The Fed Keeps a Watchful Eye as U.S. Economy Continues to Improve

The Fed’s “Beige Book” painted a beige—or is it Goldilocks?—picture of the economy, as most districts reported economic activity growing at a modest/moderate pace, employment generally rising, and wage pressures still generally well-contained. Nothing suggested cause for the Fed to change its plans or guidance.

  • Indeed, in her speech last week, Fed Chairwoman Janet Yellen said that she thinks the U.S. is at least 2 years away (maybe more) from reaching full employment and that inflation pressures remain subdued, so tightening policy any time soon would probably be premature.
  • With that said, her speech wasn’t all that dovish. She didn’t make new promises or push the envelope; rather, she reiterated that Fed policy remains data-dependent and the Fed “must always be prepared to respond” to rising inflation.
  • Somewhat worryingly (for those who worry about these things), she stressed the mandate of maximizing employment and acknowledged the responsibility to constrain inflation, but made no mention of preventing asset price bubbles in things like stocks, houses, or things that yield 5%.

Business and Consumer Activity Rebounding
Early in the week, the Empire State (NY Fed) survey disappointed, slipping from 5.6 to 1.3 on weak new orders. Later in the week, the Philadelphia (Mid-Atlantic) Fed index surprised on the upside, rising from 9.0 to 16.6 on strong new orders. The market’s reaction suggests Philadelphia trumps New York.

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‘No Brakes’ on U.S. Growth – But Are Americans on Board?

IMF Bullish on U.S. Economy – Americans Remain Cautious
“There are no brakes on U.S. growth,” said the IMF’s chief economist, “It’s an economy that is fundamentally robust.” The latest International Monetary Fund (IMF) forecast is for 3.6% global GDP in 2014. The U.S. is expected to grow 2.8%, the Eurozone 1.2%, Japan 1.4% and the UK 2.9%.

Indeed, U.S. labor market data signaled ongoing strength, as unemployment claims fell to 300k, the biggest week/week drop in 10 years and the lowest weekly number since May 2007. Seasonal factors (Easter) and normal data volatility may be at work, but it’s still a low number. The February JOLTs report was fine, considering the weather: the number of job openings and hires rose, the number of terminations was flat. The number of job openings is the highest since January 2008.

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Yellen More Dovish? Don’t be Fooled.

Observations on the Capital Markets – Week Ended April 4, 2014

Fed Chair Yellen sounded very dovish in Monday’s speech, emphasizing that markets should expect extraordinary policy accommodation for some time, given the slack in the labor market. She broke with precedent by citing anecdotes (this from a person who has perhaps overused the words “data dependent”). She did not repeat the “six-month” guesstimate of how soon after QE ended Fed funds would start rising, but she didn’t “walk it back” either, or give any guidance suggesting anything more dovish than the Fed statement.

My take: she demonstrated empathy without making any promises or commitments. She’s a very good politician (as well as a very good Fed Governor). Continue reading

Slow Growth for the Economy but Weather Effects Fading

Do you believe Putin’s words or actions? Putin continued to say he wanted a diplomatic solution to Ukraine while continuing to mass troops along the Ukrainian border. Meanwhile the International Monetary Fund (IMF) approved a line of credit of up to $18 billion to Ukraine and the Ukrainian parliament passed a law to implement IMF-demanded austerity measures. The “West” cancelled a G8 meeting scheduled for Sochi, and so the G8 reverts to the G7 with the expulsion of Russia. Continue reading

The Fed Doesn’t Surprise, but the Market Reacts Anyway.

As expected, quantitative easing (QE) was tapered another $10 billion last week and the Fed dropped its earlier guidance that it might start raising the Fed Funds rate when unemployment is 6.5% (confirming that it will wait longer than that, since we’re almost at 6.5%).

The U.S. stock market sold off sharply on this news (even though the outcome was widely expected), then rallied the next day.  Some observers think it was computer algorithms that (seeing unexpected hawkishness) triggered the selling; the dip was a buying opportunity.  The bond market moved to price in a stronger economy and faster pace of Fed Fund rate hikes.

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U.S. Economy Looks OK but War Risks / Chinese Financial Risks Rise

Observations on the Capital Markets – Week Ended March 14, 2014

China’s downbeat economic data raised fears as softness in Chinese economic data (below-consensus growth in industrial production, retail sales, and CPI) fueled concerns over the health of its economy.

The price of copper fell 5% on the week and is down 12% year to date, raising fears that the Chinese financial system is facing cascading margin calls like what happened to U.S. CDO (Collateralized Debt Obligations) prices in 2007-9 (lots of Chinese copper positions appear to be leveraged).

A referendum in Crimea about seceding from the Ukraine to rejoin Russia, only rumored at a week ago, took place Sunday March 16; the Russians report that 93% voted in favor of doing so. Regardless of how the people might have voted under other circumstances, the outcome is almost certain: Russia is effectively conquering/annexing Crimea.

The U.N. will not act. Russia has a veto on the Security Council. On Saturday, it vetoed a draft resolution against the Ukraine referendum (China abstained). Western diplomats continue to cry foul, but it’s hard to make a clear moral case against Crimean self-determination when the Kiev “government” was not elected. Continue reading

Will the World and the Markets (Passively) Accept Russia’s Actions?

Having bloodlessly consolidated his control of Crimea, Russian President Vladimir Putin announced he hoped there would be no shooting (e.g. military response to the invasion). Most markets rallied, regaining the ground they’d lost when the invasion occurred.

There won’t be a NATO military response: pushing the Russians out is effectively impossible in practical terms. (How the Ukrainians themselves will act is uncertain. As one analyst put it, “The only question now is whether the new Ukrainian government will accept the loss of Crimea quietly or try to retaliate against Russian speakers in Ukraine – offering Putin a pretext for invasion, and thereby precipitating an all-out civil war.”)

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March – In Like a Lion? Not as Far as The Economy is Concerned

Last week’s U.S. economic data was again on the soft side, but we still can’t rule out bad weather as the cause. New factory orders for durable goods were down 1% month over month (m/m) in January but up 4.6% year over year (y/y). Excluding the volatile transportation segment, they were up 1.1% m/m and 1.2% y/y. This is consistent with bad weather superimposed on a slowly-growing economy – no big surprise. In other data:

  • The Markit flash services PMI fell from 56.7 to 52.7 . . . still above 50.
  • The Chicago Fed’s National Activity Index fell to  - 0.39
  • The (local-focus) Chicago-area PMI was strong, at 59.8.
  • The Kansas City Fed index came in at +4, even after citing weather as a headwind.
  • The Richmond Fed index fell to -6 . . . details were weak . . . weather is blamed.
  • The Dallas Fed’s February Manufacturing Outlook Survey showed general business activity, at 0.3, barely in positive (slow-growth) territory. However, factory activity was notably strong, rising for the tenth month in a row.
  • Initial unemployment claims rose to 348k – the high end of the recent range.

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Treasury Secretary to Emerging Markets: Get Your Fiscal House in Order

Observations on the Capital Markets – Week Ended February 21, 2014

The Congressional Budget Office (CBO) stirred the pot again by saying raising the minimum wage would cost jobs, causing a rare public rebuke from The White House.

The G-20 met for two days in Sidney and agreed on enacting policies to, over the next five years, boost collective GDP by two percentage points compared to GDP under current policies. U.S. Treasury Secretary Jack Lew said President Obama will ask for a new stimulus package including things like infrastructure projects to create good middle-class jobs.

The capital markets last week were calm, even as economic data pointed in both directions. Housing market data was disappointing, blamed largely on weather, while inflation remained well-behaved low but with no apparent threat of deflation.

Janet Yellen appears to have hit a home run in terms of building her “brand” and credibility. This may be the most important development of the week. FOMC minutes suggest Fed policy may be becoming less predictable. Fed minutes showed that there were champions of virtually every policy option and no apparent consensus on anything. This suggests policy decisions might truly become data-dependent, even if there is a bias to predictability and stability. As was the case while waiting for the Fed to begin tapering, markets might focus inordinately on forest, not the trees: on the pace of tapering ($10 billion at this meeting or not?). This might increase market volatility.

Next week holds a lot of data reporting, but not enough to confirm/disprove the “weather” hypothesis. Very much on the radar now: Ukraine and Thailand. Continue reading

Whether or Not it’s the Weather, the Economy Is Definitely Slowing

The weather has certainly been bad . . . but some of last week’s economic data suggests that the weakness is not just weather-related (e.g. construction jobs have held up relatively well, online sales have been weaker than those of bricks-and-mortar.)

  • January retail sales fell, and December was revised down.
  • With sales soft, the retail inventory:sales ratio ticked up. The factory-level ratio has also ticked up; the wholesale ratio has not.
  • Industrial production fell 0.3% in January. Manufacturing output fell 0.8%, while the cold weather boosted utility output 4.1%.
  • Capacity utilization slipped from 78.9% to 78.5%.
  • Bucking the negative trend, the NFIB small business sentiment index rose 0.2 to 94.1.

GDP US Quarterly Forecast

It’s not weak enough yet for the Fed to signal they might slow the QE taper, but the stock market seemed to display a “bad news is good news” complacency.

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