Mind the Gap

Economic fundamentals (the “real economy”) have been struggling to catch up with the buoyant behavior of financial markets and, eventually, these diverging patterns (gaps) will have to be reconciled. On the economic side, the main global structural imbalances (a mountain of debt, a lack of aggregate demand) remain very much in place and the multiple transitions that all the major economic areas are facing are far from being completed. The recent market dynamics would be inconceivable in a “normal” market cycle, but nothing is impossible in the fantastic world of Quantitative Easing (QE) and money printing. Continue reading

ECB Tackles Low Growth and Falling Inflation

Attended by the world’s top central bankers, the European Central Bank (ECB) met in August for its regular monthly meeting in Jackson Hole, Wyoming. I thought I would share some insights from Tanguy Le Saout, Pioneer’s Head of European Fixed Income.

Anticipation was running high that the ECB would announce further measures to help tackle Europe’s twin problems of low growth and falling inflation. In a surprising move, ECB President Mario Draghi, deviated from his prepared speech. These and other unscripted remarks appeared to signal a significant shift in ECB policy. It raised hopes for the imminent announcement of a Quantitative Easing (QE) program and caused a substantial fall in European bond yields and the euro currency. With expectations high, did the ECB deliver? Continue reading

The Dollar Jumped and Stocks Rallied Last Week … What were The Triggers?

Concerns about the Ukraine and Islamic State remained high last week, but diminished at week-end on news of a cease-fire in Ukraine and NATO resolve to address the Islamic State. The European Central Bank (ECB) surprised markets (bullishly), and U.S. economic news was biased to the positive.

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Signs Point to Continued Slow Growth Ahead

Last week’s data provided a mixed picture of the economy. Businesses produced more, but demand growth was soft. That combination suggests slower future economic growth, not acceleration (but still growth, not recession). Some points to note:

  • The NFIB Small Business Optimism Index ticked up from 95.0 to 95.7.
  • The Empire State (NY Fed) Index slipped, but remains strong at 14.7.
  • Industrial production rose, led by auto production, and capacity utilization ticked up slightly as well.
  • Business inventories rose modestly…slightly faster than sales.
  • Consumer confidence slipped, despite good job market data…too many war/conflict/disease stories in the paper? That said, retail sales managed a 0.2% increase month over month (m/m) – still below expectations.
  • Mortgage applications ticked down week over week (w/w); the generic rate dropped to 4.24%.
  • Inflation remains comfortably below trigger levels for Fed tightening

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UK Forecast Update: Growth, Inflation and Monetary Policy

Pioneer’s Head of Global Asset Allocation Research, Monica Defend, along with Europe and EMEA Global Asset Allocation Research Senior Economist, Andrea Brasili, recently released an update on the UK economy. The update was based on the 2Q14 preliminary results for gross domestic product (GDP), which came in higher than expected. They expect growth above 3%, higher inflation in 2015, and a gradual shift in monetary policy towards higher rates. Highlights from their report are below. To read the full report, click here. Continue reading

Two Preconditions of Fed Tightening Evident in Last Week’s Data

The Yellen Fed is wary of tightening too soon. It wants to see significant improvement in labor markets. (We’re seeing it.) It also wants to see evidence that U.S. inflation has formed a bottom. This precondition for a tighter Fed policy is also being fulfilled – CPI inflation has been steady and slow…but not slowing.

U.S. Economic Activity Looks Good

  • Initial unemployment claims dropped to 284k, the first reading this cycle below 300k and the lowest since early 2006. These are boom-time readings, not recovering economy readings.
  • CPI came in at 2.1% y/y; Core was 1.9%.
  • About 200 S&P 500 companies have reported so far; more than 70% (slightly better than average) have beaten consensus.
  • The Chicago Fed National Activity Index, a gauge of economic activity, was slightly above-trend.
  • The Markit U.S. manufacturing PMI softened a bit, to 56.3…still strong (50 is break-even).
  • The Richmond Fed’s manufacturing index (zero is break-even) rose from 4 to 7–solid; hiring was notably strong.
  • The Kansas City Fed manufacturing index rose from 6 to 9, lifted by durable goods producers and employment. Rising quit rates particularly among machinists and welders were cited.

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World Cup Syndrome? Few Yellow Cards in Last Week’s Data.

It’s not surprising that World Cup Syndrome has historically been responsible for lower office productivity around the world – in fact, you may have seen the telling chart created by Bloomberg, which uses European Central Bank (ECB) data to track dips in trading volume during games in the 2010 World Cup.

Perhaps ‘WCS’ is owed a nod for last week’s drop in ISIS (Islamic State) activity? The so-called Group of Death (Syria, Iran, Iraq, and the caliphate formerly known as ISIS) was very quiet last week.

  • ISIS renamed itself the Islamist State and said it was a caliphate.
  • Iraq’s parliament appears frozen, with Sunni, Kurdish, and Shiite factions apparently unable to strike a deal.
  • It appears that the Islamist State gained ground…but oil traders don’t seem worried.

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