Two recent speeches by Fed officials -- Cleveland Fed President Mester (hawk) and Fed Governor Brainard (dove) -- underscore the possibility that a downshift in the "dots" will be the most lasing market-relevant outcome of the March 15-16 FOMC Meeting. While a March Rate Hike still appears to be on the table, market reactions to one could be short-lived as a more benign outlook for the funds rate turns out to the more significant change in Fed policy.
Mester says explicitly that the Summary of Economic Projections (SEP) "will be particularly helpful in March given the global economic and financial developments we've seen since our last set of projections."
And, it would seem that the SEP may be the place where Fed officials display their heightened uncertainty about the outlook.
a. Mester says, "Even as policy gradually normalizes, it will likely need to remain accommodative for some time to come, given some of the forces impacting our economy -- for example, slow growth abroad, dollar appreciation, more restrictive financial conditions, and the continued rebalancing of supply and demand in the energy sector."
The SEP also may be the place to reflect an apparent overall agreement by Fed hawks and doves about the possible downshifting of the neutral rate of interest rate -- the rate consistent with trend economic growth at full employment -- relative to past levels.
a. In an earlier speech in February, Mester acknowledged "there is some uncertainty about what the "normal" level of interest rates is. If productivity growth remains low and the potential growth rate of the economy over the longer run has moved lower, then the longer-run level of the funds rate consistent with price stability and maximum employment -- the so-called neutral rate -- would also be lower than it was in earlier periods." This is the first opening I've seen in Mester's typically hawkish commentary that lends itself to some compromise with the doves on the FOMC.
b. Brainard said, "The neutral rate of interest -- or the rate of interest consistent with the economy remaining at its potential rate of output and inflation remaining at target level -- appears to have declined over the past 30 years in the United States and is now at historically low levels."
To be sure, a March Rate Hike still appears to be on the table, particularly since recent US macroeconomic data support the hawkish position.
Mester says:
a. "At this point, I see the market volatility and sharp drop in oil prices as posing risks to the forecast, but I believe it is premature to conclude they necessitate a material change in my modal economic outlook."
b. "While there is a possibility that a steeper, more persistent drop in equity markets could lead to a broader and more persistent pullback in risk-taking and credit extension, with spillovers to the broader economy, so far we have not seen this."
c. "Until I see further evidence to the contrary, my current expectation is that the US economy will work through the episode of market turbulence and the soft patch of economic data to regain its footing for moderate growth, even as the energy and manufacturing sectors remain challenged."
Q116 Real GDP Growth so far looks like it sped up to an above-trend 2+% from 1.0% in Q415.
Meanwhile, Brainard voices concern that "Core PCE Inflation has remained stubbornly in the vicinity of 1-1/4 to 1-1/2 percent over the past three years in the United States."
The y/y for the Core PCE Deflator jumped to 1.7% in January.
Sunday, February 28, 2016
Friday, February 26, 2016
US Economic Data Continue to Support a Fed Rate Hike
The high January Core PCE Deflator (0.3% m/m and 1.7% y/y), along with the good-sized gain in Real Consumption, adds to evidence arguing for the Fed to hike the funds rate in March.
a. The Market-Based Core PCE Deflator confirms the pickup in inflation, as it rose an above-trend 0.2% m/m with its y/y rising to 1.5% from 1.3% in December.
b. While the pickup in January inflation likely reflects start-of-year price hikes, the latter's impact risks showing up also in February inflation data as a result if bi-monthly sampling in the CPI.
c. Real Consumption risks speeding up to 3+% in Q115 -- some of the strength being weather-related. This growth rate is in line with the Atlanta Fed's GDP Now Model.
Next week's US economic data are not likely to change the story:
a. February Mfg ISM risks moving up, as January "hard' data on the manufacturing sector -- IP, Manufacturing Payrolls, and Durable Goods Orders -- belied the weakness seen in the 48.2 January Mfg ISM.
b. February Payrolls should be decent, similar to the +151k in January, as there was not much change in the Claims data between survey weeks.
c. Average Hourly Earnings, however, should slow to +0.1% m/m from the +0.5% January print, based on calendar and compositional considerations. The y/y should be steady at 2.5%.
While the risk of a March Fed Rate Hike could hold back the stock market in the next few weeks -- especially after the March 10th ECB meeting, stocks may very well decide to take a hike in stride, as I discussed in the prior blog.
Moreover, a rate hike would signal that Fed officials remain confident that the economy will continue to grow at an above-trend pace in coming quarters -- a positive for stocks. Skipping a rate hike would signal serious concern about the health of the economy.
a. The Market-Based Core PCE Deflator confirms the pickup in inflation, as it rose an above-trend 0.2% m/m with its y/y rising to 1.5% from 1.3% in December.
b. While the pickup in January inflation likely reflects start-of-year price hikes, the latter's impact risks showing up also in February inflation data as a result if bi-monthly sampling in the CPI.
c. Real Consumption risks speeding up to 3+% in Q115 -- some of the strength being weather-related. This growth rate is in line with the Atlanta Fed's GDP Now Model.
Next week's US economic data are not likely to change the story:
a. February Mfg ISM risks moving up, as January "hard' data on the manufacturing sector -- IP, Manufacturing Payrolls, and Durable Goods Orders -- belied the weakness seen in the 48.2 January Mfg ISM.
b. February Payrolls should be decent, similar to the +151k in January, as there was not much change in the Claims data between survey weeks.
c. Average Hourly Earnings, however, should slow to +0.1% m/m from the +0.5% January print, based on calendar and compositional considerations. The y/y should be steady at 2.5%.
While the risk of a March Fed Rate Hike could hold back the stock market in the next few weeks -- especially after the March 10th ECB meeting, stocks may very well decide to take a hike in stride, as I discussed in the prior blog.
Moreover, a rate hike would signal that Fed officials remain confident that the economy will continue to grow at an above-trend pace in coming quarters -- a positive for stocks. Skipping a rate hike would signal serious concern about the health of the economy.
Monday, February 22, 2016
Today's Markets and Central Bank Policy -- Can Stocks Weather a Fed Rate Hike?
Today's market actions -- stocks up, bond prices down, oil up, dollar up -- appear to be a reaction to soft data, as weaker-than-expected Euro area PMIs lifted expectations of an ECB ease on March 10. Softer US economic data expected on Tuesday and Wednesday -- Existing and New Home Sales, Consumer Confidence -- similarly could boost the market consensus that the Fed will not hike rates on March 16, thereby helping to extend these market moves. However, stronger data are likely on Thursday (Durable Goods Orders) and, particularly, on Friday (Core PCE Deflator) that could risk reversing some of these market moves.
With next week's February Mfg ISM and Employment Report risking to be strong enough to argue for a March Fed hike, as well, the markets may very well trade more cautiously beyond this Friday. The question could become whether the stock market would weather a Fed rate hike. Here are some possible reasons why it may:
1. A March rate hike may be already built into the markets for the most part. This is because a hike would fit with the Fed's forward guidance, which the markets reacted to earlier in the year.
2. Economic growth appears to have sped up so far in Q116, as indicated by the 2.6% Atlanta Fed GDP Now estimate. While this may prove temporary, as it reflects a weather-related bounce in consumer spending and an uptick in inventory investment, the markets might view the stronger growth background as supporting the Fed's projection of rate normalization with little drag on GDP Growth. With economic growth little affected by the rate normalization, the stock market should take the latter in stride.
With next week's February Mfg ISM and Employment Report risking to be strong enough to argue for a March Fed hike, as well, the markets may very well trade more cautiously beyond this Friday. The question could become whether the stock market would weather a Fed rate hike. Here are some possible reasons why it may:
1. A March rate hike may be already built into the markets for the most part. This is because a hike would fit with the Fed's forward guidance, which the markets reacted to earlier in the year.
2. Economic growth appears to have sped up so far in Q116, as indicated by the 2.6% Atlanta Fed GDP Now estimate. While this may prove temporary, as it reflects a weather-related bounce in consumer spending and an uptick in inventory investment, the markets might view the stronger growth background as supporting the Fed's projection of rate normalization with little drag on GDP Growth. With economic growth little affected by the rate normalization, the stock market should take the latter in stride.
Friday, February 19, 2016
High January Core CPI Adds to Risk of March Fed Rate Hike
The high 0.3% m/m January Core CPI raises the risk of a Fed rate hike in March, particularly given the two Fed officials who said in the latest FOMC Minutes that they are looking for hard evidence to bolster their expectations of a rise in inflation toward 2.0% (see my prior blog).
While most of the Core CPI speedup, if not all, probably reflected start-of-year price hikes, there could be some carry-over into the February CPI because of bi-monthly sampling.
a. In 2015, the Core CPI rose 0.16% m/m in February after +0.17% in January. Both exceeded the +0.1% m/m Q414 average.
The January 2016 Core PCE Deflator should speed up, as well -- probably to 0.2% m/m. This would lift the y/y to 1.6% from 1.4% in December. It would be the closest the y/y has gotten to the Fed's 2.0% target since 2012 and would be close to the 1.68% 10-year average of the Core PCE Deflator.
While most of the Core CPI speedup, if not all, probably reflected start-of-year price hikes, there could be some carry-over into the February CPI because of bi-monthly sampling.
a. In 2015, the Core CPI rose 0.16% m/m in February after +0.17% in January. Both exceeded the +0.1% m/m Q414 average.
The January 2016 Core PCE Deflator should speed up, as well -- probably to 0.2% m/m. This would lift the y/y to 1.6% from 1.4% in December. It would be the closest the y/y has gotten to the Fed's 2.0% target since 2012 and would be close to the 1.68% 10-year average of the Core PCE Deflator.
Wednesday, February 17, 2016
January FOMC Minutes Not As Dovish As Portrayed
The January FOMC Meeting Minutes are not as dovish as some commentators have portrayed from the increased level of uncertainty highlighted in the Minutes. A close reading shows that this increased uncertainty did not notably change the medium- term outlook held by Fed officials or staff. Interestingly, the Minutes show a new emphasis on upcoming CPI releases as important inputs into the Fed's decision whether to hike -- at least for a couple of members.
1. Although both the FOMC participants agreed that the recent financial market turmoil had raised the level of uncertainty surrounding the US economic outlook, it was not enough to alter their medium-term economic outlook.
a. "While acknowledging the possible adverse effects of the tightening of financial conditions that had occurred, most policymakers thought that the extent to which tighter conditions would persist and what they might imply for the outlook were unclear, and they therefore judged that it was premature to alter appreciably their assessment of the medium-term economic outlook."
b. "... if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks." Note that at this point the recent tightening has not been sustained.
2. Fed staff did not significantly change their medium-term GDP forecast as a result of the financial market turmoil.
a. The staff estimated "that the negative effects of a lower projected path of equity prices and a higher assumed trajectory for the foreign exchange value of the dollar would be mostly offset by the positive effects of a lower path for crude oil prices and slightly more stimulus to aggregate demand from changes in fiscal policy."
3. The actual weakness in Q415 Real GDP Growth was attributed to the drop in inventory investment and weather. And, much of the weakness was expected to be reverse in Q116 -- which, in fact, is what the Atlanta Fed's GDP Now Model is projecting.
4. Fed officials acknowledged that manufacturing activity was being hurt by the dollar's appreciation, weak economic growth abroad and declining oil prices. Surveys pointed to a continuation of this sector's weakness into January, but a few District Presidents said manufacturers in their Districts were still optimistic about the outlook for 2016.
a. It does not look like Fed staff or officials were expecting the bounce in manufacturing output seen in today's January Industrial Production Report.
5. The January and February CPI Reports -- due February 19 and March 16 -- could be important inputs into the March FOMC decision.
a. "A couple of members emphasized that direct evidence that inflation was rising toward 2 percent would be an important element of their assessments of the appropriate timing of further policy firming."
b. This strikes me as being a new emphasis by Fed officials.
1. Although both the FOMC participants agreed that the recent financial market turmoil had raised the level of uncertainty surrounding the US economic outlook, it was not enough to alter their medium-term economic outlook.
a. "While acknowledging the possible adverse effects of the tightening of financial conditions that had occurred, most policymakers thought that the extent to which tighter conditions would persist and what they might imply for the outlook were unclear, and they therefore judged that it was premature to alter appreciably their assessment of the medium-term economic outlook."
b. "... if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks." Note that at this point the recent tightening has not been sustained.
2. Fed staff did not significantly change their medium-term GDP forecast as a result of the financial market turmoil.
a. The staff estimated "that the negative effects of a lower projected path of equity prices and a higher assumed trajectory for the foreign exchange value of the dollar would be mostly offset by the positive effects of a lower path for crude oil prices and slightly more stimulus to aggregate demand from changes in fiscal policy."
3. The actual weakness in Q415 Real GDP Growth was attributed to the drop in inventory investment and weather. And, much of the weakness was expected to be reverse in Q116 -- which, in fact, is what the Atlanta Fed's GDP Now Model is projecting.
4. Fed officials acknowledged that manufacturing activity was being hurt by the dollar's appreciation, weak economic growth abroad and declining oil prices. Surveys pointed to a continuation of this sector's weakness into January, but a few District Presidents said manufacturers in their Districts were still optimistic about the outlook for 2016.
a. It does not look like Fed staff or officials were expecting the bounce in manufacturing output seen in today's January Industrial Production Report.
5. The January and February CPI Reports -- due February 19 and March 16 -- could be important inputs into the March FOMC decision.
a. "A couple of members emphasized that direct evidence that inflation was rising toward 2 percent would be an important element of their assessments of the appropriate timing of further policy firming."
b. This strikes me as being a new emphasis by Fed officials.
Monday, February 15, 2016
A Window for the Markets To Retrace?
The next few weeks -- up until the March 10th ECB Meeting, and possibly up to the March 15-16 FOMC Meeting -- risk being a window in which the markets retrace their recent trends -- based on fundamental considerations. Stocks, dollar and commodity prices would rise, while bond prices fall. What happens after March 16 will depend on what the Fed does. I believe the door is still open for a rate hike in March, -- and the upcoming US economic data should support one (as discussed below). But there could be some easing in the more important forward guidance.
The fundamental considerations are with respect to upcoming US macroeconomic data and market sentiment. Over the next few weeks, most of the US macro economic data are likely to strengthen and push down expectations of recession. While a number of second-tier Fed officials are scheduled to speak, their comments may very well be interpreted dovishly as market sentiment appears to favor the idea that the Fed will not hike rates at that meeting.
Expectations of an ECB ease should help, but the risk is that it disappoints the markets, as in December -- /1/ an ECB official already has warned the markets not to expect too much, /2/ the failure of the BoJ's move to negative rates to weaken the Yen for long stands as a warning that central bank moves other than the Fed may not be significant.
Here are some thoughts on the key US economic data that could impact the markets into early March.
Feb 17 January Housing Starts/Permits -- 1-Family Starts are likely to rebound, as their Permits were stronger than their Starts in December. The markets should ignore what happens to Multis -- besides being volatile, the bounce in Northeast Permits in December was in anticipation of a law change and should unwind in January.
Feb 17 January PPI -- Not important. Besides the fact that Fed officials have dismissed currently low inflation as due to temporary factors, there could be start-of-year effects that are one-off. The same applies to the January CPI, due February 19
Feb 17 January IP -- Risks printing stronger than the +0.4% m/m consensus. Total Hours Worked in Manufacturing jumped 0.8% m/m (0.6% production workers) in January, and Utility Output should bounce as a result of the cold weather. A decline in Mining Output should be a partial offset.
Feb 18 Initial Claims -- No estimate, but it will be an important sign of strength if they do not completely retrace their prior week's decline. The same goes for Continuing Claims.
Feb 18 February Phil Fed Mfg Index -- Risk is for a stronger-than-consensus print (-2.8 versus -3.5 in January). While the Index rose in January, it remained in negative territory, so it looks like it understated the strength of manufacturing seen in the Payroll data and could catch up in February.
Feb 22 February Markit Mfg PMI -- The Markit Mfg PMI rose in January, as well, but only slightly. And, the sharp weakening in the dollar this month could help sentiment. So, it too risks rising further in February.
Feb 25 January Durable Goods Orders -- The drop in December Total, Ex Transportatation and Core Durable Orders could have been exaggerated by seasonal factors, which push them down sharply that month. Seasonals boost them in January, so the risk is that they rebound.
March 1 February Mfg ISM -- This Index risks rising, and a 50 handle cannot be ruled out, after it was unchanged at 48.2 in January. The January print belied the manufacturing strength seen in the Payroll data.
March 3 February Non-Mfg ISM -- This Index risks rising, as well, after it dropped in January. A return to more seasonable weather should have helped retailers.
March 4 February Payrolls/Unemployment -- While it is early to have an estimate, a Payroll print near January's +151k would seem to be good ballpark guess. The trend in Claims post the January Payroll Survey Week so far is little different from the trend going into the January Survey Week. And, the market volatility may have held back employers from hiring. But, any Payroll gain above 95k is above trend and roughly speaking is enough to put downward pressure on the Unemployment Rate.
March 15 February Retail Sales -- The cold weather this month should help the sales of seasonable goods. Fundamentally, labor income growth and low oil prices should keep the consumer as a driver of overall economic growth.
The fundamental considerations are with respect to upcoming US macroeconomic data and market sentiment. Over the next few weeks, most of the US macro economic data are likely to strengthen and push down expectations of recession. While a number of second-tier Fed officials are scheduled to speak, their comments may very well be interpreted dovishly as market sentiment appears to favor the idea that the Fed will not hike rates at that meeting.
Expectations of an ECB ease should help, but the risk is that it disappoints the markets, as in December -- /1/ an ECB official already has warned the markets not to expect too much, /2/ the failure of the BoJ's move to negative rates to weaken the Yen for long stands as a warning that central bank moves other than the Fed may not be significant.
Here are some thoughts on the key US economic data that could impact the markets into early March.
Feb 17 January Housing Starts/Permits -- 1-Family Starts are likely to rebound, as their Permits were stronger than their Starts in December. The markets should ignore what happens to Multis -- besides being volatile, the bounce in Northeast Permits in December was in anticipation of a law change and should unwind in January.
Feb 17 January PPI -- Not important. Besides the fact that Fed officials have dismissed currently low inflation as due to temporary factors, there could be start-of-year effects that are one-off. The same applies to the January CPI, due February 19
Feb 17 January IP -- Risks printing stronger than the +0.4% m/m consensus. Total Hours Worked in Manufacturing jumped 0.8% m/m (0.6% production workers) in January, and Utility Output should bounce as a result of the cold weather. A decline in Mining Output should be a partial offset.
Feb 18 Initial Claims -- No estimate, but it will be an important sign of strength if they do not completely retrace their prior week's decline. The same goes for Continuing Claims.
Feb 18 February Phil Fed Mfg Index -- Risk is for a stronger-than-consensus print (-2.8 versus -3.5 in January). While the Index rose in January, it remained in negative territory, so it looks like it understated the strength of manufacturing seen in the Payroll data and could catch up in February.
Feb 22 February Markit Mfg PMI -- The Markit Mfg PMI rose in January, as well, but only slightly. And, the sharp weakening in the dollar this month could help sentiment. So, it too risks rising further in February.
Feb 25 January Durable Goods Orders -- The drop in December Total, Ex Transportatation and Core Durable Orders could have been exaggerated by seasonal factors, which push them down sharply that month. Seasonals boost them in January, so the risk is that they rebound.
March 1 February Mfg ISM -- This Index risks rising, and a 50 handle cannot be ruled out, after it was unchanged at 48.2 in January. The January print belied the manufacturing strength seen in the Payroll data.
March 3 February Non-Mfg ISM -- This Index risks rising, as well, after it dropped in January. A return to more seasonable weather should have helped retailers.
March 4 February Payrolls/Unemployment -- While it is early to have an estimate, a Payroll print near January's +151k would seem to be good ballpark guess. The trend in Claims post the January Payroll Survey Week so far is little different from the trend going into the January Survey Week. And, the market volatility may have held back employers from hiring. But, any Payroll gain above 95k is above trend and roughly speaking is enough to put downward pressure on the Unemployment Rate.
March 15 February Retail Sales -- The cold weather this month should help the sales of seasonable goods. Fundamentally, labor income growth and low oil prices should keep the consumer as a driver of overall economic growth.
Friday, February 12, 2016
March Fed Rate Hike Still in Play -- Some Evidence
Many market participants are convinced the Fed will not hike rates in March, given how much stocks and oil prices have fallen. However, other evidence, including economic evidence, so far keeps a rate hike in play:
1. Atlanta Fed Model is now projecting 2.7% (q/q, saar) for Q116 Real GDP Growth -- an above-trend pace.
2. An above-trend pace is evident in the decline in the January Unemployment Rate.
3. Cleveland Fed President Mester -- a hawk -- does not look as if she has changed her view of the appropriateness of a gradual raising of the funds rate, in a nicely laid-out speech yesterday (see the Cleveland Fed website).
To be sure, the current market weakness risks slowing economic growth ahead, either through wealth effects or possibly through bank lending practices, as Yellen acknowledged in her testimony in the past couple of days. The Fed's Senior Loan Officer Survey, for example, shows some tightening in lending standards in Q415. But, these effects take time to show up in real-side economic data. So, their influence on Fed policy may be more in play later this year.
However, the markets could react more benignly to a March hike if the economy continues to look relatively strong by the time the FOMC meets. In this case, the drag from the recent market drops would be mitigated -- and the Fed could stay the course in hiking 4 times this year.
1. Atlanta Fed Model is now projecting 2.7% (q/q, saar) for Q116 Real GDP Growth -- an above-trend pace.
2. An above-trend pace is evident in the decline in the January Unemployment Rate.
3. Cleveland Fed President Mester -- a hawk -- does not look as if she has changed her view of the appropriateness of a gradual raising of the funds rate, in a nicely laid-out speech yesterday (see the Cleveland Fed website).
To be sure, the current market weakness risks slowing economic growth ahead, either through wealth effects or possibly through bank lending practices, as Yellen acknowledged in her testimony in the past couple of days. The Fed's Senior Loan Officer Survey, for example, shows some tightening in lending standards in Q415. But, these effects take time to show up in real-side economic data. So, their influence on Fed policy may be more in play later this year.
However, the markets could react more benignly to a March hike if the economy continues to look relatively strong by the time the FOMC meets. In this case, the drag from the recent market drops would be mitigated -- and the Fed could stay the course in hiking 4 times this year.
Thursday, February 11, 2016
Claims Data Stronger But Not Necessarily a Positive for Stocks
The improvement in today's Unemployment Claims data is not necessarily a positive for the stock market. The data keep alive the possibility of a March Fed rate hike, as they show that the financial market turmoil is not yet crushing the economy. The problem is that the drag from the turmoil may take time to manifest itself, so current data that show strength will encourage a rate hike that would exacerbate future economic weakness.
To be sure, the latest weekly data are strong. Both Initial and Continuing Claims fell below their January averages, with Initial falling below the Q415 average, as well. But, it is too soon to say that this one-week drop is the start of a new lower trend, and we need to see several weeks of decline to confirm that it is not a head-fake.
From a somewhat longer perspective, the Claims data don't as yet suggest a pickup in Q116 Real GDP Growth. The Q116 averages-to-date are above the Q415 averages, raising the risk of even slower GDP Growth in Q16 than the anemic 0.7% in Q415. Of course, the Q116 averages would fall further if Claims stay low in coming weeks. So, the verdict is still out with regard to Q116 GDP Growth.
Both Initial and Continuing are for weeks ahead of the February Payroll Survey Week, but as they stand now they do not suggest a stronger gain than the +151k in January. The 4-week average of Initial is 282k, versus 279k going into the January Survey Week. Continuing Claims in the latest week are 8k above their level in the January Week.
Initial Claims Continuing Claims
(level, 000s) (level, mns)
Latest Week 269 2.239
Prior Week 285 2.260
January Avg 283 2.248
Q116 Avg to Date 276 2.248
Q415 Avg 270 2.187
Carl Palash
To be sure, the latest weekly data are strong. Both Initial and Continuing Claims fell below their January averages, with Initial falling below the Q415 average, as well. But, it is too soon to say that this one-week drop is the start of a new lower trend, and we need to see several weeks of decline to confirm that it is not a head-fake.
From a somewhat longer perspective, the Claims data don't as yet suggest a pickup in Q116 Real GDP Growth. The Q116 averages-to-date are above the Q415 averages, raising the risk of even slower GDP Growth in Q16 than the anemic 0.7% in Q415. Of course, the Q116 averages would fall further if Claims stay low in coming weeks. So, the verdict is still out with regard to Q116 GDP Growth.
Both Initial and Continuing are for weeks ahead of the February Payroll Survey Week, but as they stand now they do not suggest a stronger gain than the +151k in January. The 4-week average of Initial is 282k, versus 279k going into the January Survey Week. Continuing Claims in the latest week are 8k above their level in the January Week.
Initial Claims Continuing Claims
(level, 000s) (level, mns)
Latest Week 269 2.239
Prior Week 285 2.260
January Avg 283 2.248
Q116 Avg to Date 276 2.248
Q415 Avg 270 2.187
Carl Palash
Wednesday, February 10, 2016
Yellen Leaves Door Open for March Hike -- Catch-22 for Stocks
Yellen left open the door for a March rate hike in her Semi-Annual Monetary Policy Report -- throwing in a Catch-22 problem for the stock market. A hike would seem likely if stocks stabilize or rebound. A hike might be avoided if the stock market continues to fall sharply. This conundrum suggests that market rallies should be sold.
Yellen essentially followed the message contained in the January FOMC Statement -- the economy is expanding moderately, the labor market is improving, inflation is low as a result of temporary factors, and monetary policy is expected to entail "gradual increases in the federal funds rate." While financial conditions have become less supportive and if persistent "could weigh on the outlook for economic outlook and the labor market," some of these conditions -- lower long-term interest rates and oil prices -- are supportive of growth as is labor income growth.
A Fed decision not to hike in March would seem to hinge on two main factors, based on these comments. First, US macroeconomic data would need to weaken notably. Second, financial conditions would have to weaken substantially further. In particular, the Fed appears to have thrown a gauntlet in front of the stock market -- if the market wants the Fed to skip a hike in March, it needs to fall significantly more. And, it would have to fall even more than otherwise if the dollar falls further on balance. Ironically, a notable weakening in the US macroeconomic data could be a positive for the stock market if they improve the economic outlook by persuading the Fed to skip tightening in March.
Carl Palash
Yellen essentially followed the message contained in the January FOMC Statement -- the economy is expanding moderately, the labor market is improving, inflation is low as a result of temporary factors, and monetary policy is expected to entail "gradual increases in the federal funds rate." While financial conditions have become less supportive and if persistent "could weigh on the outlook for economic outlook and the labor market," some of these conditions -- lower long-term interest rates and oil prices -- are supportive of growth as is labor income growth.
A Fed decision not to hike in March would seem to hinge on two main factors, based on these comments. First, US macroeconomic data would need to weaken notably. Second, financial conditions would have to weaken substantially further. In particular, the Fed appears to have thrown a gauntlet in front of the stock market -- if the market wants the Fed to skip a hike in March, it needs to fall significantly more. And, it would have to fall even more than otherwise if the dollar falls further on balance. Ironically, a notable weakening in the US macroeconomic data could be a positive for the stock market if they improve the economic outlook by persuading the Fed to skip tightening in March.
Carl Palash
Tuesday, February 9, 2016
Yellen's Testimony and a March Rate Hike
Any hint in Yellen's testimony that the Fed will skip hiking the funds rate in March risks triggering a short-covering rally in stocks, given how much they have fallen since Friday's Employment Report. This reverse "buy the rumor, sell the fact" rally should not be chased, however, as Yellen is unlikely to squash the risk of a Fed rate hike in March when she presents the Semi-Annual Monetary Policy Report to the Congress on Wednesday (House) and Thursday (Senate). This Report, formerly known as the Humphrey-Hawkins Testimony, is meant to reflect the consensus view of the FOMC -- and this view was spelled out in the January FOMC Meeting Statement. The latter left open the door for future funds rate hikes, making the decision to do so dependent on economic and financial conditions.
The Statement said, "the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments." The latest information is mixed, with the January Employment Report showing an above-trend increase in Payrolls (albeit slower than the Q415 pace) and a decline in the Unemployment Rate, but inflation measures and financial developments remain problematic. Yellen will probably say there will be more evidence on the economy before the FOMC meets in March.
The question is how she discusses the recent financial turmoil -- whether Yellen emphasizes the seriousness of the plunge in stocks or downplays it. She could says that stocks have not fallen very far despite the heightened volatility. Or, she could point out that other markets -- dollar and bonds -- have become more pro-growth. This observation may come out in the question and answer part of the testimony rather than in the written testimony.
Some Fed officials already have downplayed the relevance of the stock market drop by itself for monetary policy, saying that the fallout on the economy is what will be important. While they are hawks, their views could have influenced the consensus view of the Committee -- which could show up in the Minutes of the January FOMC Meeting (which would be a market negative if so). Indeed, the Fed would have a problem if it skips a rate hike in March because of the stock market sell-off -- stocks would likely drop ahead of any subsequent FOMC meeting when a rate hike is a risk, challenging the Fed to do so. For this reason, Yellen will likely be careful not to over-emphasize the market's significance by itself.
And, as it is forward guidance, not an individual rate hike, that is the key to understanding the import of Fed policy, the markets will need to wait until the March meeting to see if Fed officials lowered their projections of the fed funds rate ahead. Yellen's testimony will be stuck with the "dots" shown in December.
If the stock market reacts poorly to Yellen's testimony, NY Fed President Dudley is scheduled to give a speech on Friday when he can try to limit the damage.
Carl Palash
The Statement said, "the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments." The latest information is mixed, with the January Employment Report showing an above-trend increase in Payrolls (albeit slower than the Q415 pace) and a decline in the Unemployment Rate, but inflation measures and financial developments remain problematic. Yellen will probably say there will be more evidence on the economy before the FOMC meets in March.
The question is how she discusses the recent financial turmoil -- whether Yellen emphasizes the seriousness of the plunge in stocks or downplays it. She could says that stocks have not fallen very far despite the heightened volatility. Or, she could point out that other markets -- dollar and bonds -- have become more pro-growth. This observation may come out in the question and answer part of the testimony rather than in the written testimony.
Some Fed officials already have downplayed the relevance of the stock market drop by itself for monetary policy, saying that the fallout on the economy is what will be important. While they are hawks, their views could have influenced the consensus view of the Committee -- which could show up in the Minutes of the January FOMC Meeting (which would be a market negative if so). Indeed, the Fed would have a problem if it skips a rate hike in March because of the stock market sell-off -- stocks would likely drop ahead of any subsequent FOMC meeting when a rate hike is a risk, challenging the Fed to do so. For this reason, Yellen will likely be careful not to over-emphasize the market's significance by itself.
And, as it is forward guidance, not an individual rate hike, that is the key to understanding the import of Fed policy, the markets will need to wait until the March meeting to see if Fed officials lowered their projections of the fed funds rate ahead. Yellen's testimony will be stuck with the "dots" shown in December.
If the stock market reacts poorly to Yellen's testimony, NY Fed President Dudley is scheduled to give a speech on Friday when he can try to limit the damage.
Carl Palash
Monday, February 8, 2016
The Key to Understanding Fed Monetary Policy
The key to understanding Fed monetary policy is to realize the primary impact is through forward guidance. Currently, it is more important to focus on the Fed's projection of the funds rate than whether it raises the funds rate by 25 BPs. The latter would be more a catch-up to their projection than a policy change. This way of evaluating Fed policy explains why the markets have moved so much after what was viewed as a modest 25 BP hike in December 2015. The markets reacted to the Fed's projection of 4 hikes in 2016, not the actual 25 BP hike.
This way of looking at Fed monetary policy means that what will matter at the March 15-16 FOMC Meeting is whether the trajectory of the "dots" -- the projected funds rates -- changes. If the Fed skips a March rate hike but the trajectory remains the same as before, any market relief should be short-lived. The forward guidance for the future path of the Federal funds rate will be what is important.
Many market participants would say "Wait! Isn't the fed funds futures market building in at most 2 hikes in 2016?" The answer is that the Fed's projection has impacted all the markets -- stocks, fixed income, currencies and commodities -- and the combined impact reflects the expectation of 4 hikes. This is observable from some Street calculations of the Financial Conditions Index showing a drop equivalent to 4 25 BP rate hikes. The likely net economic drag from all these different channels of policy has weighed on the fed funds futures market, which embodies the expectation that the Fed will not follow through with all 4 hikes as a result.
The idea that forward guidance is what matters hearkens back to the debate surrounding Quantitative Easing. When this was implemented a few years ago, market participants argued whether QE operated through the "flow" of monthly purchases by the Fed or through the initial announcement of the total amount of Treasuries to be purchased. Fed staff determined that the initial announcement is how it works. Similarly, it would seem that the Fed's announcement of its expectation for the entire funds rate trajectory is more important than any particular 25 BP hike that is part of that trajectory.
Carl Palash
February 8, 2016
This way of looking at Fed monetary policy means that what will matter at the March 15-16 FOMC Meeting is whether the trajectory of the "dots" -- the projected funds rates -- changes. If the Fed skips a March rate hike but the trajectory remains the same as before, any market relief should be short-lived. The forward guidance for the future path of the Federal funds rate will be what is important.
Many market participants would say "Wait! Isn't the fed funds futures market building in at most 2 hikes in 2016?" The answer is that the Fed's projection has impacted all the markets -- stocks, fixed income, currencies and commodities -- and the combined impact reflects the expectation of 4 hikes. This is observable from some Street calculations of the Financial Conditions Index showing a drop equivalent to 4 25 BP rate hikes. The likely net economic drag from all these different channels of policy has weighed on the fed funds futures market, which embodies the expectation that the Fed will not follow through with all 4 hikes as a result.
The idea that forward guidance is what matters hearkens back to the debate surrounding Quantitative Easing. When this was implemented a few years ago, market participants argued whether QE operated through the "flow" of monthly purchases by the Fed or through the initial announcement of the total amount of Treasuries to be purchased. Fed staff determined that the initial announcement is how it works. Similarly, it would seem that the Fed's announcement of its expectation for the entire funds rate trajectory is more important than any particular 25 BP hike that is part of that trajectory.
Carl Palash
February 8, 2016
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