US economic data and Fed speeches in the first half of next week risk highlighting the potential for a Fed rate hike. But, they are not likely to stand in the way of month-/quarter-end buying in the stock market. And, Friday's Employment Report risks providing some relief.
Monday
1. Consensus risks being too low on the February Core PCE Deflator.
a. Consensus is +0.2% m/m and 1.7% y/y (the latter steady with January).
2. A 0.3% m/m cannot be ruled out, however, as the high 0.3% Core CPI was fairly widespread.
3. And, the y/y for the Core PCE Deflator could easily print 1.8%, as the base effects make for an easy comparison (and assuming no downward revision to January).
4. A high Core PCE Deflator is probably not enough to prompt the Fed to tighten in April, however.
a. Yellen already appeared to dismiss the high Core CPI, blaming special factors. And, she is right that the jump in apparel prices looked to be a result of early introduction of Spring clothing in stores -- and should unwind in coming months.
Tuesday
Fed officials are speaking. They could underscore the potential for a Fed rate hike.
1. Johns Williams, President of the San Francisco Fed, is a perennial hawk and speaks early Tuesday.
a. He has argued for a Fed rate hike ahead of almost every FOMC Meeting in the past couple of years.
b. He was right only once. And, I don't believe he has ever dissented when the FOMC decided not to hike.
c. I'm thinking that he's playing a role similar to that played by Larry Meyer when he was a Fed governor under Greenspan in the late 1990s. Both talked up the need for tightening, attempting to hold back excessive market reaction to the Chairman's intent not to tighten. If that's the case, any market reaction to Williams' speeches should be faded.
2. Yellen speaks on the Economic Outlook and Monetary Policy to the Economics Club of New York mid day.
a. This venue was used by Greenspan on occasion to announce intentions to change policy.
b. I doubt that Yellen will do the same now. There is no reason why she should change the message she gave at the post-FOMC press conference -- emphasizing downside risks from financial markets and global economy but still leaving open the door for a rate hike at any upcoming FOMC Meeting.
Wednesday
1. The March ADP Estimate risks printing above 200k, as the high +230k Private Payroll gain in February feeds into the calculation of this number.
a. If the March ADP Estimate is strong, it risks overestimating Friday's March Payrolls.
2. The March FOMC Minutes will probably not shed any new light on the probability of a Fed rate hike in April, May or June.
Friday
1. March Payrolls and Average Hourly Earnings risk printing below consensus.
a. Consensus is +205k Payrolls and +0.2% AHE.
2. March Payrolls have slowed sharply after a strong February in 2 of the past 3 years:
Nonfarm Payrolls (m/m change, 000s)
March February
2016 na 242
2015 126 264
2014 192 197
2013 88 268
3. Average Hourly Earnings risk printing 0.1% m/m, based on calendar considerations. The y/y should fall to 2.0-2.1% from 2.2% in February.
Sunday, March 27, 2016
Friday, March 25, 2016
Which 1.4% GDP Growth Is Important?
Today's release of an upwardly revised Q415 Real GDP Growth to 1.4% (q/q, saar) from 1.0% does not change the US economic outlook. And, it should not impact Fed monetary policy.
1. The 1.4% pace is still below the 1.7% trend estimated by Fed staff.
2. The weakness in GDP is particularly apparent in the large drop in Corporate Profits that put them 11.5% below the level in Q414. The drop helps to explain the stock market weakness in late 2015 and early 2016.
3. Most of the upward revision resulted from replacing Commerce Department staff's estimates of some consumer service spending -- particularly spending on health care -- with recently released survey findings. Other parts of the economy remained mostly sluggish.
More important is the downward revision in the Atlanta Fed's GDP NOW Estimate of Q116 Real GDP Growth. It argues against a Fed tightening in April.
1. The Estimate was revised down to 1.4% from 1.9%, taking account of this week's releases of US economic data.
2. The Q116 GDP pace is now projected to be the same in Q116 as in Q415 -- in line with what I had shown yesterday with regard to January-February Home Sales and underlying Durable Goods Orders.
3. The absence of a boost to Q116 Real GDP from the warm winter is consistent with the history of Q1 GDP when temperatures are warm.
Early evidence suggests some speedup in Q216 Real GDP Growth -- which should not be surprising since the Fed eased in March (relative to its earlier forward guidance, which I have argued is the best way to evaluate policy). But, it is too soon to say how much of a speedup will be seen. This speedup could be important with regard to a June Fed rate hike.
1. The Claims data improved in so far in March, although the uptick in last week's Initial Claims raises some questions about the sustainability of the improvement.
2. The ECRI Leading Index has risen sharply in the past 5 weeks, spurred in part by the stock market rally. It is back to levels seen in July 2015.
1. The 1.4% pace is still below the 1.7% trend estimated by Fed staff.
2. The weakness in GDP is particularly apparent in the large drop in Corporate Profits that put them 11.5% below the level in Q414. The drop helps to explain the stock market weakness in late 2015 and early 2016.
3. Most of the upward revision resulted from replacing Commerce Department staff's estimates of some consumer service spending -- particularly spending on health care -- with recently released survey findings. Other parts of the economy remained mostly sluggish.
More important is the downward revision in the Atlanta Fed's GDP NOW Estimate of Q116 Real GDP Growth. It argues against a Fed tightening in April.
1. The Estimate was revised down to 1.4% from 1.9%, taking account of this week's releases of US economic data.
2. The Q116 GDP pace is now projected to be the same in Q116 as in Q415 -- in line with what I had shown yesterday with regard to January-February Home Sales and underlying Durable Goods Orders.
3. The absence of a boost to Q116 Real GDP from the warm winter is consistent with the history of Q1 GDP when temperatures are warm.
Early evidence suggests some speedup in Q216 Real GDP Growth -- which should not be surprising since the Fed eased in March (relative to its earlier forward guidance, which I have argued is the best way to evaluate policy). But, it is too soon to say how much of a speedup will be seen. This speedup could be important with regard to a June Fed rate hike.
1. The Claims data improved in so far in March, although the uptick in last week's Initial Claims raises some questions about the sustainability of the improvement.
2. The ECRI Leading Index has risen sharply in the past 5 weeks, spurred in part by the stock market rally. It is back to levels seen in July 2015.
Thursday, March 24, 2016
Today's US Economic Data Suggest Little Change in Economic Outlook
The US economic data released so far this week do not provide firm evidence that the US economy has picked up enough steam to allow the Fed to hike -- if that is what officials are looking for.
a. Initial Claims show that layoffs eased in February and March, with Continuing Claims beginning to catch up in March. But, the latest week's 265k print for Initial Claims is near the October-February trend and raises a caution flag.
b. The levels of Home Sales and underlying Durable Goods Orders were little changed over January-February compared to their Q415 averages.
Existing New Durable Goods Orders Claims
Home Sales Home Sales Ex Transportation Core Initial Cont
(Mn Units) (000s) (bn dollars) (000s) (Mn)
Mar na na na na 259 2.199
Feb 5.08 512 155.2 67.4 261 2.253
Jan 5.47 502 156.8 68.6 283 2.249
Q116-to-date 5.28 507 156.0 68.0 268 2.241
Q415 5.20 510 155.9 68.3 270 2.230
Next week's US economic data will not likely change the story of moderate growth -- with mixed evidence on inflation, as well.
a. Most evidence points to a 50+ print for March Mfg ISM. But, the Index would need to climb to 53+ to indicate real improvement.
b. The March ADP Estimate risks printing high for technical reasons, while March Payrolls risk printing low after the strong February Print (see my March 18th blog). Also, March Average Hourly Earnings should be modest, based on calendar considerations.
c. There is a risk the February Core PCE Deflator will show an increase in the y/y to 1.8% from 1.7% in January (consensus is 1.7%). But, timing issues with apparel prices likely would be responsible for the pickup (as well as for 0.1% pt of the 0.3% m/m). Yellen appeared to dismiss the high Core CPI prints on special factors, so a high Core PCE Deflator is probably not enough to move the Fed to hike.
a. Initial Claims show that layoffs eased in February and March, with Continuing Claims beginning to catch up in March. But, the latest week's 265k print for Initial Claims is near the October-February trend and raises a caution flag.
b. The levels of Home Sales and underlying Durable Goods Orders were little changed over January-February compared to their Q415 averages.
Existing New Durable Goods Orders Claims
Home Sales Home Sales Ex Transportation Core Initial Cont
(Mn Units) (000s) (bn dollars) (000s) (Mn)
Mar na na na na 259 2.199
Feb 5.08 512 155.2 67.4 261 2.253
Jan 5.47 502 156.8 68.6 283 2.249
Q116-to-date 5.28 507 156.0 68.0 268 2.241
Q415 5.20 510 155.9 68.3 270 2.230
Next week's US economic data will not likely change the story of moderate growth -- with mixed evidence on inflation, as well.
a. Most evidence points to a 50+ print for March Mfg ISM. But, the Index would need to climb to 53+ to indicate real improvement.
b. The March ADP Estimate risks printing high for technical reasons, while March Payrolls risk printing low after the strong February Print (see my March 18th blog). Also, March Average Hourly Earnings should be modest, based on calendar considerations.
c. There is a risk the February Core PCE Deflator will show an increase in the y/y to 1.8% from 1.7% in January (consensus is 1.7%). But, timing issues with apparel prices likely would be responsible for the pickup (as well as for 0.1% pt of the 0.3% m/m). Yellen appeared to dismiss the high Core CPI prints on special factors, so a high Core PCE Deflator is probably not enough to move the Fed to hike.
Wednesday, March 23, 2016
The Big Short -- Not the Full Story
The "Big Short" movie presents the popular view that greedy banks and credit rating agencies were behind the housing bubble in 2005-07. But, this is not the full story from a macro perspective. From this perspective, policymakers were using easy monetary policy to sustain economic growth in the face of an aggressive Chinese mercantilist policy, and banks were just responding to this policy. Banks did go overboard in their response, however, and represented a failure on the part of bank regulators to prevent this from happening. But, the real problem was that the policymakers' reliance on housing demand and household borrowing to lift economic growth was not sustainable.
The macro narrative begins with China's decision to grab market share from the US manufacturing sector by keeping its currency too low in the early 2000s. China's exports to the US surged but its imports from the US rose only modestly. As a result, the US was faced with a drag from net exports that had to be offset if GDP Growth were not to slow significantly.
The offset had to come from some sector of the US economy spending more than its income -- a standard Keynesian prescription. Typically, the prescription entails expansive fiscal policy. But, in 2005-07, the US relied on the household sector to "overspend," using low interest rates and easier lending standards to boost home buying and consumer credit debt. What the banks did fit with the macro needs of the time.
Unfortunately, this reliance on the household sector was doomed to fail. With Chinese net exports widening, housing demand and consumer credit debt had to expand in tandem to offset the increasing drag. But, there is only so much housing and household indebtedness that is either needed or sustainable. So, at some point, US GDP Growth would have to weaken, as theses channels to boost spending slowed.
In this light, the expansion of the housing market to sub-prime borrowers -- pushed by Democratic Congressional leaders who pressed FNMA to buy sub-prime mortgages and boosted by banks' overly lax lending and credit rating standards -- helped to sustain the expansion of domestic demand by broadening the demand for housing beyond what had been normal boundaries. But, it also made the end point come sooner than later, as these borrowers were more susceptible to tightening monetary policy than were prime borrowers. And, the banks' overly aggressive actions to expand such lending were the culprit here.
The impact of Chinese mercantilist policy on the US economy has receded in recent years. China has become somewhat less competitive as its currency has risen and wage inflation sped up. Meanwhile, US labor cost inflation has been stable, and companies have relied more heavily on technology to hold down labor costs. Other factors have helped to boost US GDP Growth. The surge in US domestic oil production has reduced the need for oil imports. And, capital gains on homes and stocks have substituted for borrowing to encourage consumers spending more relative to their incomes than otherwise.
However, policymakers have moved in ways hurting economic growth They restrained bank risk taking, encouraged households to pull in borrowing, and cut the federal deficit. And, the result is in line with Keynes' Paradox of Saving -- if everyone tries to save more, then GDP and aggregate saving will decline. The policymakers' actions go a long way in explaining the anemic recovery.
The macro narrative begins with China's decision to grab market share from the US manufacturing sector by keeping its currency too low in the early 2000s. China's exports to the US surged but its imports from the US rose only modestly. As a result, the US was faced with a drag from net exports that had to be offset if GDP Growth were not to slow significantly.
The offset had to come from some sector of the US economy spending more than its income -- a standard Keynesian prescription. Typically, the prescription entails expansive fiscal policy. But, in 2005-07, the US relied on the household sector to "overspend," using low interest rates and easier lending standards to boost home buying and consumer credit debt. What the banks did fit with the macro needs of the time.
Unfortunately, this reliance on the household sector was doomed to fail. With Chinese net exports widening, housing demand and consumer credit debt had to expand in tandem to offset the increasing drag. But, there is only so much housing and household indebtedness that is either needed or sustainable. So, at some point, US GDP Growth would have to weaken, as theses channels to boost spending slowed.
In this light, the expansion of the housing market to sub-prime borrowers -- pushed by Democratic Congressional leaders who pressed FNMA to buy sub-prime mortgages and boosted by banks' overly lax lending and credit rating standards -- helped to sustain the expansion of domestic demand by broadening the demand for housing beyond what had been normal boundaries. But, it also made the end point come sooner than later, as these borrowers were more susceptible to tightening monetary policy than were prime borrowers. And, the banks' overly aggressive actions to expand such lending were the culprit here.
The impact of Chinese mercantilist policy on the US economy has receded in recent years. China has become somewhat less competitive as its currency has risen and wage inflation sped up. Meanwhile, US labor cost inflation has been stable, and companies have relied more heavily on technology to hold down labor costs. Other factors have helped to boost US GDP Growth. The surge in US domestic oil production has reduced the need for oil imports. And, capital gains on homes and stocks have substituted for borrowing to encourage consumers spending more relative to their incomes than otherwise.
However, policymakers have moved in ways hurting economic growth They restrained bank risk taking, encouraged households to pull in borrowing, and cut the federal deficit. And, the result is in line with Keynes' Paradox of Saving -- if everyone tries to save more, then GDP and aggregate saving will decline. The policymakers' actions go a long way in explaining the anemic recovery.
Thursday, March 17, 2016
Thoughts on the Fed and Today's US Economic Data
Here are some thoughts on the Fed's decsision yesterday and the key economic data released today.
Fed
1. The Fed's action was essentially an easing, not just keeping policy steady. As I've argued, the Fed's forward guidance is more important than a hike in the funds rate, as the latter would just be catch-up to the prior forward guidance -- which was built into all the markets (more broadly than just the fed funds futures market, which reflected not just Fed forward guidance but also feedback from the reactions of other markets).
a. Keeping the funds rate steady was tantamount to an easing, as well as was the ratcheting down of the "dots." The markets had built in 4 rate hikes for the year, which included March.
b. The easing was essentially reversing what was a policy mistake in December, when the Fed projected 4 rate hikes in its forward guidance. The financial market turmoil reflected in part this Fed projection -- although Yellen was careful to blame the turmoil on foreign developments
2. The Fed's policy decisions so far have been done with a disdain for actual economic data:
a. The Fed skipped tightening in September, even though US economy had grown above trend for two consecutive quarters (Q2 and Q315).
b. The Fed tightened in December when Q4 economic growth was weak.
c. The Fed held the fund rate steady in March when both economic growth and core inflation were speeding up.
3. This leaves trying to figure out the timing of the next Fed rate hike almost independent of what's going on in the US economy.
a. The next Fed rate hike may depend on European and Chinese economic data, rising stock market, steepening yield curve, etc.
b. The best signal could be what's built into the Fed Funds futures market, as the Fed may want to "follow" the market.
4. The reason the Fed wants to lift the Funds Rate is that it believes it is too low relative to a longer-run level that officials term then "neutral" rate -- the fund rate that is consistent with trend GDP Growth when the economy is at full employment.
a. The neutral rate is not observable directly -- making Fedspeak about it sound almost like the medieval debate over how many angels fit on a pinhead. To be sure, the fact that the Unemployment Rate continues to fall means the economy is growing at an above-trend pace. So, the current funds rate is presumably below the neutral level.
Today's Key US Economic Data
1. Today's data provide more evidence that the economy has picked up steam in the final month of the quarter.
2. Initial and Continuing Claims retraced only part of the prior week's drops, keeping them at the low end of this year's range.
a. Initial Claims were for the March Payroll Survey Week. They are not a reliable predictor of Payrolls (as they reflect only one of several "flows" impacting the labor market), but they suggest another decent gain.
3. The jump in the March Phil Fed Mfg Index to +12.4 from -2.8 in February puts it at a level that is consistent with the Mfg ISM climbing above 50 in the next report (due April 1).
Fed
1. The Fed's action was essentially an easing, not just keeping policy steady. As I've argued, the Fed's forward guidance is more important than a hike in the funds rate, as the latter would just be catch-up to the prior forward guidance -- which was built into all the markets (more broadly than just the fed funds futures market, which reflected not just Fed forward guidance but also feedback from the reactions of other markets).
a. Keeping the funds rate steady was tantamount to an easing, as well as was the ratcheting down of the "dots." The markets had built in 4 rate hikes for the year, which included March.
b. The easing was essentially reversing what was a policy mistake in December, when the Fed projected 4 rate hikes in its forward guidance. The financial market turmoil reflected in part this Fed projection -- although Yellen was careful to blame the turmoil on foreign developments
2. The Fed's policy decisions so far have been done with a disdain for actual economic data:
a. The Fed skipped tightening in September, even though US economy had grown above trend for two consecutive quarters (Q2 and Q315).
b. The Fed tightened in December when Q4 economic growth was weak.
c. The Fed held the fund rate steady in March when both economic growth and core inflation were speeding up.
3. This leaves trying to figure out the timing of the next Fed rate hike almost independent of what's going on in the US economy.
a. The next Fed rate hike may depend on European and Chinese economic data, rising stock market, steepening yield curve, etc.
b. The best signal could be what's built into the Fed Funds futures market, as the Fed may want to "follow" the market.
4. The reason the Fed wants to lift the Funds Rate is that it believes it is too low relative to a longer-run level that officials term then "neutral" rate -- the fund rate that is consistent with trend GDP Growth when the economy is at full employment.
a. The neutral rate is not observable directly -- making Fedspeak about it sound almost like the medieval debate over how many angels fit on a pinhead. To be sure, the fact that the Unemployment Rate continues to fall means the economy is growing at an above-trend pace. So, the current funds rate is presumably below the neutral level.
Today's Key US Economic Data
1. Today's data provide more evidence that the economy has picked up steam in the final month of the quarter.
2. Initial and Continuing Claims retraced only part of the prior week's drops, keeping them at the low end of this year's range.
a. Initial Claims were for the March Payroll Survey Week. They are not a reliable predictor of Payrolls (as they reflect only one of several "flows" impacting the labor market), but they suggest another decent gain.
3. The jump in the March Phil Fed Mfg Index to +12.4 from -2.8 in February puts it at a level that is consistent with the Mfg ISM climbing above 50 in the next report (due April 1).
Wednesday, March 16, 2016
FOMC Keeps Funds Rate Steady But Eases Forward Guidance
The FOMC kept the funds rate steady, but lowered its forward guidance -- this is bullish for stocks, commodity prices and Treasuries (particularly shorter end of the curve), but bearish for the dollar.
a. The "dots" imply 2 hikes in the funds rate in the rest of the year to 1.0% by year end, rather than the prior 4 hikes. This is more than the subtraction of 1 dot to reflect not having hiked today.
b. It is still important that the Fed's forward guidance is now lower, even though it brought it closer to the expectations built into the Fed funds futures market.
The recent economic background gave the Fed an opportunity to bring the funds rate further away its "emergency" level. Fed officials did not take advantage of it.
The next FOMC meeting where a rate hike will be a risk is likely June.
a. But, the economic background may not be as supportive of a hike as now. One risk arguing against it is that the Core CPI and Core PCE Deflator could be held down in April and May as Apparel Prices unwind the earlier-than-normal introduction of Spring clothing that boosted the February CPI (and probably the March CPI, given bi-monthly sampling).
b. But, the risk of June hike could weigh on stocks and other markets as that meeting approaches.
The Central Tendencies were little changed from January's, with 2016 Real Growth and Inflation a tad weaker. The Fed still should talk up moderate growth and a gradual increase in inflation -- and not provoke concern about the US economy in the markets.
a. The "dots" imply 2 hikes in the funds rate in the rest of the year to 1.0% by year end, rather than the prior 4 hikes. This is more than the subtraction of 1 dot to reflect not having hiked today.
b. It is still important that the Fed's forward guidance is now lower, even though it brought it closer to the expectations built into the Fed funds futures market.
The recent economic background gave the Fed an opportunity to bring the funds rate further away its "emergency" level. Fed officials did not take advantage of it.
The next FOMC meeting where a rate hike will be a risk is likely June.
a. But, the economic background may not be as supportive of a hike as now. One risk arguing against it is that the Core CPI and Core PCE Deflator could be held down in April and May as Apparel Prices unwind the earlier-than-normal introduction of Spring clothing that boosted the February CPI (and probably the March CPI, given bi-monthly sampling).
b. But, the risk of June hike could weigh on stocks and other markets as that meeting approaches.
The Central Tendencies were little changed from January's, with 2016 Real Growth and Inflation a tad weaker. The Fed still should talk up moderate growth and a gradual increase in inflation -- and not provoke concern about the US economy in the markets.
High CPI Underimines Some Recent Attempts to Dismiss High Core PCE Deflator -- Argues for Fed Rate Hike
The high 0.3% m/m February Core CPI looks to have reflected widespread increases and points to a 0.2-0.3% Core PCE Deflator. Along with the stronger-than-consensus jump in February Housing Starts, today's CPI report adds to the wide span of US economic data arguing for a Fed rate hike this afternoon.
a. The largest increase in the CPI was the +1.6% m/m Apparel. Bi-monthly sampling and possibly early introduction of higher-priced Spring clothing (due to the relatively warm winter) were likely partly responsible. But, the increases were sizable in other components, as well.
b. The underlying components of Housing Starts/Permits were strong, as well -- both 1-Family Starts and Permits rose m/m.
The high CPI print undermines two recent attempts to dismiss the significance of the high 1.7% y/y print in the January Core PCE Deflator (see below). Both argue that base effects boosted the y/y in January and that the y/y pace is likely to fall back in coming months.
Here's where they could be wrong:
a. A 0.2-0.3% m/m February Core PCE Deflator should translate into 1.7-1.8%, with 1.8% the better chance (and assuming no revision to January). The February 2015 Core PCE Deflator rose 0.13% m/m, so the base effect helps to boost the y/y in February.
b. The m/m percent change in the Core PCE Deflator averaged a modest 0.13% m/m from February through December 2015, and it is more likely that it will average at least that pace for the rest of 2016.
The two benign views of the January Core PCE Deflator are:
1. Morgan Stanley economists argue that the high January Core PCE Deflator resulted from favorable base effects, according to a Bloomberg news story. MS economists think that the 1.7% y/y will be the peak for the year.
2. Fed Governor Brainard also attributed the high print to base effects. She said in a footnote in her latest speech: "Because the most recent 12-month change in core PCE prices includes several relatively large monthly increases in core PCE prices in the first part of 2015, it is possible that 12-month core PCE inflation will move lower in coming months as these relatively large monthly increases drop out of the 12-month window."
a. This is actually backwards with regard to how base effects impact the y/y calculation. The y/y is lifted when the current month is compared to a relatively soft print 12 months earlier.
a. The largest increase in the CPI was the +1.6% m/m Apparel. Bi-monthly sampling and possibly early introduction of higher-priced Spring clothing (due to the relatively warm winter) were likely partly responsible. But, the increases were sizable in other components, as well.
b. The underlying components of Housing Starts/Permits were strong, as well -- both 1-Family Starts and Permits rose m/m.
The high CPI print undermines two recent attempts to dismiss the significance of the high 1.7% y/y print in the January Core PCE Deflator (see below). Both argue that base effects boosted the y/y in January and that the y/y pace is likely to fall back in coming months.
Here's where they could be wrong:
a. A 0.2-0.3% m/m February Core PCE Deflator should translate into 1.7-1.8%, with 1.8% the better chance (and assuming no revision to January). The February 2015 Core PCE Deflator rose 0.13% m/m, so the base effect helps to boost the y/y in February.
b. The m/m percent change in the Core PCE Deflator averaged a modest 0.13% m/m from February through December 2015, and it is more likely that it will average at least that pace for the rest of 2016.
The two benign views of the January Core PCE Deflator are:
1. Morgan Stanley economists argue that the high January Core PCE Deflator resulted from favorable base effects, according to a Bloomberg news story. MS economists think that the 1.7% y/y will be the peak for the year.
2. Fed Governor Brainard also attributed the high print to base effects. She said in a footnote in her latest speech: "Because the most recent 12-month change in core PCE prices includes several relatively large monthly increases in core PCE prices in the first part of 2015, it is possible that 12-month core PCE inflation will move lower in coming months as these relatively large monthly increases drop out of the 12-month window."
a. This is actually backwards with regard to how base effects impact the y/y calculation. The y/y is lifted when the current month is compared to a relatively soft print 12 months earlier.
Tuesday, March 15, 2016
Five Possible Outcomes from the FOMC
Here are 5 possible outcomes for Wednesday's 2pm FOMC Statement and how the stock and Treasury market might react to them.
Fed Action Market Reaction
1. No Hike, No Change in Forward Guidance Knee-Jerk Bounce in Stocks, Could be Sold
To Leave Stocks Little Changed on the Day
Treasury Yields Little Changed, Curve
Could Steepen
2. No Hike, Keeps April or June Hike in Play, Knee-Jerk Bounce in Stocks, Sold To Leave
No Change in Forward Guidance Stocks Lower on the Day
(WSJ scenario)
Treasury Yields Little Changed, Curve
Could Flatten
3. No Hike, Lowers Forward Guidance Stocks Rally
Treasuries Rally
4. 25 BP Hike, Lowers Forward Guidance Knee-Jerk Sell-Off in Stocks, Could Be
(my preferred scenario, but long shot) Bought To Leave Stocks Higher on the Day
Treasury Yield Impact Not Clear, Could
Be Opposite of Stocks
5. 10-20 BP Hike, Lowers Forward Guidance Stocks Rally
(even better scenario, but long shot)
Treasury Yield Impact Not Clear, Could
Be Opposite of Stocks
Fed Action Market Reaction
1. No Hike, No Change in Forward Guidance Knee-Jerk Bounce in Stocks, Could be Sold
To Leave Stocks Little Changed on the Day
Treasury Yields Little Changed, Curve
Could Steepen
2. No Hike, Keeps April or June Hike in Play, Knee-Jerk Bounce in Stocks, Sold To Leave
No Change in Forward Guidance Stocks Lower on the Day
(WSJ scenario)
Treasury Yields Little Changed, Curve
Could Flatten
3. No Hike, Lowers Forward Guidance Stocks Rally
Treasuries Rally
4. 25 BP Hike, Lowers Forward Guidance Knee-Jerk Sell-Off in Stocks, Could Be
(my preferred scenario, but long shot) Bought To Leave Stocks Higher on the Day
Treasury Yield Impact Not Clear, Could
Be Opposite of Stocks
5. 10-20 BP Hike, Lowers Forward Guidance Stocks Rally
(even better scenario, but long shot)
Treasury Yield Impact Not Clear, Could
Be Opposite of Stocks
Sunday, March 13, 2016
Medium-Term Outlook for Stocks/What Was Behind Friday's Stock Market Bounce?
The stock market outlook is positive into May, assuming the Fed does not throw up a roadblock.
Positive considerations include: /1/ S&P 500 broke above the 2000 psychological resistance level on Friday, /2/ month- and quarter-ends should support stocks in the 2nd half of March, /3/ Stronger Q116 GDP Growth should lift earnings reports in April.
A potential roadblock would be if the Fed does what Hilsenrath suggested in the Wall Street Journal early last week. He said it was likely the FOMC would skip hiking then funds rate on March 16, but leave open the door for a hike in April or June. Such an outcome would in effect challenge stocks to sell off ahead of these meetings to see if the Fed would "blink" again.
In contrast, the risk that I see -- that the Fed hikes the funds rate but eases on the forward guidance (opposite of Hilsenrath's scenario) -- would be a positive for stocks, although there would likely be knee-jerk selling initially. Note that skipping a rate hike and lowering forward guidance would be even more positive for stocks.
Explaining Friday's Stock Market Bounce
Market commentary attributed Friday's stock market bounce to a re-evaluation of Thursday's ECB policy moves, with market participants being more appreciative of it as an easing. While stocks often reverse direction the day after a central bank meeting -- at least that's often the case the day after a Fed FOMC meeting - I think the ECB-related reasons for Friday's bounce were more subtle and really highlight the importance of China and this coming Wednesday's Fed decision.
a. If the markets truly had re-evaluated ECB policy as an easing, the euro would have fallen sharply on Friday, unwinding most of Thursday's bounce, instead of just edging down.
Importance of China
1. Thursday's bounce in the Euro lowered the trade-weighted value of the Remimbi enough to allow the PBoC to lift the dollar value of the currency on Friday (and still leave the trade-weighted value of its currency lower on the day) -- which the market took as a positive sign of confidence in the Chinese economy.
a. The bounce in the Euro was an ironic and unintended consequence of Draghi's comment that ECB rate cuts were likely over.
Fed Considerations
1. The ironic weakening in the dollar may have been viewed by stocks as an action that would offset the drag from a Fed tightening -- although the market gives low probability to the latter in March.
2. The scenario in which the Fed hikes the funds rate but eases on the forward guidance may have acquired a little more credence, as it would be the mirror image of the ECB's move (see prior blog posting).
Positive considerations include: /1/ S&P 500 broke above the 2000 psychological resistance level on Friday, /2/ month- and quarter-ends should support stocks in the 2nd half of March, /3/ Stronger Q116 GDP Growth should lift earnings reports in April.
A potential roadblock would be if the Fed does what Hilsenrath suggested in the Wall Street Journal early last week. He said it was likely the FOMC would skip hiking then funds rate on March 16, but leave open the door for a hike in April or June. Such an outcome would in effect challenge stocks to sell off ahead of these meetings to see if the Fed would "blink" again.
In contrast, the risk that I see -- that the Fed hikes the funds rate but eases on the forward guidance (opposite of Hilsenrath's scenario) -- would be a positive for stocks, although there would likely be knee-jerk selling initially. Note that skipping a rate hike and lowering forward guidance would be even more positive for stocks.
Explaining Friday's Stock Market Bounce
Market commentary attributed Friday's stock market bounce to a re-evaluation of Thursday's ECB policy moves, with market participants being more appreciative of it as an easing. While stocks often reverse direction the day after a central bank meeting -- at least that's often the case the day after a Fed FOMC meeting - I think the ECB-related reasons for Friday's bounce were more subtle and really highlight the importance of China and this coming Wednesday's Fed decision.
a. If the markets truly had re-evaluated ECB policy as an easing, the euro would have fallen sharply on Friday, unwinding most of Thursday's bounce, instead of just edging down.
Importance of China
1. Thursday's bounce in the Euro lowered the trade-weighted value of the Remimbi enough to allow the PBoC to lift the dollar value of the currency on Friday (and still leave the trade-weighted value of its currency lower on the day) -- which the market took as a positive sign of confidence in the Chinese economy.
a. The bounce in the Euro was an ironic and unintended consequence of Draghi's comment that ECB rate cuts were likely over.
Fed Considerations
1. The ironic weakening in the dollar may have been viewed by stocks as an action that would offset the drag from a Fed tightening -- although the market gives low probability to the latter in March.
2. The scenario in which the Fed hikes the funds rate but eases on the forward guidance may have acquired a little more credence, as it would be the mirror image of the ECB's move (see prior blog posting).
Thursday, March 10, 2016
ECB Forward Guidance Dominates/ To Be Mirrored by the Fed?
Today's long-awaited ECB easing was superceded by Draghi's expectation that interest rates will not be cut again. In other words, forward guidance was more important than the actual policy change. This dominance of forward guidance may very well happen again at next week's FOMC meeting. As I discussed on my February 28 blog post, "A Fed Hawk and Dove," a downshifting in the "dots" may accompany a rate hike on March 16 -- and the downshifting may be the most important element of the policy announcement.
If this happens, the "divergence" trades -- betting on a tighter Fed versus an easier ECB -- would be turned on their heads. The dollar should weaken and stocks rally. While short-term yields should rise, it is not clear whether the Treasury curve will flatten or not. Expectations of future short-term rates would be lower, but inflation expectations higher.
If this happens, the "divergence" trades -- betting on a tighter Fed versus an easier ECB -- would be turned on their heads. The dollar should weaken and stocks rally. While short-term yields should rise, it is not clear whether the Treasury curve will flatten or not. Expectations of future short-term rates would be lower, but inflation expectations higher.
An Important Message from Claims?
The drop in both Initial and Continuing Claims in the latest week could be a sign that the economy is picking up momentum at the end of Q116. To be sure, one week's data are not enough to make a trend, and school-related spring breaks could impart some volatility into the data at this time of year (New York had a large drop in Initial Claims this week). Nevertheless, today's data, the last Claims report to be released ahead of the March 15-16 FOMC meeting, at the minimum should dent the downside concerns about the economic outlook expressed by some Fed officials.
The -18k w/w in Initial Claims to 259k in the March 5 week and the -32k w/w in Continuing Claims to 2.225 Mn in the February 27 week put them back to the lows seen in Q415 -- suggesting their run-up over January-February may be over. It is possible that the recovery in the stock market since mid-February has quickly boosted business and consumer confidence.
This is important, since it would show that the pickup in Q116 Real GDP Growth is not just a weather-related bounce. And, it would set the stage for above-trend economic growth to persist into Q216. It will be important to see if Initial Claims stay below the 270k+ levels of January-February in coming weeks.
The -18k w/w in Initial Claims to 259k in the March 5 week and the -32k w/w in Continuing Claims to 2.225 Mn in the February 27 week put them back to the lows seen in Q415 -- suggesting their run-up over January-February may be over. It is possible that the recovery in the stock market since mid-February has quickly boosted business and consumer confidence.
This is important, since it would show that the pickup in Q116 Real GDP Growth is not just a weather-related bounce. And, it would set the stage for above-trend economic growth to persist into Q216. It will be important to see if Initial Claims stay below the 270k+ levels of January-February in coming weeks.
Sunday, March 6, 2016
The Decline in February AHE and Fed Policy
Some market commentators highlighted the decline in February Average Hourly Earnings (AHE) in Friday's Employment Report as an argument for the Fed not to hike in March. There are reasons to be cautious about accepting this analysis.
1. The -0.1% m/m decline in February's AHE can be attributed to calendar and job composition effects as well as to a partial offset to the +0.5% January jump.
2. The underlying trend in wage inflation supports the Fed's view that inflation should eventually move up to about 2.0% -- the y/y pace of the major measures of labor costs are about 2.0% (see table below).
3. The Core PCE Deflator already is moving closer to the Fed's 2.0% target. Its y/y pace was 1.7% in January.
Major Measures of Labor Costs
(4-Qtr Percent Change)
Year AHE Compensation/Hr ECI ULC
Q116 2.4
2015 2.6 2.6 2.0 2.1
2014 1.9 2.9 2.2 2.8
AHE = Average Hourly Earnings
ECI = Empoyment Cost Index
ULC = Unit Labor Costs
1. The -0.1% m/m decline in February's AHE can be attributed to calendar and job composition effects as well as to a partial offset to the +0.5% January jump.
2. The underlying trend in wage inflation supports the Fed's view that inflation should eventually move up to about 2.0% -- the y/y pace of the major measures of labor costs are about 2.0% (see table below).
3. The Core PCE Deflator already is moving closer to the Fed's 2.0% target. Its y/y pace was 1.7% in January.
Major Measures of Labor Costs
(4-Qtr Percent Change)
Year AHE Compensation/Hr ECI ULC
Q116 2.4
2015 2.6 2.6 2.0 2.1
2014 1.9 2.9 2.2 2.8
AHE = Average Hourly Earnings
ECI = Empoyment Cost Index
ULC = Unit Labor Costs
Friday, March 4, 2016
February Employment Report Essentially Solid
The February Employment Report does not stand in the way of a Fed rate hike in March, as it shows a solid labor market. The weak parts of the report -- Nonfarm Workweek and Average Hourly Earnings -- could have reflected noise.
1. The larger-than-expected +242k m/m increase in Nonfarm Payrolls underscores Fed officials' comments that the labor market is strong.
a. The upside surprise was in Retail Jobs (+55k) and Educational Services (+28k). Retail jobs were expected to slow in February after seasonal factors had been thought to have exaggerated the January gain. There still could be some seasonal adjustment problem with them in February, but the uptrend is solid. Education jobs rebounded 28k after falling 21k in January.
2. The jobs strength could have been a quick adjustment by companies to the extended use of existing workers in January, as seen in the high 34.6 Hour Average Workweek that month. I had thought this extended use would persist in February and that we'd seen the hiring reaction in March.
But, with the Workweek falling to 34.4 Hours in February, the suspicion is that both the high January and low February prints reflected noise around a 34.5 Hour trend. Note that the Manufacturing Workweek -- the best measured of all the sectors -- was steady at 40.8 Hours in February.
3. The drop in the Workweek is behind the drop in Total Hours Worked. So, their drop, too, is suspect.
4. Good weather could have been a factor boosting jobs. The Number of People Not At Work Because of Bad Weather fell to 228k from 269k in January. The February level is below trend (250k), while the January level was above trend (225k).
5. The steady 4.9% Unemployment Rate (4.91% versus 4.92% in January, unrounded), confirms labor market strength. It remained below the 5.0% Q415 average, suggesting continuing above-trend GDP Growth.
6. The 0.1% m/m decline in Average Hourly Earnings should be viewed cautiously. To some extent, the softness was expected as a result of the timing of the survey week. It also could be just a partial unwinding of the +0.5% m/m jump in January. The 2-month average is +0.2% m/m, the same as the Q415 average.
1. The larger-than-expected +242k m/m increase in Nonfarm Payrolls underscores Fed officials' comments that the labor market is strong.
a. The upside surprise was in Retail Jobs (+55k) and Educational Services (+28k). Retail jobs were expected to slow in February after seasonal factors had been thought to have exaggerated the January gain. There still could be some seasonal adjustment problem with them in February, but the uptrend is solid. Education jobs rebounded 28k after falling 21k in January.
2. The jobs strength could have been a quick adjustment by companies to the extended use of existing workers in January, as seen in the high 34.6 Hour Average Workweek that month. I had thought this extended use would persist in February and that we'd seen the hiring reaction in March.
But, with the Workweek falling to 34.4 Hours in February, the suspicion is that both the high January and low February prints reflected noise around a 34.5 Hour trend. Note that the Manufacturing Workweek -- the best measured of all the sectors -- was steady at 40.8 Hours in February.
3. The drop in the Workweek is behind the drop in Total Hours Worked. So, their drop, too, is suspect.
4. Good weather could have been a factor boosting jobs. The Number of People Not At Work Because of Bad Weather fell to 228k from 269k in January. The February level is below trend (250k), while the January level was above trend (225k).
5. The steady 4.9% Unemployment Rate (4.91% versus 4.92% in January, unrounded), confirms labor market strength. It remained below the 5.0% Q415 average, suggesting continuing above-trend GDP Growth.
6. The 0.1% m/m decline in Average Hourly Earnings should be viewed cautiously. To some extent, the softness was expected as a result of the timing of the survey week. It also could be just a partial unwinding of the +0.5% m/m jump in January. The 2-month average is +0.2% m/m, the same as the Q415 average.
Thursday, March 3, 2016
Looking For Softer-Than-Consensus But Still Strong February Employment Report
I see a somewhat softer-than-consensus February Employment Report, but still strong enough to keep open the door for a March Fed rate hike. It should be a positive for the stock market and a positive for the longer-end of the Treasury market, but a negative for TIPS.
A. Payrolls -- Speedup to a below-consensus 175k from 151k in January. Consensus is 190k.
1. Layoffs appear to have eased off m/m:
a. The 4-week average of Initial Claims fell to 272k going into the February Payroll Survey Week from 285k into the January Week.
b. Challenger Layoff Announcements fell to 62k from 75k in January. But these are not seasonally adjusted, so may not be comparable on a m/m basis.
2. But, Hiring remains cautious:
a. Continuing Claims rose to 2.257 Mn in the February Survey Week from 2.246 Mn in the January Week, despite the decline in layoffs.
b. Uncertainty about the outlook stemming from the financial market turmoil may not have abated in early February. The VIX averaged 24.1 in February through the survey week, versus 23.6 in January through its survey week.
3. The weather was supportive of job growth in February, similar to January.
B. Unemployment Rate -- Risk of an uptick to 5.0%. Consensus is for a steady 4.9%.
1. Conference Board Job Components worsened in February.
2. Continuing Claims rose between survey weeks.
C. Average Hourly Earnings -- A below-consensus +0.1% m/m, after +0.5% in January. Consensus is +0.2%.
1. Calendar considerations point to a 0.1% m/m Average Hourly Earnings.
2. But, the y/y should be steady at 2.5% -- which would confirm a modest uptrend in the underlying pace of AHE.
D. Nonfarm Workweek -- Steady at a high 34.6 Hours. Consensus is the same.
1. My suspicion is that the uptick in the Workweek to 34.6 Hours in January from 34.5 Hours in December resulted from companies having substituted longer hours by existing workers for hiring -- as a result of the heightened uncertainty stemming from the financial market turmoil.
2. This substitution may have persisted into February, based on the VIX.
3. But, with the turmoil having subsided subsequently, the high Workweek bodes well for a speedup in March Payrolls, as hiring catches up to the demand for labor.
A. Payrolls -- Speedup to a below-consensus 175k from 151k in January. Consensus is 190k.
1. Layoffs appear to have eased off m/m:
a. The 4-week average of Initial Claims fell to 272k going into the February Payroll Survey Week from 285k into the January Week.
b. Challenger Layoff Announcements fell to 62k from 75k in January. But these are not seasonally adjusted, so may not be comparable on a m/m basis.
2. But, Hiring remains cautious:
a. Continuing Claims rose to 2.257 Mn in the February Survey Week from 2.246 Mn in the January Week, despite the decline in layoffs.
b. Uncertainty about the outlook stemming from the financial market turmoil may not have abated in early February. The VIX averaged 24.1 in February through the survey week, versus 23.6 in January through its survey week.
3. The weather was supportive of job growth in February, similar to January.
B. Unemployment Rate -- Risk of an uptick to 5.0%. Consensus is for a steady 4.9%.
1. Conference Board Job Components worsened in February.
2. Continuing Claims rose between survey weeks.
C. Average Hourly Earnings -- A below-consensus +0.1% m/m, after +0.5% in January. Consensus is +0.2%.
1. Calendar considerations point to a 0.1% m/m Average Hourly Earnings.
2. But, the y/y should be steady at 2.5% -- which would confirm a modest uptrend in the underlying pace of AHE.
D. Nonfarm Workweek -- Steady at a high 34.6 Hours. Consensus is the same.
1. My suspicion is that the uptick in the Workweek to 34.6 Hours in January from 34.5 Hours in December resulted from companies having substituted longer hours by existing workers for hiring -- as a result of the heightened uncertainty stemming from the financial market turmoil.
2. This substitution may have persisted into February, based on the VIX.
3. But, with the turmoil having subsided subsequently, the high Workweek bodes well for a speedup in March Payrolls, as hiring catches up to the demand for labor.
Tuesday, March 1, 2016
Today's Stock Market Rally -- A Harbinger of More to Come?
The stock market's bullish reaction to today's strong US economic data fits with the views expressed in my blog over the past few weeks:
1. Stocks would rally at least up to the ECB Meeting on March 10.
2. Stocks may very well take a March Fed Rate Hike in stride if the macroeconomic background is in line with the above-trend FOMC Central Tendency Projection for GDP Growth.
It is far from clear, however, that US economic growth will exceed the 1.7% (annualized) estimated trend. For example, the Atanta Fed's GDP Now Model's projection for Q116 Real GDP Growth is down to 1.9% (q/q, saar).
And, while Initial Unemployment Claims appear to have peaked in January, Continuing Claims are still trending up. So, while layoffs may have abated, hiring has turned more cautious. Both should move down to send a clear signal that economic growth is above trend.
Nevertheless, I'm getting cautiously more optimistic that the stock market rally will persist beyond the March 15-16 FOMC meeting, as /1/ key data ahead of the meeting should remain strong and /2/ there were hints from two Fed officials (a hawk and a dove) that forward guidance coming out of the meeting may ease up even, as is the risk, the funds rate is hiked -- see prior blog postings.
If the stock market gets through the March FOMC Meeting with little damage, I can see it rallying at least into May -- ahead of the "Brexit" referendum.
1. Stocks would rally at least up to the ECB Meeting on March 10.
2. Stocks may very well take a March Fed Rate Hike in stride if the macroeconomic background is in line with the above-trend FOMC Central Tendency Projection for GDP Growth.
It is far from clear, however, that US economic growth will exceed the 1.7% (annualized) estimated trend. For example, the Atanta Fed's GDP Now Model's projection for Q116 Real GDP Growth is down to 1.9% (q/q, saar).
And, while Initial Unemployment Claims appear to have peaked in January, Continuing Claims are still trending up. So, while layoffs may have abated, hiring has turned more cautious. Both should move down to send a clear signal that economic growth is above trend.
Nevertheless, I'm getting cautiously more optimistic that the stock market rally will persist beyond the March 15-16 FOMC meeting, as /1/ key data ahead of the meeting should remain strong and /2/ there were hints from two Fed officials (a hawk and a dove) that forward guidance coming out of the meeting may ease up even, as is the risk, the funds rate is hiked -- see prior blog postings.
If the stock market gets through the March FOMC Meeting with little damage, I can see it rallying at least into May -- ahead of the "Brexit" referendum.
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