesday. The jobs components of this report have a tendency not to move intuitively with the Unemployment Rate. For example, in September the jobs components improved, but the Unemployment Rate rose. It is possible that a better view of the job market brings people back into the labor force (and vice versa), boosting labor supply more than employment.
a. Consensus is looking for the Confidence Index to fall to 101.5 from 104.1 in September. A decline in Confidence would raise the risk of a decline in the October Unemployment Rate from 5.0% in September.
Sunday, October 16, 2016
Overreations to Friday's Fed Talk?
Two Fed speeches on Friday sparked noticeable market reactions that might have been overdone.
Yellen conjectured that the Fed could temporarily allow "a high-pressure economy" in order to boost productivity. The long end of the Treasury curve sold off on the inflationary implications of this scenario.
NY Fed President Dudley gave a wide-ranging interview to the NY Times in which he touched on many of the considerations and issues mentioned in prior FOMC Statements/Minutes and other Fed speeches. The markets picked up on his expectation of a rate hike by the end of the year, and stocks came off their highs.
There may be less than meets the eye in these comments, however:
1. A "high-pressure economy" is not that far different from prior Fed talk that inflation would be allowed to exceed the 2.0% target for awhile. Also, such an economy might not be inflationary if it is successful in boosting productivity growth. While wage growth might pick up, it would be offset by higher productivity growth so that unit labor costs would not speed up. Moreover, her discussion was essentially theoretical and not necessarily what will be Fed policy.
The sell-off in the long end of the Treasury market after her speech very well may have been a warning sign that such a policy would backfire. Higher long-term yields would hurt economic growth. To be sure, from an optimal control approach to analyzing markets -- markets will move in ways to achieve the Fed's goal -- stocks could rally and the dollar fall to offset the drag from higher Treasury yields.
2. Dudley spent a lot of time in the interview agreeing withe Brainard/Yellen contention that the strong payroll growth this year could be accommodated in a non-inflationary way as a result of more people coming back into the labor force in response to their perceptions of a improved job opportunities. In other words, the Unemployment Rate has been steady at about 4.9% this year (5.0% in September) despite the good-sized gains in Payrolls. Labor market capacity remained ample.
So, it was somewhat disconcerting that his expectation of rate hike this year seemed to be solely due to calendar considerations and to ignore this economic argument. But, the two can be reconciled: Dudley may think the Unemployment Rate will decline over October-November. In this case, however, his expectation of a rate hike does not represent any more evidence than what will be seen in the next two Employment Reports. So, the interview should not significantly impact the probability of a December rate hike.
Yellen conjectured that the Fed could temporarily allow "a high-pressure economy" in order to boost productivity. The long end of the Treasury curve sold off on the inflationary implications of this scenario.
NY Fed President Dudley gave a wide-ranging interview to the NY Times in which he touched on many of the considerations and issues mentioned in prior FOMC Statements/Minutes and other Fed speeches. The markets picked up on his expectation of a rate hike by the end of the year, and stocks came off their highs.
There may be less than meets the eye in these comments, however:
1. A "high-pressure economy" is not that far different from prior Fed talk that inflation would be allowed to exceed the 2.0% target for awhile. Also, such an economy might not be inflationary if it is successful in boosting productivity growth. While wage growth might pick up, it would be offset by higher productivity growth so that unit labor costs would not speed up. Moreover, her discussion was essentially theoretical and not necessarily what will be Fed policy.
The sell-off in the long end of the Treasury market after her speech very well may have been a warning sign that such a policy would backfire. Higher long-term yields would hurt economic growth. To be sure, from an optimal control approach to analyzing markets -- markets will move in ways to achieve the Fed's goal -- stocks could rally and the dollar fall to offset the drag from higher Treasury yields.
2. Dudley spent a lot of time in the interview agreeing withe Brainard/Yellen contention that the strong payroll growth this year could be accommodated in a non-inflationary way as a result of more people coming back into the labor force in response to their perceptions of a improved job opportunities. In other words, the Unemployment Rate has been steady at about 4.9% this year (5.0% in September) despite the good-sized gains in Payrolls. Labor market capacity remained ample.
So, it was somewhat disconcerting that his expectation of rate hike this year seemed to be solely due to calendar considerations and to ignore this economic argument. But, the two can be reconciled: Dudley may think the Unemployment Rate will decline over October-November. In this case, however, his expectation of a rate hike does not represent any more evidence than what will be seen in the next two Employment Reports. So, the interview should not significantly impact the probability of a December rate hike.
Sunday, October 9, 2016
Did the Markets Make a Mistake On Friday?
The markets may have made a mistake on Friday as they did not appear to appreciate the dovish implications of the September Employment Report and a dovish speech by Fed Vice Chair Stan Fischer on Friday. Stocks fell, Treasuries sold off initially and then ended little changed, and the dollar rose on the day. To the extent that these moves reflected a failure to analyze the data/speech correctly, there could be reversals this coming week. It is possible, however, that the markets were still fixated on the fall-out from Brexit and developments regarding Deutsche Bank. These two items, along with the Presidential election and Q316 earnings, are likely to be the most important factors overhanging the markets in the next few weeks.
The Report was dovish for two reasons:
1. The uptick in the Unemployment Rate to 5.0% -- thanks to a higher Participation Rate -- was exactly consistent with the factor cited by Yellen as the reason the Fed did not hike in the prior week's FOMC Meeting. That is, the labor market capacity expanded to allow for sold job growth without inflation.
2. The 0.2% Average Hourly Earnings was on the low side of the increase implied by calendar considerations. This supported the idea that wage inflation is well under control and suggests that many of the new jobs are low-productivity/low-wage.
Fischer devoted a speech to acknowledging (by explaining) the possibility that the "natural" rate of the funds rate is close to zero. This is the first speech I recollect him making that raised dovish implications for monetary policy. The speech can be found on the Fed's website. Moreover, on Sunday, Fischer voiced little concern that the Fed was at risk of waiting too long to hike.
The failure of the markets to react appropriately to these two events might be explained a number of ways:
1. The markets focused on the solid Payroll gain, even though it was well below the average pace seen in prior months this year (156k m/m versus 181k). The few Street economists/analysts I read seemed to emphasize this part of the Report. This focus was incorrect, however, given the uptick in the Unemployment Rate.
a. To be sure, this September Employment Report is not the last word on the labor market this year, but it is ahead of the November FOMC Meeting. The October and November Reports will be released ahead of the December meeting.
2. Weakness in the Pound and, to a lesser extent, the Euro dominated the FX market and exacerbated fears of significant economic problems stemming from Brexit.
a. As I wrote in a prior blog (June 26), a way to understand Brexit is that it entails a loss of value-added from the association for both the UK (and to a lesser extent) the Euro area. Both now have to work harder to maintain the same standard of living -- and the boost to exports and import substitutes from their weaker currencies is the way the markets act to allow that to happen. This means that it should be no surprise that UK and Euro area real-side economic indicators improve -- contrary to the expectation of a recession by most economists. But, their weaker currencies could hurt US net exports.
3. The regulatory problems with Deutsche Bank continued to hold back stocks.
a. The demand by the US Department of Justice for a large fine for alleged misdeeds in 2007-08 is an example of policymakers aiming for a goal with the unintended consequence of harming economic growth -- a factor behind the sluggish recovery since 2009 (see my blog of September 27).
The Report was dovish for two reasons:
1. The uptick in the Unemployment Rate to 5.0% -- thanks to a higher Participation Rate -- was exactly consistent with the factor cited by Yellen as the reason the Fed did not hike in the prior week's FOMC Meeting. That is, the labor market capacity expanded to allow for sold job growth without inflation.
2. The 0.2% Average Hourly Earnings was on the low side of the increase implied by calendar considerations. This supported the idea that wage inflation is well under control and suggests that many of the new jobs are low-productivity/low-wage.
Fischer devoted a speech to acknowledging (by explaining) the possibility that the "natural" rate of the funds rate is close to zero. This is the first speech I recollect him making that raised dovish implications for monetary policy. The speech can be found on the Fed's website. Moreover, on Sunday, Fischer voiced little concern that the Fed was at risk of waiting too long to hike.
The failure of the markets to react appropriately to these two events might be explained a number of ways:
1. The markets focused on the solid Payroll gain, even though it was well below the average pace seen in prior months this year (156k m/m versus 181k). The few Street economists/analysts I read seemed to emphasize this part of the Report. This focus was incorrect, however, given the uptick in the Unemployment Rate.
a. To be sure, this September Employment Report is not the last word on the labor market this year, but it is ahead of the November FOMC Meeting. The October and November Reports will be released ahead of the December meeting.
2. Weakness in the Pound and, to a lesser extent, the Euro dominated the FX market and exacerbated fears of significant economic problems stemming from Brexit.
a. As I wrote in a prior blog (June 26), a way to understand Brexit is that it entails a loss of value-added from the association for both the UK (and to a lesser extent) the Euro area. Both now have to work harder to maintain the same standard of living -- and the boost to exports and import substitutes from their weaker currencies is the way the markets act to allow that to happen. This means that it should be no surprise that UK and Euro area real-side economic indicators improve -- contrary to the expectation of a recession by most economists. But, their weaker currencies could hurt US net exports.
3. The regulatory problems with Deutsche Bank continued to hold back stocks.
a. The demand by the US Department of Justice for a large fine for alleged misdeeds in 2007-08 is an example of policymakers aiming for a goal with the unintended consequence of harming economic growth -- a factor behind the sluggish recovery since 2009 (see my blog of September 27).
Friday, October 7, 2016
September Employment Report Should Be Bullish for Stocks and Treasuries, Bearish Dollar
The September Employment Report should be bullish for both stock and Treasury prices but bearish for the dollar -- as its key elements should keep the Fed on hold at least through November. In particular, the Report underscores Yellen's rationale for not tightening in September -- the labor market has enough capacity to accommodate decent job growth without igniting inflation.
1. The +156k m/m increase in Total Payrolls, with net downward revisions in July and August, is decent but not kept them under the +181k m/m January-August average.
2. The uptick in the Unemployment Rate to 5.0% (4.96% unrounded) from 4.9% in August (4.92% unrounded) occurred even with a large 354k increase in Civilian Employment.
a. This is because the Labor Force jumped 444k as Labor Force Participation (percentage of working age population that is working or unemployed but looking for work) rose. The higher Participation Rate is a sign that people are becoming more confident about the labor market. If it continues, it would give the economy more room to grow without pushing up inflation.
b. The broader measure of labor market slack -- U-6 -- was unchanged at 9.7%.
3. The 0.2% m/m increase (0.23% unrounded) in Average Hourly Earnings was modest, after a 0.1% August increase and in light of calendar considerations that should have biased up the September print.
a. The y/y rebounded to 2.6%, but this remains within this year's range. And, it should fall back to 2.4% by November.
1. The +156k m/m increase in Total Payrolls, with net downward revisions in July and August, is decent but not kept them under the +181k m/m January-August average.
2. The uptick in the Unemployment Rate to 5.0% (4.96% unrounded) from 4.9% in August (4.92% unrounded) occurred even with a large 354k increase in Civilian Employment.
a. This is because the Labor Force jumped 444k as Labor Force Participation (percentage of working age population that is working or unemployed but looking for work) rose. The higher Participation Rate is a sign that people are becoming more confident about the labor market. If it continues, it would give the economy more room to grow without pushing up inflation.
b. The broader measure of labor market slack -- U-6 -- was unchanged at 9.7%.
3. The 0.2% m/m increase (0.23% unrounded) in Average Hourly Earnings was modest, after a 0.1% August increase and in light of calendar considerations that should have biased up the September print.
a. The y/y rebounded to 2.6%, but this remains within this year's range. And, it should fall back to 2.4% by November.
Wednesday, October 5, 2016
Do US Economic Data Explain Recent Market Behavior -- And What About Friday's Employment Report?
The markets are moving in seemingly inconsistent directions -- with Treasury yields up despite a range-bound stock market and stronger dollar. However, this is essentially the scenario I laid out in my blog of September 18, where I argued that "early considerations suggest that most key US economic data in the next month or so will be strong enough to keep the risk of a December Fed rate hike alive in the markets, but not strong enough to eliminate all doubt. Treasury yields would likely stay in the recently higher range and stocks remain in their range."
This week's key data so far fit this expectation, although my expectation for Friday's September Employment Report (+140k Payrolls, 4.9% Unemployment Rate, but 0.3% m/m Average Hourly Earnings) argues for a relief rally in Treasuries and a pullback in the dollar. Stocks should rally, as well.
1. While the September Mfg ISM rose to 51.5, above consensus, it remained within the 48.2-53.2 range (average, 50.9) between January and August -- a period in which the Fed did not tighten.
a. The jump in the September Non-Mfg ISM to 57.1 from 51.8 in August also kept it within this year's range (51.8-59.5).
2. The +154k September ADP Estimate is a decent print, but the smallest m/m gain this year (156-257k between January and August).
a. There were 2 conflicting technical considerations regarding a forecast of the September ADP Estimate: /1/ The low +126k m/m increase in August Payrolls acted to hold it down, /2/ but, a weekly index maintained by the Phil Fed argued for a stronger print. The unknown was the strength of the ADP sample, itself. The fact that the September print remained on the low side of the range suggests that the sample reflected modest labor market fundamentals.
b. Recent history suggests Friday's September Payrolls will print below the ADP Estimate, the same as what happened in August. September and August Private Payrolls were both above or below the ADP Estimate in 3 of the past 4 years.
c. I"m estimating +140k for September Total Payrolls. Consensus is +172k.
Modest labor market fundamentals would be consistent with the sluggish pace of GDP Growth being projected by the NY and Atlanta Fed's nowcast models. The Atlanta Fed's forecast for Q3 Real GDP Growth is now only 2.2%, and may very well be lowered after today's wider August Trade Deficit is incorporated. The NY Fed's forecast also is 2.2% and will likely be lowered when it is updated on Friday. Its early projection of Q4 Real GDP Growth is now only 1.2%.
One piece of evidence that appears to contradict the idea of modest labor market fundamentals is the strength seen in the Conference Board Consumer Confidence Index, which is considered to be the consumer survey most reflective of labor market conditions. My guess is that the strength in people's perceptions of the labor market is showing up in an increase in labor market participation by those who previously stopped looking for jobs. If so, it should keep the Unemployment Rate about 4.9% -- the consensus estimate.
a. The Fed is likely to look past any strength in job growth if the Unemployment Rate remains near 4.9%. Yellen highlighted that labor market is sufficient to allow for good-sized job gains without putting much, if any, upward pressure on wage inflation.
Note that the risk for Average Hourly Earnings is an above-trend 0.3% m/m increase in both September and October because of calendar considerations. But, they should slow to 0.1% in November. While the y/y would climb in September and October to 2.6% -- the high end of the recent range -- it would fall to 2.4% in November. So, large gains in September and October should be discounted if not ignored.
a. Note that consensus is 0.3% m/m for September AHE.
This week's key data so far fit this expectation, although my expectation for Friday's September Employment Report (+140k Payrolls, 4.9% Unemployment Rate, but 0.3% m/m Average Hourly Earnings) argues for a relief rally in Treasuries and a pullback in the dollar. Stocks should rally, as well.
1. While the September Mfg ISM rose to 51.5, above consensus, it remained within the 48.2-53.2 range (average, 50.9) between January and August -- a period in which the Fed did not tighten.
a. The jump in the September Non-Mfg ISM to 57.1 from 51.8 in August also kept it within this year's range (51.8-59.5).
2. The +154k September ADP Estimate is a decent print, but the smallest m/m gain this year (156-257k between January and August).
a. There were 2 conflicting technical considerations regarding a forecast of the September ADP Estimate: /1/ The low +126k m/m increase in August Payrolls acted to hold it down, /2/ but, a weekly index maintained by the Phil Fed argued for a stronger print. The unknown was the strength of the ADP sample, itself. The fact that the September print remained on the low side of the range suggests that the sample reflected modest labor market fundamentals.
b. Recent history suggests Friday's September Payrolls will print below the ADP Estimate, the same as what happened in August. September and August Private Payrolls were both above or below the ADP Estimate in 3 of the past 4 years.
c. I"m estimating +140k for September Total Payrolls. Consensus is +172k.
Modest labor market fundamentals would be consistent with the sluggish pace of GDP Growth being projected by the NY and Atlanta Fed's nowcast models. The Atlanta Fed's forecast for Q3 Real GDP Growth is now only 2.2%, and may very well be lowered after today's wider August Trade Deficit is incorporated. The NY Fed's forecast also is 2.2% and will likely be lowered when it is updated on Friday. Its early projection of Q4 Real GDP Growth is now only 1.2%.
One piece of evidence that appears to contradict the idea of modest labor market fundamentals is the strength seen in the Conference Board Consumer Confidence Index, which is considered to be the consumer survey most reflective of labor market conditions. My guess is that the strength in people's perceptions of the labor market is showing up in an increase in labor market participation by those who previously stopped looking for jobs. If so, it should keep the Unemployment Rate about 4.9% -- the consensus estimate.
a. The Fed is likely to look past any strength in job growth if the Unemployment Rate remains near 4.9%. Yellen highlighted that labor market is sufficient to allow for good-sized job gains without putting much, if any, upward pressure on wage inflation.
Note that the risk for Average Hourly Earnings is an above-trend 0.3% m/m increase in both September and October because of calendar considerations. But, they should slow to 0.1% in November. While the y/y would climb in September and October to 2.6% -- the high end of the recent range -- it would fall to 2.4% in November. So, large gains in September and October should be discounted if not ignored.
a. Note that consensus is 0.3% m/m for September AHE.
Tuesday, September 27, 2016
Who's Lying?
"Who's lying?" is one of the stand-out themes of the Presidential race. My view is that the most important lies can be found in the conventional stories to afix blame for the 2008-09 financial crisis/recession and for the post-recession anemic recovery. Convention fixes the blame for 2008-09 on banks and for the anemic recovery on a natural consequence of a financial-induced recession. The first story fails to take account of macroeconomic considerations as well as major policy mistakes. The second story fails to take account of policy actions -- both by Democrats and Republicans -- that had the unintended consequence of hurting economic growth. Wrong explanations lead to bad policy prescriptions. Here are some reasons I believe help explain the anemic recovery since 2009 -- and provide hints on what policy actions could best remedy it:
At least some of the weakness in post-Great Recession GDP Growth can be attributed to 5 policy-related actions — and is not a natural consequence of a financial-induced recession:
1. Actions to cut the Federal Deficit — a Republican concern but, in fact, a wrong target. The decline in Real Federal Govt Purchases cut annual Real GDP Growth by 1% pt in each year between 2011 and 2013.
2. Administrative and Executive actions aimed at targets that hurt GDP Growth. The most important may have been clamping down on the financial sector. But, there are other industries that were curtailed by these actions, as well — particularly in the energy sector. While these targets might be desirable they nevertheless had anti-growth effects.
3. Tighter lending standards by banks, as they were pressured or required by regulators to curtail risk taking.
4. Increased regulations and legislative-related increases in labor costs have impaired small business formation.
5. Anti-business rhetoric by Obama in 2009-10. This may have been important. I was surprised to learn that FDR maintained anti-business rhetoric in his speeches throughout the 1930s. This may help explain why the US economy did not recover more quickly from the 1931 depression than it did. Its failure to do so has been a puzzle for economists.
Moreover, I think economists like Larry Summers are overselling the effectiveness of fiscal stimulus, like infrastructure building. Fiscal stimulus will not be as powerful as it was years ago. This is because the drain from imports will reduce the multiplier/accelerator effects of the stimulus.
a. Also, Summers’ claim that increased infrastructure building will lead to higher productivity growth is questionable. Productivity has not been amenable to modeling in the past — its speedup/slowdown is not easily explainable. My own hunch is twofold: /1/ the clamping down of banking not only held back a high-productivity industry but likely undercut productivity efforts in other industries, as well. /2/ Almost all of the job growth has been in low-productive services -- which may have resulted in part from a surge in back-office health-care jobs related to insurance filings with ObamaCare and in part from not being capable of being outsourced abroad or eliminated by technology.
6. Nevertheless, I think the “natural” window for the Fed to hike rates is when fiscal stimulus is implemented that will substitute for the easy monetary policy. Assuming the new administration implements fiscal stimulus in H117, the window for Fed tightening would be H217.
At least some of the weakness in post-Great Recession GDP Growth can be attributed to 5 policy-related actions — and is not a natural consequence of a financial-induced recession:
1. Actions to cut the Federal Deficit — a Republican concern but, in fact, a wrong target. The decline in Real Federal Govt Purchases cut annual Real GDP Growth by 1% pt in each year between 2011 and 2013.
2. Administrative and Executive actions aimed at targets that hurt GDP Growth. The most important may have been clamping down on the financial sector. But, there are other industries that were curtailed by these actions, as well — particularly in the energy sector. While these targets might be desirable they nevertheless had anti-growth effects.
3. Tighter lending standards by banks, as they were pressured or required by regulators to curtail risk taking.
4. Increased regulations and legislative-related increases in labor costs have impaired small business formation.
5. Anti-business rhetoric by Obama in 2009-10. This may have been important. I was surprised to learn that FDR maintained anti-business rhetoric in his speeches throughout the 1930s. This may help explain why the US economy did not recover more quickly from the 1931 depression than it did. Its failure to do so has been a puzzle for economists.
Moreover, I think economists like Larry Summers are overselling the effectiveness of fiscal stimulus, like infrastructure building. Fiscal stimulus will not be as powerful as it was years ago. This is because the drain from imports will reduce the multiplier/accelerator effects of the stimulus.
a. Also, Summers’ claim that increased infrastructure building will lead to higher productivity growth is questionable. Productivity has not been amenable to modeling in the past — its speedup/slowdown is not easily explainable. My own hunch is twofold: /1/ the clamping down of banking not only held back a high-productivity industry but likely undercut productivity efforts in other industries, as well. /2/ Almost all of the job growth has been in low-productive services -- which may have resulted in part from a surge in back-office health-care jobs related to insurance filings with ObamaCare and in part from not being capable of being outsourced abroad or eliminated by technology.
6. Nevertheless, I think the “natural” window for the Fed to hike rates is when fiscal stimulus is implemented that will substitute for the easy monetary policy. Assuming the new administration implements fiscal stimulus in H117, the window for Fed tightening would be H217.
Wednesday, September 21, 2016
FOMC Statement Modestly Hawkish, But Yellen's Rationale Very Bullish for Stock Market
Today's FOMC Statement was modestly hawkish, but Yellen's rationale for not tightening at this meeting is very bullish for the stock market.
1. The Statement was modestly hawkish, as it acknowledged that "the case for an increase in the federal funds rate has strengthened."
2. But, Yellen's rationale for not tightening at this meeting is very bullish for the stock market, as it was pro-growth. It echoed Fed Governor Brainard's point last week that the labor market is not tightening even with strong job growth. In other words, labor market capacity has been expanding, as more people are being drawn back into the labor market, and thus should accommodate continued decent growth without creating inflationary pressures.
a. In her prepared remarks, Yellen emphasized that the steady 4.9% Unemployment Rate in the face of strong Payroll gains allowed the Fed to tolerate economic growth, presumably 2+% GDP, and thus allowed the Fed not to hike today.
b. The Fed's projections have the Unemployment Rate falling to 4.8% in Q416, 4.6% in Q417, and 4.5% in Q418. Moreover, these projections see a higher funds rate in each of these years.
c. This suggests that as long as the Unemployment Rate remains in the 4.9-5.0% range, the Fed may very well continue to refrain from hiking the funds rate.
d. And, continuing decent GDP growth is a positive for the profits outlook.
1. The Statement was modestly hawkish, as it acknowledged that "the case for an increase in the federal funds rate has strengthened."
2. But, Yellen's rationale for not tightening at this meeting is very bullish for the stock market, as it was pro-growth. It echoed Fed Governor Brainard's point last week that the labor market is not tightening even with strong job growth. In other words, labor market capacity has been expanding, as more people are being drawn back into the labor market, and thus should accommodate continued decent growth without creating inflationary pressures.
a. In her prepared remarks, Yellen emphasized that the steady 4.9% Unemployment Rate in the face of strong Payroll gains allowed the Fed to tolerate economic growth, presumably 2+% GDP, and thus allowed the Fed not to hike today.
b. The Fed's projections have the Unemployment Rate falling to 4.8% in Q416, 4.6% in Q417, and 4.5% in Q418. Moreover, these projections see a higher funds rate in each of these years.
c. This suggests that as long as the Unemployment Rate remains in the 4.9-5.0% range, the Fed may very well continue to refrain from hiking the funds rate.
d. And, continuing decent GDP growth is a positive for the profits outlook.
Sunday, September 18, 2016
The September FOMC Meeting and the Markets' Outlook
Market participants are debating whether Treasury yields will fall or rise in the next few months and whether the stock market will break above their range. The FOMC Statement on Wednesday may determine which side of the debate is right. Here's why I think the Statement risks keeping Treasury yields in the recently high range and stocks range bound.
Consensus and I expect the Fed to refrain from hiking rates at this week's FOMC Meeting. But, the Statement is the key to how the markets will trade afterwards, and it risks being hawkish -- saying, in line with Yellen's Jackson Hole Speech, that the labor market is approaching full employment and inflation is approaching the Fed's target. The combination of no hike and a hawkish Statement could be a compromise between the hawks and doves on the FOMC.
A hawkish Statement would likely result in knee-jerk selling of Treasuries and stocks, as it would make the markets think a December rate hike is in play. Such sell-offs tend to be overdone, however, and this case should not be an exception -- the December FOMC Meeting is far off and nothing is guaranteed. Indeed, early considerations suggest most key US economic data in the next month or so will be strong enough to keep the risk of a December hike alive in the markets, but not strong enough to eliminate all doubt. So, after the initial reaction and volatility, Treasury yields would likely stay in their recently higher range and stocks remain in their range.
1. Generally, the risk is that US economic data pertaining to September and October will strengthen as the weather returns to normal after a very hot August.
a. In particular, Ex Auto Retail Sales should post gains, after having fallen in July and August.
2. September Nonfarm Payrolls should remain moderate, around 150k, as the Claims data show little change since the August Survey Week. (Such a moderation in Payrolls happened in August-September last year, as well). Fed hawks, such as Williams, view this pace of net job creation as strong enough to warrant higher rates. But Fed doves, like Brainard, are not convinced.
3. Similarly, the September Unemployment Rate should be little changed from August's 4.9%.
a. But, an uptick in the Unemployment Rate to 5.0% cannot be ruled out. The Rate was 4.922% in August (up from 4.88% in July), so a small uptick could round to 5.0% -- which would have a positive headline effect on Treasuries and stocks.
4. In a broad sense, Q416 Real GDP Growth could slow to under 2.0% -- in line with the early forecast of the NY Fed's nowcast model and consistent with the tightening of bank lending standards in mid year -- but the q/q slowdown could mask a modest speedup in economic activity during the quarter.
a. A speedup during the quarter could lead to a pickup in Q117 Real GDP Growth. The renewed move up in the ECRI Leading Index in the past couple of weeks supports this possibility. But, winter weather plays the most important role in determining the strength of GDP growth in the Q1 of a year.
b. Note that the Atlanta Fed's nowcast model's forecast of Q316 GDP fell to 3.0% from 3.3% after last week's data releases. The NY Fed's model had been projecting 2.8% for Q316 but will not be updated until next Friday (as it refrained from doing so ahead of the FOMC Meeting).
Upcoming inflation-related data could feed into the hawks' camp.
1. Average Hourly Earnings risk printing an above-trend 0.3% m/m for both September and October, based on calendar considerations. The y/y would return to its recent high of 2.6% in the October Employment Report. But, AHE should slow to 0.1% m/m and 2.4% y/y in the November Report (due in early December), based on calendar consideration.
2. Whether the Core CPI prints 0.3% m/m in September, as in August, is a tough call. A number of the components that rose notably in August could be one-off -- just snapbacks from declines in June and July -- so could soften in September. But, the bi-monthly sampling for the CPI means that some of the increases -- such as for the EpiPen -- could be captured in the September CPI survey as well as in the August survey.
3. But, the August Core PCE Deflator is likely to weaker than the 0.3% m/m Core CPI as a result of differences in composition and definition.
Aside from the US economic data, the outlook for fiscal policy may be clearer at the December FOMC Meeting. Expectations of large fiscal stimulus -- if Trump wins -- or even moderate fiscal stimulus -- if Clinton wins -- could encourage the Fed to hike.
a. Note that the sell-off in German Bunds has been attributed to the ECB failing to extend its bond buying program. But, it also could be attributed to the ECB pushing the European countries to boost fiscal stimulus.
b. I continue to think that aggressive fiscal stimulus is the major downside risk for Treasury prices.
Consensus and I expect the Fed to refrain from hiking rates at this week's FOMC Meeting. But, the Statement is the key to how the markets will trade afterwards, and it risks being hawkish -- saying, in line with Yellen's Jackson Hole Speech, that the labor market is approaching full employment and inflation is approaching the Fed's target. The combination of no hike and a hawkish Statement could be a compromise between the hawks and doves on the FOMC.
A hawkish Statement would likely result in knee-jerk selling of Treasuries and stocks, as it would make the markets think a December rate hike is in play. Such sell-offs tend to be overdone, however, and this case should not be an exception -- the December FOMC Meeting is far off and nothing is guaranteed. Indeed, early considerations suggest most key US economic data in the next month or so will be strong enough to keep the risk of a December hike alive in the markets, but not strong enough to eliminate all doubt. So, after the initial reaction and volatility, Treasury yields would likely stay in their recently higher range and stocks remain in their range.
1. Generally, the risk is that US economic data pertaining to September and October will strengthen as the weather returns to normal after a very hot August.
a. In particular, Ex Auto Retail Sales should post gains, after having fallen in July and August.
2. September Nonfarm Payrolls should remain moderate, around 150k, as the Claims data show little change since the August Survey Week. (Such a moderation in Payrolls happened in August-September last year, as well). Fed hawks, such as Williams, view this pace of net job creation as strong enough to warrant higher rates. But Fed doves, like Brainard, are not convinced.
3. Similarly, the September Unemployment Rate should be little changed from August's 4.9%.
a. But, an uptick in the Unemployment Rate to 5.0% cannot be ruled out. The Rate was 4.922% in August (up from 4.88% in July), so a small uptick could round to 5.0% -- which would have a positive headline effect on Treasuries and stocks.
4. In a broad sense, Q416 Real GDP Growth could slow to under 2.0% -- in line with the early forecast of the NY Fed's nowcast model and consistent with the tightening of bank lending standards in mid year -- but the q/q slowdown could mask a modest speedup in economic activity during the quarter.
a. A speedup during the quarter could lead to a pickup in Q117 Real GDP Growth. The renewed move up in the ECRI Leading Index in the past couple of weeks supports this possibility. But, winter weather plays the most important role in determining the strength of GDP growth in the Q1 of a year.
b. Note that the Atlanta Fed's nowcast model's forecast of Q316 GDP fell to 3.0% from 3.3% after last week's data releases. The NY Fed's model had been projecting 2.8% for Q316 but will not be updated until next Friday (as it refrained from doing so ahead of the FOMC Meeting).
Upcoming inflation-related data could feed into the hawks' camp.
1. Average Hourly Earnings risk printing an above-trend 0.3% m/m for both September and October, based on calendar considerations. The y/y would return to its recent high of 2.6% in the October Employment Report. But, AHE should slow to 0.1% m/m and 2.4% y/y in the November Report (due in early December), based on calendar consideration.
2. Whether the Core CPI prints 0.3% m/m in September, as in August, is a tough call. A number of the components that rose notably in August could be one-off -- just snapbacks from declines in June and July -- so could soften in September. But, the bi-monthly sampling for the CPI means that some of the increases -- such as for the EpiPen -- could be captured in the September CPI survey as well as in the August survey.
3. But, the August Core PCE Deflator is likely to weaker than the 0.3% m/m Core CPI as a result of differences in composition and definition.
Aside from the US economic data, the outlook for fiscal policy may be clearer at the December FOMC Meeting. Expectations of large fiscal stimulus -- if Trump wins -- or even moderate fiscal stimulus -- if Clinton wins -- could encourage the Fed to hike.
a. Note that the sell-off in German Bunds has been attributed to the ECB failing to extend its bond buying program. But, it also could be attributed to the ECB pushing the European countries to boost fiscal stimulus.
b. I continue to think that aggressive fiscal stimulus is the major downside risk for Treasury prices.
Thursday, September 15, 2016
Today's Soft Data Argue Against a Fed Rate Hike
Today's data on August Retail Sales and Industrial Production were weaker than consensus -- in line with the risks I highlighted in a prior blog -- and argue against a Fed rate hike next week. The Atltanta Fed's model will likely lower its nowcast of Q316 Real GDP Growth from the latest 3.3% forecast. While the worst of the soft patch may be over, it does not look like there will be a strong bounce, if any.
1. August Retail Sales fell both in Total (-0.3% m/m) and Ex Auto (-0.1% m/m) and followed downward revisions to both June and July.
a. Consensus for August Retail Sales was -0.1% and +0.2%, respectively.
2. August Industrial Production fell 0.4% m/m, weaker than the -0.3% consensus.
a. Importantly, Manufacturing Output also fell 0.4% m/m -- despite a rebound in motor vehicle assemblies -- and followed downward revised gains in June and July. Fed hawks had cited the June-July gains when they upped their rhetoric a few weeks ago.
3. While the Phil Fed Mfg Index jumped to +12.8 in September from +2 in August, the bulk of the details weakened.
a. An average of the components that map into the Mfg ISM fell in September.
b. Note that the overall Phil Fed Index reflects answers to a question about overall business conditions. The details are more company specific, as they regard orders, production, inventories, employment, etc. Companies should be more knowledgeable about the latter than the former.
4. The Claims data suggest the worst of the soft patch may be over. Both Initial and Continuing barely moved up in the latest week, suggesting that the hurricane-related bad weather in parts of the country did not significantly depress them in the prior week. Both are slightly below their respective August average.
5. The August PPI showed no inflation in the headline prints -- 0.0% m/m Total and +0.1% m/m Core. Consensus was 0.1% m/m for both.
a. Excluding the dubious Trade Services Component, as well as excluding food and energy, the PPI rose 0.3% m/m. But this high print followed a 0.0% m/m print in July and has been volatile in recent months.
b. The components that feed into the PCE Deflator look soft to benign.
c. Tomorrow's August CPI report is more important to the Fed and the markets.
1. August Retail Sales fell both in Total (-0.3% m/m) and Ex Auto (-0.1% m/m) and followed downward revisions to both June and July.
a. Consensus for August Retail Sales was -0.1% and +0.2%, respectively.
2. August Industrial Production fell 0.4% m/m, weaker than the -0.3% consensus.
a. Importantly, Manufacturing Output also fell 0.4% m/m -- despite a rebound in motor vehicle assemblies -- and followed downward revised gains in June and July. Fed hawks had cited the June-July gains when they upped their rhetoric a few weeks ago.
3. While the Phil Fed Mfg Index jumped to +12.8 in September from +2 in August, the bulk of the details weakened.
a. An average of the components that map into the Mfg ISM fell in September.
b. Note that the overall Phil Fed Index reflects answers to a question about overall business conditions. The details are more company specific, as they regard orders, production, inventories, employment, etc. Companies should be more knowledgeable about the latter than the former.
4. The Claims data suggest the worst of the soft patch may be over. Both Initial and Continuing barely moved up in the latest week, suggesting that the hurricane-related bad weather in parts of the country did not significantly depress them in the prior week. Both are slightly below their respective August average.
5. The August PPI showed no inflation in the headline prints -- 0.0% m/m Total and +0.1% m/m Core. Consensus was 0.1% m/m for both.
a. Excluding the dubious Trade Services Component, as well as excluding food and energy, the PPI rose 0.3% m/m. But this high print followed a 0.0% m/m print in July and has been volatile in recent months.
b. The components that feed into the PCE Deflator look soft to benign.
c. Tomorrow's August CPI report is more important to the Fed and the markets.
Monday, September 12, 2016
Brainard Comes Through; When Should the Fed Tighten?
Fed Governor Brainard came through with dovish comments, citing a variety of reasons for monetary policy not to tighten. In particular, she cited the likelihood of continuing low inflation, evidence of increased capacity as the Unemployment Rate has been steady despite strong Payroll gains this year, and downside risks from abroad. She continues to provide the best analysis of the US economic situation among all the Fed officials.
Fed hawks (like Williams, Fischer and apparently Dudley) cited the strength of June-July economic data to raise the potential for a September rate hike. But, this analysis was dubious, as the June-July strength risked being just a temporary catch-up from the weak May. They should have known this, and, indeed, that is what occurred as the August data softened. Low growth may persist, as the NY Fed nowcast model projects a slowdown in Real GDP Growth to 1.7% in Q416 from a projected 2.8% in Q316. Moreover, the latter risks being revised down as data come in.
In an environment of slow economic growth and low inflation, when would it be appropriate for the Fed to tighten? My view is that there would be a natural window for the Fed to tighten when there is a substitute force to spur the economy. And, this force is likely to be fiscal stimulus. If the new Administration -- whether Clinton or Trump -- implements a large enough program of fiscal stimulus -- either tax cuts, government spending increases, or regulatory reform -- that boosts the economy significantly, the Fed would have an opportunity to raise rates. This idea suggests that the earliest window for the Fed to tighten may be mid- to late-2017.
Fed hawks (like Williams, Fischer and apparently Dudley) cited the strength of June-July economic data to raise the potential for a September rate hike. But, this analysis was dubious, as the June-July strength risked being just a temporary catch-up from the weak May. They should have known this, and, indeed, that is what occurred as the August data softened. Low growth may persist, as the NY Fed nowcast model projects a slowdown in Real GDP Growth to 1.7% in Q416 from a projected 2.8% in Q316. Moreover, the latter risks being revised down as data come in.
In an environment of slow economic growth and low inflation, when would it be appropriate for the Fed to tighten? My view is that there would be a natural window for the Fed to tighten when there is a substitute force to spur the economy. And, this force is likely to be fiscal stimulus. If the new Administration -- whether Clinton or Trump -- implements a large enough program of fiscal stimulus -- either tax cuts, government spending increases, or regulatory reform -- that boosts the economy significantly, the Fed would have an opportunity to raise rates. This idea suggests that the earliest window for the Fed to tighten may be mid- to late-2017.
Friday, September 9, 2016
Markets Vote No Confidence in the Appropriateness of a Fed Rate Hike -- What to Look for Next Week
The markets voted no confidence in the appropriateness of a Fed rate hike today -- stocks, Treasuries and oil prices fell sharply and the dollar rose. The stock market reaction, especially, signals that a rate hike would be viewed as harmful to the economy. The markets reacted to a speech by Boston Fed President Rosengren in which he said that in his opinion "a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy." The large market reactions to this standard Fed comment (in line with Yellen's Jackson Hole speech) show a pent-up sensitivity to the potential for a September rate hike. Several items scheduled next week may show whether this sensitivity was overdone today:
Monday:
1. Atlanta Fed President Lockhart speaks twice. His last speech on August 16 indicated that he thinks one rate hike this year would be appropriate. He is not likely to change this view, and a repeat may test whether the market is "sold out" on the potential for a hike.
2. Fed Governor Brainard speaks at 1.15pm (EDT), later than Lockhart. She has been a dove and a better indicator of upcoming Fed actions than have the hawks. If she continues to argue against a hike, the markets could reverse some of the latest sell-off. If she says that a reasonable case can be made for a hike, it would seem to be almost a done deal.
Thursday:
1. August Retail Sales risk printing weaker than expected, based on anecdotal evidence. In particular, the very hot weather in the country could have had a depressing effect on the early introduction of fall clothing. Consensus is 0.0% m/m Total and +0.2% Ex Auto. A weak report could push down the NY Fed and Atlanta Fed models' nowcast of Q3 Real GDP Growth. The latest nowcasts are 2.8-3.3% for Q316 Real GDP Growth (was 3.0-3.5% before today's release of July Wholesale Inventories). The NY Fed model projects 1.7% for Q416 Real GDP Growth.
2. The Claims data are for the Labor Day week, so the markets may ignore them. They strengthened a bit in yesterday's release, but stayed within their recent range. Moreover, they could have been held down by the bad weather in the Southeast that week -- and catch-up could boost them in this report.
3. The September Phil Fed Manufacturing Index could come in weaker than expected, after it ran counter to the Mfg ISM in August (it rose, while Mfg ISM fell). Consensus is for an unchanged 2.
4. August Manufacturing Output, part of Industrial Production, could unwind the +0.7% m/m jump in July, based on the drop in Mfg jobs and hours worked in August. The July jump was cited by Fed hawks as evidence supporting a rate hike.
Friday:
1. A soft August Core CPI, just like the +0.1% m/m July Core, would question the need to slow the economy -- and thus argue against a Fed rate hike.
Monday:
1. Atlanta Fed President Lockhart speaks twice. His last speech on August 16 indicated that he thinks one rate hike this year would be appropriate. He is not likely to change this view, and a repeat may test whether the market is "sold out" on the potential for a hike.
2. Fed Governor Brainard speaks at 1.15pm (EDT), later than Lockhart. She has been a dove and a better indicator of upcoming Fed actions than have the hawks. If she continues to argue against a hike, the markets could reverse some of the latest sell-off. If she says that a reasonable case can be made for a hike, it would seem to be almost a done deal.
Thursday:
1. August Retail Sales risk printing weaker than expected, based on anecdotal evidence. In particular, the very hot weather in the country could have had a depressing effect on the early introduction of fall clothing. Consensus is 0.0% m/m Total and +0.2% Ex Auto. A weak report could push down the NY Fed and Atlanta Fed models' nowcast of Q3 Real GDP Growth. The latest nowcasts are 2.8-3.3% for Q316 Real GDP Growth (was 3.0-3.5% before today's release of July Wholesale Inventories). The NY Fed model projects 1.7% for Q416 Real GDP Growth.
2. The Claims data are for the Labor Day week, so the markets may ignore them. They strengthened a bit in yesterday's release, but stayed within their recent range. Moreover, they could have been held down by the bad weather in the Southeast that week -- and catch-up could boost them in this report.
3. The September Phil Fed Manufacturing Index could come in weaker than expected, after it ran counter to the Mfg ISM in August (it rose, while Mfg ISM fell). Consensus is for an unchanged 2.
4. August Manufacturing Output, part of Industrial Production, could unwind the +0.7% m/m jump in July, based on the drop in Mfg jobs and hours worked in August. The July jump was cited by Fed hawks as evidence supporting a rate hike.
Friday:
1. A soft August Core CPI, just like the +0.1% m/m July Core, would question the need to slow the economy -- and thus argue against a Fed rate hike.
Friday, September 2, 2016
August Employment Report Should Stop the Fed in September
The August Employment Report should stop the Fed from hiking at its September FOMC Meeting. The Report joins yesterday's Mfg ISM in showing that the economic strength seen in June and July -- and cited by the Fed hawks for their desire to hike in September -- was temporary. (I believe the June-July strength was just a catch-up after the weak May.)
The Report suggests modest economic growth. And, I would not be surprised if the Atlanta and NY Fed models eventually lower their nowcasts of Q3 Real GDP Growth (currently 3.2% and 2.8%, respectively). But, the combination of modest growth, low inflation, and steady Fed policy should be positives for stocks and Treasuries.
Note that my August Payroll estimate of +150k was almost dead-on. It ranked 2 out of 150 estimates on Estimize.com.
Here are the salient points of the report:
1. The 151k m/m increase in Nonfarm Payrolls is below the +186k m/m average from January through July.
2. The cyclical sectors -- manufacturing and construction -- posted job declines.
3. While the Unemployment Rate was steady at 4.9%, it rose to to 4.92% from 4.88% unrounded.
4. The broader measure of Unemployment -- U6 -- was steady at 9.7%.
5. Part-timers for Economic Reasons rose for the 2nd month in a row.
6. The Nonfarm Workweek fell to 34.3 Hours from a downward-revised 34.4 Hours in July (was 34.5 Hours), arguing against a pickup in production.
a. August Manufacturing Output is likely to unwind the July jump. Fed hawks had cited the July jump in arguing that economic growth was picking up.
7. Average Hourly Earnings rose 0.1% m/m, pushing down the y/y to 2.4% from an upward-revised 2.7% in July. The August y/y increase is the lowest since November 2015.
The Report suggests modest economic growth. And, I would not be surprised if the Atlanta and NY Fed models eventually lower their nowcasts of Q3 Real GDP Growth (currently 3.2% and 2.8%, respectively). But, the combination of modest growth, low inflation, and steady Fed policy should be positives for stocks and Treasuries.
Note that my August Payroll estimate of +150k was almost dead-on. It ranked 2 out of 150 estimates on Estimize.com.
Here are the salient points of the report:
1. The 151k m/m increase in Nonfarm Payrolls is below the +186k m/m average from January through July.
2. The cyclical sectors -- manufacturing and construction -- posted job declines.
3. While the Unemployment Rate was steady at 4.9%, it rose to to 4.92% from 4.88% unrounded.
4. The broader measure of Unemployment -- U6 -- was steady at 9.7%.
5. Part-timers for Economic Reasons rose for the 2nd month in a row.
6. The Nonfarm Workweek fell to 34.3 Hours from a downward-revised 34.4 Hours in July (was 34.5 Hours), arguing against a pickup in production.
a. August Manufacturing Output is likely to unwind the July jump. Fed hawks had cited the July jump in arguing that economic growth was picking up.
7. Average Hourly Earnings rose 0.1% m/m, pushing down the y/y to 2.4% from an upward-revised 2.7% in July. The August y/y increase is the lowest since November 2015.
Wednesday, August 31, 2016
August Payrolls/Average Hourly Earnings Risk Printing Below Expectations
Friday's August Employment Report may very well come in weaker than consensus expects, but it will probably not completely close the door on a September Fed rate hike -- as it is not clear whether they will be weaker than the possibly low bars set by the Fed. Nevertheless, weaker-than-expected prints for Payrolls and Average Hourly Earnings could boost stocks and bonds and weigh on the dollar. Here is some evidence that Payrolls and Average Hourly Earnings will come in weaker than expected.
Payrolls
1. Payrolls came in below the ADP Estimate in August in each of the past 3 years (since ADP changed its estimation procedures). The average shortfall is 48k, with a range of 24k to 70k.
August Print (000s)
ADP Estimate First-Print Private Payrolls
2016 177 na
2015 190 140
2014 204 134
2013 176 152
2. Some Street Economists point out that consensus has overestimated August Payrolls in each of the past 5 years. Consensus is +180k.
a. This pattern of consensus miss has tended to be an unreliable predictor, however.
3. The August Payroll Survey Week was relatively early this year, after a late July week. This early timing would seem to risk a downward bias to the m/m change in jobs.
a. But, BLS seasonal adjustment should account for this calendar timing, and there is no conclusive evidence that this early survey week will bias down an August Payroll gain.
Average Hourly Earnings
1. Average Hourly Earnings should print 0.0-0.1% m/m, as a result of a calendar quirk.
a. This quirk was likely responsible for the 0.3% m/m jump in July Average Hourly Earnings.
2. The y/y would fall to 2.3-2.4% from 2.6% in July. This would be the lowest y/y since November 2015.
3. Consensus for Average Hourly Earnings is +0.2% m/m.
Payrolls
1. Payrolls came in below the ADP Estimate in August in each of the past 3 years (since ADP changed its estimation procedures). The average shortfall is 48k, with a range of 24k to 70k.
August Print (000s)
ADP Estimate First-Print Private Payrolls
2016 177 na
2015 190 140
2014 204 134
2013 176 152
2. Some Street Economists point out that consensus has overestimated August Payrolls in each of the past 5 years. Consensus is +180k.
a. This pattern of consensus miss has tended to be an unreliable predictor, however.
3. The August Payroll Survey Week was relatively early this year, after a late July week. This early timing would seem to risk a downward bias to the m/m change in jobs.
a. But, BLS seasonal adjustment should account for this calendar timing, and there is no conclusive evidence that this early survey week will bias down an August Payroll gain.
Average Hourly Earnings
1. Average Hourly Earnings should print 0.0-0.1% m/m, as a result of a calendar quirk.
a. This quirk was likely responsible for the 0.3% m/m jump in July Average Hourly Earnings.
2. The y/y would fall to 2.3-2.4% from 2.6% in July. This would be the lowest y/y since November 2015.
3. Consensus for Average Hourly Earnings is +0.2% m/m.
Subscribe to:
Posts (Atom)