Fed Governor Brainard came through with dovish comments, citing a variety of reasons for monetary policy not to tighten. In particular, she cited the likelihood of continuing low inflation, evidence of increased capacity as the Unemployment Rate has been steady despite strong Payroll gains this year, and downside risks from abroad. She continues to provide the best analysis of the US economic situation among all the Fed officials.
Fed hawks (like Williams, Fischer and apparently Dudley) cited the strength of June-July economic data to raise the potential for a September rate hike. But, this analysis was dubious, as the June-July strength risked being just a temporary catch-up from the weak May. They should have known this, and, indeed, that is what occurred as the August data softened. Low growth may persist, as the NY Fed nowcast model projects a slowdown in Real GDP Growth to 1.7% in Q416 from a projected 2.8% in Q316. Moreover, the latter risks being revised down as data come in.
In an environment of slow economic growth and low inflation, when would it be appropriate for the Fed to tighten? My view is that there would be a natural window for the Fed to tighten when there is a substitute force to spur the economy. And, this force is likely to be fiscal stimulus. If the new Administration -- whether Clinton or Trump -- implements a large enough program of fiscal stimulus -- either tax cuts, government spending increases, or regulatory reform -- that boosts the economy significantly, the Fed would have an opportunity to raise rates. This idea suggests that the earliest window for the Fed to tighten may be mid- to late-2017.
Monday, September 12, 2016
Friday, September 9, 2016
Markets Vote No Confidence in the Appropriateness of a Fed Rate Hike -- What to Look for Next Week
The markets voted no confidence in the appropriateness of a Fed rate hike today -- stocks, Treasuries and oil prices fell sharply and the dollar rose. The stock market reaction, especially, signals that a rate hike would be viewed as harmful to the economy. The markets reacted to a speech by Boston Fed President Rosengren in which he said that in his opinion "a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy." The large market reactions to this standard Fed comment (in line with Yellen's Jackson Hole speech) show a pent-up sensitivity to the potential for a September rate hike. Several items scheduled next week may show whether this sensitivity was overdone today:
Monday:
1. Atlanta Fed President Lockhart speaks twice. His last speech on August 16 indicated that he thinks one rate hike this year would be appropriate. He is not likely to change this view, and a repeat may test whether the market is "sold out" on the potential for a hike.
2. Fed Governor Brainard speaks at 1.15pm (EDT), later than Lockhart. She has been a dove and a better indicator of upcoming Fed actions than have the hawks. If she continues to argue against a hike, the markets could reverse some of the latest sell-off. If she says that a reasonable case can be made for a hike, it would seem to be almost a done deal.
Thursday:
1. August Retail Sales risk printing weaker than expected, based on anecdotal evidence. In particular, the very hot weather in the country could have had a depressing effect on the early introduction of fall clothing. Consensus is 0.0% m/m Total and +0.2% Ex Auto. A weak report could push down the NY Fed and Atlanta Fed models' nowcast of Q3 Real GDP Growth. The latest nowcasts are 2.8-3.3% for Q316 Real GDP Growth (was 3.0-3.5% before today's release of July Wholesale Inventories). The NY Fed model projects 1.7% for Q416 Real GDP Growth.
2. The Claims data are for the Labor Day week, so the markets may ignore them. They strengthened a bit in yesterday's release, but stayed within their recent range. Moreover, they could have been held down by the bad weather in the Southeast that week -- and catch-up could boost them in this report.
3. The September Phil Fed Manufacturing Index could come in weaker than expected, after it ran counter to the Mfg ISM in August (it rose, while Mfg ISM fell). Consensus is for an unchanged 2.
4. August Manufacturing Output, part of Industrial Production, could unwind the +0.7% m/m jump in July, based on the drop in Mfg jobs and hours worked in August. The July jump was cited by Fed hawks as evidence supporting a rate hike.
Friday:
1. A soft August Core CPI, just like the +0.1% m/m July Core, would question the need to slow the economy -- and thus argue against a Fed rate hike.
Monday:
1. Atlanta Fed President Lockhart speaks twice. His last speech on August 16 indicated that he thinks one rate hike this year would be appropriate. He is not likely to change this view, and a repeat may test whether the market is "sold out" on the potential for a hike.
2. Fed Governor Brainard speaks at 1.15pm (EDT), later than Lockhart. She has been a dove and a better indicator of upcoming Fed actions than have the hawks. If she continues to argue against a hike, the markets could reverse some of the latest sell-off. If she says that a reasonable case can be made for a hike, it would seem to be almost a done deal.
Thursday:
1. August Retail Sales risk printing weaker than expected, based on anecdotal evidence. In particular, the very hot weather in the country could have had a depressing effect on the early introduction of fall clothing. Consensus is 0.0% m/m Total and +0.2% Ex Auto. A weak report could push down the NY Fed and Atlanta Fed models' nowcast of Q3 Real GDP Growth. The latest nowcasts are 2.8-3.3% for Q316 Real GDP Growth (was 3.0-3.5% before today's release of July Wholesale Inventories). The NY Fed model projects 1.7% for Q416 Real GDP Growth.
2. The Claims data are for the Labor Day week, so the markets may ignore them. They strengthened a bit in yesterday's release, but stayed within their recent range. Moreover, they could have been held down by the bad weather in the Southeast that week -- and catch-up could boost them in this report.
3. The September Phil Fed Manufacturing Index could come in weaker than expected, after it ran counter to the Mfg ISM in August (it rose, while Mfg ISM fell). Consensus is for an unchanged 2.
4. August Manufacturing Output, part of Industrial Production, could unwind the +0.7% m/m jump in July, based on the drop in Mfg jobs and hours worked in August. The July jump was cited by Fed hawks as evidence supporting a rate hike.
Friday:
1. A soft August Core CPI, just like the +0.1% m/m July Core, would question the need to slow the economy -- and thus argue against a Fed rate hike.
Friday, September 2, 2016
August Employment Report Should Stop the Fed in September
The August Employment Report should stop the Fed from hiking at its September FOMC Meeting. The Report joins yesterday's Mfg ISM in showing that the economic strength seen in June and July -- and cited by the Fed hawks for their desire to hike in September -- was temporary. (I believe the June-July strength was just a catch-up after the weak May.)
The Report suggests modest economic growth. And, I would not be surprised if the Atlanta and NY Fed models eventually lower their nowcasts of Q3 Real GDP Growth (currently 3.2% and 2.8%, respectively). But, the combination of modest growth, low inflation, and steady Fed policy should be positives for stocks and Treasuries.
Note that my August Payroll estimate of +150k was almost dead-on. It ranked 2 out of 150 estimates on Estimize.com.
Here are the salient points of the report:
1. The 151k m/m increase in Nonfarm Payrolls is below the +186k m/m average from January through July.
2. The cyclical sectors -- manufacturing and construction -- posted job declines.
3. While the Unemployment Rate was steady at 4.9%, it rose to to 4.92% from 4.88% unrounded.
4. The broader measure of Unemployment -- U6 -- was steady at 9.7%.
5. Part-timers for Economic Reasons rose for the 2nd month in a row.
6. The Nonfarm Workweek fell to 34.3 Hours from a downward-revised 34.4 Hours in July (was 34.5 Hours), arguing against a pickup in production.
a. August Manufacturing Output is likely to unwind the July jump. Fed hawks had cited the July jump in arguing that economic growth was picking up.
7. Average Hourly Earnings rose 0.1% m/m, pushing down the y/y to 2.4% from an upward-revised 2.7% in July. The August y/y increase is the lowest since November 2015.
The Report suggests modest economic growth. And, I would not be surprised if the Atlanta and NY Fed models eventually lower their nowcasts of Q3 Real GDP Growth (currently 3.2% and 2.8%, respectively). But, the combination of modest growth, low inflation, and steady Fed policy should be positives for stocks and Treasuries.
Note that my August Payroll estimate of +150k was almost dead-on. It ranked 2 out of 150 estimates on Estimize.com.
Here are the salient points of the report:
1. The 151k m/m increase in Nonfarm Payrolls is below the +186k m/m average from January through July.
2. The cyclical sectors -- manufacturing and construction -- posted job declines.
3. While the Unemployment Rate was steady at 4.9%, it rose to to 4.92% from 4.88% unrounded.
4. The broader measure of Unemployment -- U6 -- was steady at 9.7%.
5. Part-timers for Economic Reasons rose for the 2nd month in a row.
6. The Nonfarm Workweek fell to 34.3 Hours from a downward-revised 34.4 Hours in July (was 34.5 Hours), arguing against a pickup in production.
a. August Manufacturing Output is likely to unwind the July jump. Fed hawks had cited the July jump in arguing that economic growth was picking up.
7. Average Hourly Earnings rose 0.1% m/m, pushing down the y/y to 2.4% from an upward-revised 2.7% in July. The August y/y increase is the lowest since November 2015.
Wednesday, August 31, 2016
August Payrolls/Average Hourly Earnings Risk Printing Below Expectations
Friday's August Employment Report may very well come in weaker than consensus expects, but it will probably not completely close the door on a September Fed rate hike -- as it is not clear whether they will be weaker than the possibly low bars set by the Fed. Nevertheless, weaker-than-expected prints for Payrolls and Average Hourly Earnings could boost stocks and bonds and weigh on the dollar. Here is some evidence that Payrolls and Average Hourly Earnings will come in weaker than expected.
Payrolls
1. Payrolls came in below the ADP Estimate in August in each of the past 3 years (since ADP changed its estimation procedures). The average shortfall is 48k, with a range of 24k to 70k.
August Print (000s)
ADP Estimate First-Print Private Payrolls
2016 177 na
2015 190 140
2014 204 134
2013 176 152
2. Some Street Economists point out that consensus has overestimated August Payrolls in each of the past 5 years. Consensus is +180k.
a. This pattern of consensus miss has tended to be an unreliable predictor, however.
3. The August Payroll Survey Week was relatively early this year, after a late July week. This early timing would seem to risk a downward bias to the m/m change in jobs.
a. But, BLS seasonal adjustment should account for this calendar timing, and there is no conclusive evidence that this early survey week will bias down an August Payroll gain.
Average Hourly Earnings
1. Average Hourly Earnings should print 0.0-0.1% m/m, as a result of a calendar quirk.
a. This quirk was likely responsible for the 0.3% m/m jump in July Average Hourly Earnings.
2. The y/y would fall to 2.3-2.4% from 2.6% in July. This would be the lowest y/y since November 2015.
3. Consensus for Average Hourly Earnings is +0.2% m/m.
Payrolls
1. Payrolls came in below the ADP Estimate in August in each of the past 3 years (since ADP changed its estimation procedures). The average shortfall is 48k, with a range of 24k to 70k.
August Print (000s)
ADP Estimate First-Print Private Payrolls
2016 177 na
2015 190 140
2014 204 134
2013 176 152
2. Some Street Economists point out that consensus has overestimated August Payrolls in each of the past 5 years. Consensus is +180k.
a. This pattern of consensus miss has tended to be an unreliable predictor, however.
3. The August Payroll Survey Week was relatively early this year, after a late July week. This early timing would seem to risk a downward bias to the m/m change in jobs.
a. But, BLS seasonal adjustment should account for this calendar timing, and there is no conclusive evidence that this early survey week will bias down an August Payroll gain.
Average Hourly Earnings
1. Average Hourly Earnings should print 0.0-0.1% m/m, as a result of a calendar quirk.
a. This quirk was likely responsible for the 0.3% m/m jump in July Average Hourly Earnings.
2. The y/y would fall to 2.3-2.4% from 2.6% in July. This would be the lowest y/y since November 2015.
3. Consensus for Average Hourly Earnings is +0.2% m/m.
Thursday, August 25, 2016
Fed Hawks Get Support from Some But Not All of Today's US Economic Data
Fed hawks got support from some but not all of today's US economic data -- and even the supportive data were not particularly strong. So, I don't think these data change the odds of a Fed rate hike in September.
Strong Durable Goods Orders -- Strong
1. The underlying components of July Durable Goods Orders rose -- Ex Transportation +1.5% m/m and Nondefense Capital Goods Ex Civilian Aircraft +1.6% (2nd m/m increase in a row, as it followed +0.5% in June). The latter (known as Core Durables) is a leading indicator of capital spending.
2. The m/m gains support the hawk's contention that capital spending will pick up in H216.
3. But, by themselves, the data do not suggest a strong pickup.
a. The levels of these orders were above their respective Q216 averages, but they remained below those of Q116 and Q415.
b. Moreover, Core Durable Shipments were -0.4% m/m in July, continuing their downtrend. These are used by Commerce to construction Business Equipment Spending in GDP, so their decline shows that a pickup in equipment spending is yet to happen.
4. Manufacturers' Durable Goods Inventories -- a small portion of Business Inventories -- rose 0.3% m/m, after declining over Q216. This supports the idea that a bounce-back in Nonfarm Inventory Investment will boost Q316 GDP. But, the question remains whether this bounce-back will be one-off and thus not a sustainable boost to GDP growth.
5. These data are for July, which has seen stronger data print for many series. It remains to be seen whether July is the start of a trend or whether August data will pull back. The key August data are released next week.
Unemployment Claims Fall -- Strong
1. Initial Claims dipped 1k w/w to 361k. Continuing Claims fell 30k to 2.145 Mn. They suggest little change in labor market conditions in August, but are not good predictors of speedups/slowdowns in Payrolls or m/m change in the Unemployment Rate.
2. Initial remains slightly above the 258k July average.
3. Continuing is back to its average level since April, after popping up in the prior two weeks.
4. Continuing is for the August Payroll Survey Week. They are slightly above the 2.139 Mn in the July Survey Week.
5. Consensus for August Payrolls is now +164k (versus +217k in July). Consensus for the August Unemployment Rate is 4.8% (versus 4.9% in July).
August Markit Services PMI Falls -- Weak
1. The Market-IHS Services PMI fell to 50.9 from 51.4 in July. It is down to its lowest level since February.
2. The decline raises the risk that next week's August Non-Mfg ISM will fall, as well. Both moved in the same direction in 6 of 7 months this year.
Strong Durable Goods Orders -- Strong
1. The underlying components of July Durable Goods Orders rose -- Ex Transportation +1.5% m/m and Nondefense Capital Goods Ex Civilian Aircraft +1.6% (2nd m/m increase in a row, as it followed +0.5% in June). The latter (known as Core Durables) is a leading indicator of capital spending.
2. The m/m gains support the hawk's contention that capital spending will pick up in H216.
3. But, by themselves, the data do not suggest a strong pickup.
a. The levels of these orders were above their respective Q216 averages, but they remained below those of Q116 and Q415.
b. Moreover, Core Durable Shipments were -0.4% m/m in July, continuing their downtrend. These are used by Commerce to construction Business Equipment Spending in GDP, so their decline shows that a pickup in equipment spending is yet to happen.
4. Manufacturers' Durable Goods Inventories -- a small portion of Business Inventories -- rose 0.3% m/m, after declining over Q216. This supports the idea that a bounce-back in Nonfarm Inventory Investment will boost Q316 GDP. But, the question remains whether this bounce-back will be one-off and thus not a sustainable boost to GDP growth.
5. These data are for July, which has seen stronger data print for many series. It remains to be seen whether July is the start of a trend or whether August data will pull back. The key August data are released next week.
Unemployment Claims Fall -- Strong
1. Initial Claims dipped 1k w/w to 361k. Continuing Claims fell 30k to 2.145 Mn. They suggest little change in labor market conditions in August, but are not good predictors of speedups/slowdowns in Payrolls or m/m change in the Unemployment Rate.
2. Initial remains slightly above the 258k July average.
3. Continuing is back to its average level since April, after popping up in the prior two weeks.
4. Continuing is for the August Payroll Survey Week. They are slightly above the 2.139 Mn in the July Survey Week.
5. Consensus for August Payrolls is now +164k (versus +217k in July). Consensus for the August Unemployment Rate is 4.8% (versus 4.9% in July).
August Markit Services PMI Falls -- Weak
1. The Market-IHS Services PMI fell to 50.9 from 51.4 in July. It is down to its lowest level since February.
2. The decline raises the risk that next week's August Non-Mfg ISM will fall, as well. Both moved in the same direction in 6 of 7 months this year.
Sunday, August 21, 2016
Fedspeak is Getting More Confusing -- Yellen's Jackson Hole Speech To Resolve? September Rate Hike?
Fedspeak is getting more confusing, with some Fed officials making both dovish and hawkish comments. But, there is a chance the confusion will be resolved to some extent by Yellen's speech at the Fed's Jackson Hole conference this coming Friday.
Yellen's Speech
Yellen's speech is on the Fed's Monetary Policy Toolkit. It would seem from its title to focus on how the Fed can respond to negative shocks when the funds rate is close to zero. By citing other policy tools besides the funds rate, she would counter the hawks' argument for the need to have more room to cut the funds rate in the event of a negative shock to the economy.
It does not appear as if the speech should contain any specific hint regarding the September 20-21 FOMC Meeting. Its absence would be appropriate, particularly since key August US economic data will not be available until the following week. But, as there is no guarantee that this "no comment" will be the case, the markets are likely to trade cautiously ahead of the speech. Stocks could maintain their modest positive bias, nonetheless, as the consensus believes stocks respond well to Yellen's speeches/testimonies.
a. Fear of a hike still may weigh on the markets up until the September 20-21 FOMC meeting -- unless upcoming US economic data turn decidedly soft. I continue to think the odds are low for a rate hike at this meeting.
Fedspeak Confusion
Until recently, Fedspeak confusion stemmed from contradictory messages sent by the hawks and doves of Fed officials. Now, this confusion has been complicated by Fed officials speaking from both sides. Last week saw San Francisco President John Williams, a hawk, argue one day for near-zero Fed funds rates in the long run and then another day for a potential September hike. The week also saw NY Fed President Bill Dudley, a centrist, spend most of a speech providing reasons why the Fed should not hike rates only to conclude that further monetary policy tightening this year cannot be ruled out. Some Fed officials are clearly anxious to tighten.
Why Fed Hawks Want to Tighten
The Fed hawks tend to cite two main reasons for hiking the funds rate -- /1/ the need for room to cut the rate in the event the economy suffers a negative shock, and /2/ above-trend growth when the economy is at full employment.
Sufficiently High Funds Rate: Without enough room above the zero level, the Fed may not be able to cut the rate sufficiently to offset the impact of a negative shock to the economy. There are some counter arguments, however:
1. A hike in the funds rate could be the negative shock, itself.
2. There are some negative shocks for which a rate cut is not appropriate. This was the case in 2008, when a loss of confidence in banks' balance sheets led to a freeze-up of financial markets. The main effect of Bernanke's aggressive cutting of the funds rate then was to boost oil prices to $140/bbl, which pushed the consumer over the cliff. A Fed/Treasury guarantee of banks' liabilities, similar to what ECB President Draghi did in Europe, would have been a more successful policy action.
3. The Fed has other tools with which to conduct monetary policy, which Yellen could address in her speech.
Above-Trend Growth When Economy at Full Employment: A continuation of above-trend growth in this situation will eventually lift inflation. But, there is a counter argument here, too:
1. Fed hawks in the past, like Larry Meyer in the late 1990s, made the same argument. The problem with this argument in the late 1990s, and likely now, is that other factors offset the tightness of the labor market and held down inflation. As a result, inflation then stayed low while the unemployment rate fell to around 4.0%. Inflation is currently stable and below the Fed's 2% target, suggesting more is going on with inflation than just a tighter labor market -- which should permit the unemployment rate to fall further without being inflationary.
A Rate Hike at the September FOMC Meeting?
The hawks, and Dudley, have emphasized that a rate hike is on the table at the September FOMC Meeting. The recent strengthening in some US economic data -- which highlighted the risk of above-trend growth -- is likely a major factor behind their view. This strengthening may not persist, however, as I mentioned in my prior blog. Here is more evidence suggesting caution in reading too much into the recently strong economic data:
1. The latest Unemployment Claims data hint that a near-term slowing may indeed be in the cards. Besides Initial Claims staying above 260k in the latest week, Continuing Claims have climbed in the latest 4 weeks and reached their highest level since May. These data suggest the pace of layoffs remains steady, while the re-hiring rate has weakened. Although there is not a reliable relationship between Initial/Continuing Claims and the m/m change in Payrolls, the Claims data raise the possibility that August Payrolls will slow to below 200k m/m.
2. The July Fed Senior Loan Officer Survey provides a reason for a near-term slowdown. Banks, on balance, tightened lending standards on C&I and Commercial Real Estate Loans. This could help explain why hiring may be slowing.
a. Note that commentators do not seem to have focused much, if at all, on these survey results.
b. The last time I looked at Lending Standards on C&I Loans, I found a clear inverse relationship with the funds rate -- the tighter the lending standards, the lower the funds rate. The relationship suggests that a near-zero funds rate is appropriate currently.
Yellen's Speech
Yellen's speech is on the Fed's Monetary Policy Toolkit. It would seem from its title to focus on how the Fed can respond to negative shocks when the funds rate is close to zero. By citing other policy tools besides the funds rate, she would counter the hawks' argument for the need to have more room to cut the funds rate in the event of a negative shock to the economy.
It does not appear as if the speech should contain any specific hint regarding the September 20-21 FOMC Meeting. Its absence would be appropriate, particularly since key August US economic data will not be available until the following week. But, as there is no guarantee that this "no comment" will be the case, the markets are likely to trade cautiously ahead of the speech. Stocks could maintain their modest positive bias, nonetheless, as the consensus believes stocks respond well to Yellen's speeches/testimonies.
a. Fear of a hike still may weigh on the markets up until the September 20-21 FOMC meeting -- unless upcoming US economic data turn decidedly soft. I continue to think the odds are low for a rate hike at this meeting.
Fedspeak Confusion
Until recently, Fedspeak confusion stemmed from contradictory messages sent by the hawks and doves of Fed officials. Now, this confusion has been complicated by Fed officials speaking from both sides. Last week saw San Francisco President John Williams, a hawk, argue one day for near-zero Fed funds rates in the long run and then another day for a potential September hike. The week also saw NY Fed President Bill Dudley, a centrist, spend most of a speech providing reasons why the Fed should not hike rates only to conclude that further monetary policy tightening this year cannot be ruled out. Some Fed officials are clearly anxious to tighten.
Why Fed Hawks Want to Tighten
The Fed hawks tend to cite two main reasons for hiking the funds rate -- /1/ the need for room to cut the rate in the event the economy suffers a negative shock, and /2/ above-trend growth when the economy is at full employment.
Sufficiently High Funds Rate: Without enough room above the zero level, the Fed may not be able to cut the rate sufficiently to offset the impact of a negative shock to the economy. There are some counter arguments, however:
1. A hike in the funds rate could be the negative shock, itself.
2. There are some negative shocks for which a rate cut is not appropriate. This was the case in 2008, when a loss of confidence in banks' balance sheets led to a freeze-up of financial markets. The main effect of Bernanke's aggressive cutting of the funds rate then was to boost oil prices to $140/bbl, which pushed the consumer over the cliff. A Fed/Treasury guarantee of banks' liabilities, similar to what ECB President Draghi did in Europe, would have been a more successful policy action.
3. The Fed has other tools with which to conduct monetary policy, which Yellen could address in her speech.
Above-Trend Growth When Economy at Full Employment: A continuation of above-trend growth in this situation will eventually lift inflation. But, there is a counter argument here, too:
1. Fed hawks in the past, like Larry Meyer in the late 1990s, made the same argument. The problem with this argument in the late 1990s, and likely now, is that other factors offset the tightness of the labor market and held down inflation. As a result, inflation then stayed low while the unemployment rate fell to around 4.0%. Inflation is currently stable and below the Fed's 2% target, suggesting more is going on with inflation than just a tighter labor market -- which should permit the unemployment rate to fall further without being inflationary.
A Rate Hike at the September FOMC Meeting?
The hawks, and Dudley, have emphasized that a rate hike is on the table at the September FOMC Meeting. The recent strengthening in some US economic data -- which highlighted the risk of above-trend growth -- is likely a major factor behind their view. This strengthening may not persist, however, as I mentioned in my prior blog. Here is more evidence suggesting caution in reading too much into the recently strong economic data:
1. The latest Unemployment Claims data hint that a near-term slowing may indeed be in the cards. Besides Initial Claims staying above 260k in the latest week, Continuing Claims have climbed in the latest 4 weeks and reached their highest level since May. These data suggest the pace of layoffs remains steady, while the re-hiring rate has weakened. Although there is not a reliable relationship between Initial/Continuing Claims and the m/m change in Payrolls, the Claims data raise the possibility that August Payrolls will slow to below 200k m/m.
2. The July Fed Senior Loan Officer Survey provides a reason for a near-term slowdown. Banks, on balance, tightened lending standards on C&I and Commercial Real Estate Loans. This could help explain why hiring may be slowing.
a. Note that commentators do not seem to have focused much, if at all, on these survey results.
b. The last time I looked at Lending Standards on C&I Loans, I found a clear inverse relationship with the funds rate -- the tighter the lending standards, the lower the funds rate. The relationship suggests that a near-zero funds rate is appropriate currently.
Monday, August 15, 2016
Early Evidence on Q316 Real GDP -- Good News for Stocks?
The early projections of the Atlanta and NY Fed models call for a speedup in Q316 Real GDP Growth to 2.4-3.5% (q/q, saar) from 1.2% in Q216. They belie some commentators' assertion that US economic growth is weak. And, they help explain the continuing uptrend in stocks during the summer.
But, in truth, very little data regarding Q316 GDP have been released as yet. With the higher frequency US economic data released so far still mixed, the risk is that these model forecasts will come down as we move through the quarter. Moreover, some of the projected speedup stems from a bounce-back in Non-farm Inventory Investment, after it fell in Q216, which could be one-off. As a result, the ultimate strength of Q316 GDP or its sustainability should remain uncertain. So, the odds remain low that the Fed will hike rates at the September FOMC Meeting -- a positive for both stocks and Treasuries.
The two prominent pieces of US economic data for July were mixed -- a strong Employment Report but soft Retail Sales. There may be less than meets the eye for both. The strength of the Employment Report could have resulted from a further catch-up after the weak May jobs report. The weakness in Retail Sales could have been just volatility after a strong June. Even if department store sales are depressed in August, as demand for fall clothing is hurt by the hot weather in parts of the country, Q316 Consumption should be boosted by spending on air conditioning. And, apparel demand should rebound as the weather returns to normal in September and October.
The broadest high-frequency measure of US economic activity -- Initial Unemployment Claims -- hint at a moderation in economic growth in August after a speedup in June-July. They bottomed in the first half of July (to be sure, a period of difficult seasonal adjustment because of summer plant shutdowns), and are back to June levels in the first week of August:
Initial Unemployment Claims (level, 000s, monthly average)
August -- First Week 266
July 259 (weekly low of 252)
June 267
May 277
April 260
The ECRI Leading Index also suggests a moderation of growth in August, as it has come off its highs in the latest 2-3 weeks:
But, in truth, very little data regarding Q316 GDP have been released as yet. With the higher frequency US economic data released so far still mixed, the risk is that these model forecasts will come down as we move through the quarter. Moreover, some of the projected speedup stems from a bounce-back in Non-farm Inventory Investment, after it fell in Q216, which could be one-off. As a result, the ultimate strength of Q316 GDP or its sustainability should remain uncertain. So, the odds remain low that the Fed will hike rates at the September FOMC Meeting -- a positive for both stocks and Treasuries.
The two prominent pieces of US economic data for July were mixed -- a strong Employment Report but soft Retail Sales. There may be less than meets the eye for both. The strength of the Employment Report could have resulted from a further catch-up after the weak May jobs report. The weakness in Retail Sales could have been just volatility after a strong June. Even if department store sales are depressed in August, as demand for fall clothing is hurt by the hot weather in parts of the country, Q316 Consumption should be boosted by spending on air conditioning. And, apparel demand should rebound as the weather returns to normal in September and October.
The broadest high-frequency measure of US economic activity -- Initial Unemployment Claims -- hint at a moderation in economic growth in August after a speedup in June-July. They bottomed in the first half of July (to be sure, a period of difficult seasonal adjustment because of summer plant shutdowns), and are back to June levels in the first week of August:
Initial Unemployment Claims (level, 000s, monthly average)
August -- First Week 266
July 259 (weekly low of 252)
June 267
May 277
April 260
The ECRI Leading Index also suggests a moderation of growth in August, as it has come off its highs in the latest 2-3 weeks:
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