• Tag Archives Inflation
  • Bi-Weekly Economic Review: Animal Spirits Haunt The Market

    This is a syndicated repost courtesy of Alhambra Investments. To view original, click here. Reposted with permission.
    The economic data over the last two weeks continued the better than expected trend. Some of the data was quite good and makes one wonder if maybe, just maybe, we are finally ready to break out of the economic doldrums. Is it possible that all that new normal, secular stagnation stuff was just a lack of animal spirits? Is it possible that the mere anticipation of tax cuts was sufficient to break us out of the 2% growth paradigm? Or are there other factors that have us on the precipice of a third consecutive quarter of 3%+ growth?
    It is easy to find the positives in the economic data these days. Retail sales surged last month and are now up nearly 6% year over year. Wholesale sales are up over 8% and inventories are improving relative to sales. Imports and exports are up 7% and 5.6% respectively. Factory orders are rising at about a 4% clip. Productivity was up 3% last quarter. The Fed’s worries about inflation also seem reasonable considering CPI and PPI well above the Fed’s target rate of inflation. Import and export prices are both up over 3% year over year. With the unemployment rate down to 4.1% you can understand why the Philips Curve disciples are getting antsy.

    This post was published at Wall Street Examiner on December 19, 2017.


  • Are Bonds Really On The Run? Why One Trader Is Skeptical

    Yesterday we observed the biggest 2-day steepening in the 2s30s yield curve since the Trump election, following a confluence of events which we discussed in this post, and which resulted in a generous payday for at least one rates trader.
    ***
    So has the long-awaited moment of a long-end selloff arrived? Or, as SocGen’s FX strategist, Kit Juckes, put it, are “Bonds on the run?” Maybe not so fast, especially since much of the recent increase in yields has been for breakevens. Here are his thoughts.
    Bonds on the Run?
    The Tax Bill is still moving towards the Oval Office, and even critics concede that it boosts
    growth a bit (more from the corporate tax cut than from the income tax cuts). While the
    relationship between growth, economic slack and inflation remains as much a mystery as how
    Father Christmas gets down the chimney, an uptick in breakeven inflation and in 10-year Note
    yields isn’t shocking. The more breakevens rise, the less real yields rise, the less this affects the
    dollar, unless or until it triggers a wholesale rethink on where Fed Funds are headed. So far, the
    market remains convinced the destination is 2-point something. Bearish bond bets may make
    sense, but FX conclusions are messier. We like short yen trades for now, but as with any carrybased
    FX trades, it feels a bit like picking up pennies in front of a present-loaded sleigh…

    This post was published at Zero Hedge on Dec 20, 2017.


  • What China Can Learn from America’s Great Depression

    When Murray Rothbard’s America’s Great Depression first appeared in print in 1963, the economics profession was still completely dominated by the Keynesian Revolution that began in the 1930s. Rothbard, instead, employed the ‘Austrian’ approach to money and the business cycle to explain the causes for the Great Depression, and to analyze the misguided and counterproductive policies that were followed in the early 1930s, which, in fact, only intensified and prolonged the economic downturn.
    To many of the economists in the early 1960s, Rothbard’s ‘Austrian’ approach seemed out-of-step with the then generally accepted textbook, macroeconomic approach that focused on a highly ‘aggregate’ analysis of economic changes and fluctuations on general output and employment as a whole. There was also the widely held presumption that governments could easily maintain economy-wide growth and stability through the use of a variety of monetary and fiscal policy tools.
    Mises, Hayek and the Austrian Theory of Money and the Business Cycle However, in the early and middle years of the 1930s, the Austrian explanation of the Great Depression was at the forefront of the theoretical and policy debates of the time. Ludwig von Mises (1881 – 1973), first developed this ‘Austrian’ theory of the causes of inflations and depressions in his book, The Theory of Money and Credit(1912; 2nd revised ed., 1924) and then in his monograph, Monetary Stabilization and Cyclical Policy (1928).
    But its international recognition and role in the business cycle debates and controversies in the 1930s were particularly due to Friedrich A. Hayek’s (1899 – 1992) version of the theory as presented in his works, Prices and Production (1932) Monetary Theory and the Trade Cycle (1933), and Profits, Interest and Investment (1939). A professor of economics at the London School of Economics throughout the 1930s and 1940s, Hayek was, at the time, considered by many to be the main competitor against John Maynard Keynes’s ‘New Economics’ that emerged out of Keynes’s 1936 book, The General Theory of Employment, Interest and Money.

    This post was published at Ludwig von Mises Institute on 12/19/2017.


  • Will Myanmar Embrace Market Reforms?

    The economic growth in Myanmar is now among the highest in Asia, and it’s come a long way since the 1960’s when it was considered one of the world’s most impoverished countries. It’s instructive to understand how this change took place, what some of the current economic metrics indicate, and current pressures being placed on Myanmar from the outside.
    For starters, the general history of Myanmar (also known as Burma, and the reason for the two names is interesting in itself) is long and fascinating. More recently, Myanmar was conquered by Great Britain (it was actually a part of British India, which was responsible for much of the administration) in 1855, and became relatively affluent in this part of the world, primarily due to the trade of rice and oil.
    However, even before British rule, Myanmar was already relatively well off due to its strategic location along important trade routes. Myanmar is located between India and China – Indian influence is still present, even today, and was resented, along with British control – and this trading activity helped offset a country based on self-sufficient agriculture and centralized control via a king.
    Britain ruled Myanmar until independence in 1948, when a series of nationalization and central planning efforts created a welfare state. The results were disastrous. Rice exports fell by two-thirds in the 1950’s, along with a 96% decline in mineral exports. In order to maintain central planning efforts, the government resorted to printing money, and runaway prices resulted from this inflation of the money supply.

    This post was published at Ludwig von Mises Institute on Dec 18, 2017.


  • Kroger And Walmart Try More Gimmicks To Thwart Amazon; They Will Fail…Again

    Over the summer, we argued that the grocery business in the U. S. is, and always has been, a fairly miserable one. From A&P to Grand Union, Dahl’s, etc., bankruptcy courts have been littered with the industry’s failures for decades.
    The reason for the persistent failures is fairly simple…razor-thin operating margins that hover around 1-3% leave the entire industry completely incapable of absorbing even the slightest financial shock from things like increasing competition and food deflation.
    ***
    Meanwhile, if these retailers have difficultly absorbing even the slightest changes in competition and food inflation, you can only imagine how the efforts of Amazon to slash in-store employee headcounts, a line item which Kroger spends roughly 17% of their revenue on, might impact the fragile industry. Unfortunately, at least for the traditional grocers of the world, a completely automated shopping experience may be closer than they had hoped just a couple of years ago.

    This post was published at Zero Hedge on Dec 18, 2017.


  • Key Events In The Last Week Before Christmas

    It might be the last full week before Christmas – with both newsflow and trading volumes set to slide substantially – but there’s still a few interesting events and data releases to look forward to next week. Among the relatively sparse data releases schedule, we get US GDP, core PCE, housing and durable goods orders in the US, as well as CPI and GDP across Euro area and UK PMI. After last week’s central bank deluge, there are a handful of leftover DM central bank meetings include the BOJ and Riksbank, with rates expected to remain on hold for both. In Emerging markets, there will be monetary policy meetings in Czech Republic, Hungary, Thailand, Taiwan and Hong Kong.
    Perhaps the most significant will be in China when on Monday the three-day Central Economic Work Conference kicks off. This event will see Party leaders discuss economic policies for the next year and the market will probably be most interested in the GDP growth target. Deutsche Bank economists have noted that it will be interesting to see if the government will change the tone on its growth target by lowering it explicitly from 6.5% to 6% or fine-tuning the wording to reflect more tolerance for slower growth.
    Away from this, tax reform in the US will once again be a topic for markets to keep an eye on with final votes on the Republican legislation in the Senate (possibly Monday or Tuesday) and House (possibly Tuesday or Wednesday) tentatively scheduled. Also worth flagging in the US is Friday’s release of the November personal income and spending reports and the Fed’s preferred inflation measure – the core PCE print. Current market expectations are for a modest +0.1% mom rise in the core PCE which translates into a one-tenth uptick in the YoY rate to +1.5%.

    This post was published at Zero Hedge on Dec 18, 2017.


  • The View From 2017’s Bridge: What Clive Hale Learned This Year

    Authored by Clive Hale via The View From The Bridge blog,
    As long time readers will know we do not put much credence in end of year forecasts; nor in fact forecasts in general; the Fed and the Met Office being stand out examples.
    As an alternative to what is going to happen in 2018 (“Markets will fluctuate”…attrubuted to J. P. Morgan) we have put together some memorable quotes we have picked up dutring the course of 2017.
    Firstly the reality about forecasting –
    “Forecasts are financial candy. Forecasts give people who hate the feeling of uncertainty something emotionally soothing.” Thomac Vician Jnr student of Ed Seykota.
    And equally damning is this – The Illusion of Certainty
    “Many of us smile at old fashioned fortune tellers. But when the soothsayers work with computer algorithms rather than tarot cards, we take their predictions seriously and are prepared to pay for them.” – Gerd Gigerenzer
    “Our industry is full of people who got famous for being right once in a row.” Howard Marks
    And then we have forecasts with added hubris for good measure…
    “Inflation is not where we want it to be or where it should be” Mario Draghi

    This post was published at Zero Hedge on Dec 18, 2017.


  • Bond Markets Really Are Signalling A Slowdown

    Authored by Lakshman Achuthan and Anirvan Banerji via Bloomberg.com,
    Analysts shouldn’t dismiss the yield curve’s message just because inflation expectations have been declining in recent years. When it comes to the economic outlook, the bond market is smarter than the stock market. That Wall Street adage appears to be on the money from a cyclical vantage point, with key indicators in the fixed-income markets independently corroborating slowdown signals from the Economic Cycle Research Institute’s leading indexes.
    The yield curve is widely considered to be among the most prescient indicators. That’s why its flattening this year has been troublesome for an otherwise optimistic consensus to explain away.
    This hasn’t stopped optimistic analysts from dismissing the yield curve’s message on the grounds that inflation expectations have been declining in recent years, or that foreign central banks like the European Central Bank and the Bank of Japan continue to artificially suppress their bond yields, pulling down U. S. yields. We’re reminded of Sir John Templeton’s warning that ‘this time it’s different’ are the “four most costly words in the annals of investing” — but that’s effectively what it means to simply ignore the slowdown signals emanating from the fixed-income markets.
    Of course, there’s no Holy Grail in the world of forecasting, which is why we look at a wide array of leading indexes that each includes many inputs. From that vantage point, the yield curve flattening actually makes a lot of sense.

    This post was published at Zero Hedge on Dec 15, 2017.


  • Waiting for the Curve to Invert

    One of the hallmarks of a Bull market is climbing a ‘Wall of Worry’. Certainly, there is plenty of longer-term optimism with Consumer and Small Business surveys showing extreme confidence. Yet analysts seem increasingly focused on what might go wrong. In the early days of 2009 – 2012 most were certain that the Trillions in money printing by central banks would cause massive inflation and thus contraction level node-bleed interest rates. Recently the worry du jour has been on rising short-term rates that is spiraling our Yield Curve towards inversion. It’s perhaps too widely know that Yield Curve inversion has always given an accurate warning of impending economic recession months later. In ‘waiting for the curve’ too many investors are cautious well before some unforeseeable inversion turning point. This chart clearly shows that historically the ‘current’ Yield Curve is not a concern, in fact, it will remain a positive factor as we approach inversion. Furthermore, even after the ominous flat yield spread is reached where short-term rates are equal to or above long-term yields, we often witness another year or more of positive growth before recessionary contraction pressures break the back of the expansion phase. Based on history, we have at least a couple years of expansion before push comes to shove in halting this 8+ year growth period.

    This post was published at FinancialSense on 12/15/2017.


  • Bill Blain: “I Have Never Seen So Many Extraordinary Events In One Year, And I’ve Been In Markets Since 1985!

    We don’t think 2018 is going to be the End of the World. There will be opportunities and mistakes. Winners and grinners, and more than a few losers. Sure, we’re looking forward to the new MiFID regime – isn’t everyone? (US Readers…..)
    Our broad brush picture is a continuation and acceleration of the Global Macro Alignment theme – a stronger global economy, cautious normalisation, continued upside for risk assets (stocks and alternatives), but a negative outlook for the bond markets with rates set to rise as Central Banks pull back from distortion. They will remain nervous about financial market instability.
    If things wobble, them my personal view is the High Yield market is where we will see the most dramatic losses start in bonds. We still see a strong chance of equity market correction – and will buy into it because the global economy is expanding. Our big Macro Threat for the coming year is resurgent inflation – how quickly will it mount and will it take out market sentiment.
    The devil is in the detail. We’re positive across all the developed economies and expect to see growth expectations raise. Although the US, UK and Europe will be moving into Normalisation with tightening, while inflation remains sub 2% Japan will continue its ZIRP (zero interest rate policy) which is massive yen negative and therefore stock positive – my Japan-watching macro man Martin Malone is calling for further massive gains in Japan Stocks.

    This post was published at Zero Hedge on Dec 15, 2017.


  • Stocks, Yield Curve Slammed After China Hike, Draghi Taper, & Tax Tumult

    Did Senators Lee and Rubio (and Hatch) just go full “Leeroy Jenkins”?
    A surprise China rate hike (and disappointing retail sales) sparked weakness in Chinese stocks…
    Mario Draghi managed to talk the Euro and Bund yields lower (despite attemptting to raise inflation forecasts)…
    Since the FOMC meeting, Bonds and Bullion are well bid as stocks and the dollar sink…

    This post was published at Zero Hedge on Dec 14, 2017.


  • Bad Case of Unaffordable Housing: Shelter CPI Rises >2x Core Inflation (‘Inflation’ Cools Ahead of FOMC Meeting)

    The Fed’s Open Market Committee (FOMC) meeting is today. And according to the SF Fed’s calibration of the Taylor Rule, the Fed Funds Target rate should be 6.13% (it is only 1.25%, a spread of 488 basis points TOO LOW).

    This post was published at Wall Street Examiner on December 13, 2017.


  • ECB Keeps Rates Unchanged, Sees Current Policy Stance “Contributing To Favorable Liquidity Conditions”

    As expected, there was little surprise in the ECB monetary policy decision, which kept all three key ECB rates unchanged, and which announced that rates will “remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.”
    As it unveiled before, QE will run at 30BN per month from January 2018 until the end of September ‘or beyond, if necessary, and in case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.’ The ECB also noted it can extend QE size or duration if needed.
    The central bank repeated it will reinvest maturing debt for extended period after QE, and that the “reinvestment will continue for as long as necessary, will help deliver appropriate stance” and “will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.”
    The market reaction to the statement which was completely in line with expectations, was modest, with the EURUSD hardly even moving on the news.
    Full statement below

    Monetary policy decisions At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

    This post was published at Zero Hedge on Dec 14, 2017.


  • UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall

    UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall
    – UK inflation hits 3.1%, highest in nearly six years
    – UK earnings flat – households are still suffering falling real wages
    – Stagflation risk as food and drink prices jumped 4.1% in 12 months
    – UK house prices fall two-months in a row, down 0.5% in October
    – Real stagflation risk now, inflation high and growth slowing
    – Savings continue to be eaten by inflation
    ***
    It was just two years ago that Mark Carney was writing his fourth letter to the British Chancellor, explaining why the country was in a deflationary slump. Even then households were feeling the pinch, despite what officials reported.
    Since then Brits have become increasingly vindicated as inflation figures have begun to show what they have all known for some time – prices and the cost of living is on the rise.
    Now Mark Carney is forced to write a different type of letter to the Chancellor, one where he will have to explain why inflation is above target at 3.1%. The jump to over 3% in the year to November is the fastest paced increase seen in nearly six years.

    This post was published at Gold Core on December 13, 2017.


  • Inflation: An X-Ray View of the Components

    e is a table showing the annualized change in Headline and Core CPI, not seasonally adjusted, for each of the past six months. Also included are the eight components of Headline CPI and a separate entry for Energy, which is a collection of sub-indexes in Housing and Transportation.
    We can make some inferences about how inflation is impacting our personal expenses depending on our relative exposure to the individual components. Some of us have higher transportation costs, others medical costs, etc.
    Listen to Inflation Spike at Current Valuations Could Be Ugly, Says Nevins
    A conspicuous feature in the year-over-year table is the volatility in energy, significantly a result of gasoline prices, which is also reflected in Transportation.

    This post was published at FinancialSense on 12/14/2017.


  • BoE Preview: “Should Be A Non-Event”

    As DB’s Jim Reid writes, the BoE meeting due in minutes, should be a non event as recent inflation prints and macro data were broadly in line with consensus. Notably, any discussion on what the Brexit breakthrough on Friday might mean for policy could be the most interesting feature.

    This post was published at Zero Hedge on Dec 14, 2017.


  • FOMC Hikes Rates As Expected: Expects 3 Hikes, Faster Growth As Two Dissent

    With a 98.3% probability heading in, there was really no doubt the most-telegraphed rate-hike ever would occur, but all eyes are on the dots (rate trajectory shows 3 hikes in 2018), inflation outlook (unchanged), and growth outlook (faster growth in 2018), and lowered unemployment outlook to below 4%. The Fed also plans to increase its balance sheet run off to $20 billion in January.
    *FED RAISES RATES BY QUARTER POINT, STILL SEES THREE 2018 HIKES *FED SEES FASTER 2018 GROWTH, LABOR MARKET STAYING `STRONG’ *FED: MONTHLY B/SHEET RUNOFF TO RISE TO $20B IN JAN. AS PLANNED The dissents by Evans and Kashkari are significant as they send the signal that there is a significant fraction of the FOMC that would like to put off additional rate hikes until inflation is moving back closer to 2%. You could expect additional dissents in March if the FOMC goes ahead with a hike then, unless inflation rebounds by then.
    On the other hand, the median target “dot” for 2020 rose to 3.063% vs 2.875% in September; suggesting even further tightening in store.
    The Fed’s forecasts improved for growth and unemployment, while keeping inflation unchanged:

    This post was published at Zero Hedge on Dec 13, 2017.


  • Yellen’s Big Goodbye (And What She’s Leaving Behind)

    The past three Fed Chairs before Yellen all had their own crisis to deal with.
    Volcker had the disaster of the early 1980’s as he struggled to tame inflation with double digit interest rates. That helped contribute to the Latin American debt crisis, and the subsequent global bear markets in stocks.
    He handed over the reins to Greenspan in the summer of ’87 and within months, the new Fed Chairman faced the largest stock market crash since the 1920’s. That trial by fire was invaluable for Greenspan, as he faced a second crisis when the DotCom bubble burst at the turn of the century.
    His successor, Ben Bernanke also did not escape without a record breaking financial panic when the real estate collapse hit the global economy especially hard in 2007.
    But Yellen? Nothing. Nada. She has presided over the least volatile, most steady, market rally of the past century. Was she lucky? Or was this the result of smart policy decisions? I tend to attribute it more to luck, but it’s tough to argue that she made any large mistakes. Sure you might quibble about the rate of interest rate increases. And her critics will argue that economic growth, and more importantly, wage increases have been especially anemic under her watch, but to a large degree, those variables are out of her hands.

    This post was published at Zero Hedge on Dec 13, 2017.


  • 2 Charts That Might Define the Fed’s Jerome Powell Era

    In September, we proposed a theory of the Fed and suggested that the FOMC will soon worry mostly about financial imbalances without much concern for recession risks. We reached that conclusion by simply weighing the reputational pitfalls faced by the economists on the committee, but now we’ll add more meat to our argument, using financial flows data released last week. We’ve created two charts, beginning with a look at cumulative, inflation-adjusted asset gains during the last seven business cycles:

    According to the way that the Fed defines its policy approach, our first chart stamps a giant ‘Mission Accomplished’ on the unconventional policies of recent years. Recall that policy makers explained their actions with reference to the portfolio balance channel, meaning they were deliberately enticing investors to buy riskier assets than they would otherwise hold. Policy makers hoped to push asset prices higher, and they seem to have succeeded, notwithstanding the usual debates about how much of the price gains should be attributed to central bankers. (See one of our contributions here and a couple of other papers here and here.) But whatever the impetus for assets to rise, it’s obvious that they responded. In fact, judging by the data shown in the chart, policy makers could have checked the higher-asset-prices box long ago, and with a King Size Sharpie.

    This post was published at FinancialSense on 12/13/2017.


  • US Stocks, Bonds, and Real Estate Most Expensive in History

    After seeing the tax reform inspired to jump in small business optimism from the NFIB, today the Duke CFO survey optimism index rose the to the best level since June 2004. Also, it was driven by tax reform. This is though coming with building inflation pressures as the survey ‘also finds the difficulty that companies are having hiring and retaining qualified employees is at a 20 yr high, and that in part will lead to higher wages.’ The survey said CFO’s expect ‘median wage growth of about 3% over the next 12 months.’ Hopefully, higher productivity can offset this as opposed to companies passing that on in higher prices. There is also healthcare inflation that is a worry as expectations are for an 8% rise next year. ‘Nearly half of US companies indicate that the cost of employee health benefits crowds out their ability to spend on long-term corporate investment.’ Like I said before, embrace lower corporate taxes but don’t assume all else equal.
    There was a slight ebbing of bullish enthusiasm according to Investors Intelligence. Bulls fell to 61.9 from 64.2 while Bears ticked up a hair to 15.2 from 15.1. The spread between the two of 46.7 is a 3 week low but is just 3.3 pts from a 30 yr high. Since bulls got back to 60 on October 11th, the Value Line Equal Weighted Geometric index is up 2.2%. A lot of tax reform generated optimism, along with better global growth will meet faster monetary tightening next year. The former certainly won that battle in 2017 also helped by $2 Trillion of ECB and BoJ largesse. That largesse changes dramatically in 2018 but markets are clearly betting on the soft landing scenario, aka a free lunch.

    This post was published at FinancialSense on 12/13/2017.