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Wed, 24th May 2017

Anirudh Sethi Report

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Archives of “deflation” Tag

Here’s one chart that could see the Fed pause on a hike today

It’s all about the wages

The fed hike case is built on a strong consumer led recovery. That’s good when people have money to spend, and when wages give them that money to spend. The wages (average hourly earnings) in the jobs reports report showed pay running at a decent 2.8% y/y. Today we get the inflation adjusted wage numbers in the CPI report and they don’t look as hot.

Last month, year on year real average weekly wages dropped for the first time since the start of 2014.

US real average weekly wages y/y

That’s not good news for the supposedly strong consumer and rate hikes won’t make the situation any better.

I’m quite surprised that the Fed will be raising so quickly after the Dec hike instead of letting that hike filter through, and monitoring the effects. To me that suggests that behind the scenes there’s something they are worried about. If they’re willing to hike in a moment when their whole basis for hikes (the consumer) might start finding things tougher, there’s something amiss.

It’s a straw clutch to try and find anything that could derail the hike tonight but there’s plenty of evidence in why they might throw in some additional caution about future hikes, and the wages numbers today may aid that sentiment.

2016 Debt Binge Produces (Surprise!) 2017 Inflation; Guess What That Means For 2018?

Just as everyone was finally accepting the idea of deflation and negative interest rates, inflation decides to pay a return visit. In the past week, articles with the following headlines appeared in major publications around the world:

Swiss inflation rises at highest monthly rate in 5 years

China February producer inflation fastest in nearly nine years

Year-over-year import prices at highest level in five years

ECB keeps bond-buying, rates unchanged amid inflation flare-up

Food inflation doubles in a month as UK shoppers start to feel the pinch

What happened? Well, towards the end of 2015 most of the world’s major governments apparently got spooked by deflation and decided to ramp up their borrowing and money creation. China, for instance, generated the following stats in 2016:

  • New loans totaling 12.65 trillion yuan, or $1.8 trillion.
  • M2 money supply growth of 11%.
  • Debt-to-GDP ratio jump from 254% to 277%.

In Europe, the European Central Bank ramped up its bond buying program, pumping about a trillion newly-created euros into the Continental economy:

WSJ: America Can’t Escape the Debt Vortex: Total obligations … hit 370% of GDP

The Wall Street Journal on ‘credit bubbles’:

  • Credit bubbles usually pop at some point and the consequences aren’t pretty
  • The stock-market crash of 1929 followed a credit boom, and so did the crash of 2008
  • In both cases, Washington overreacted, producing a 10-year depression in the 1930s and a weak recovery after the 2009 recession
The piece goes on (this is a summary, link to the full piece below), bolding mine:
Lacy Hunt, an economist with Hoisington Investment, estimated at a recent conference held by Grant’s Interest Rate Observer that debt of all kinds in the U.S. now totals more than $69 trillion. That’s more than double the $30 trillion recorded by Fed statisticians as recently as 2000. If the Hunt figure is correct, then total debt is now about 370% of GDP, up from 294% in 2000.
The article concludes:
  • There isn’t much the Fed can do about this except make it worse
  • Nor is there much that Mr. Trump can do except make it worse. But he seems intent on that-threatening trade wars against America’s biggest trading partners. If the president blocks their ability to earn dollars, he diminishes their ability to bail us, and themselves, out of the global debt slough. The past decade of government and Fed profligacy is not his fault, but that still isn’t an argument for recklessness. If this ends in tears, Mr. Trump will get the blame.

The Fed Is Preparing $1 Trillion In QE For The Next Recession: Deutsche

While in recent weeks there has been a material increase in Fed balance sheet normalization chatter, according to a new report from Deutsche Bank analysts, it may all be for nothing for one simple reason: should the US encounter a recession in the next several years, the most likely reaction by the Fed would be another $1 trillion in QE, delaying indefinitely any expectations for a return to a “normal” balance sheet.

As a reminder, as of this month, the duration of the latest expansionary cycle – as defined by the NBER – has reached 93 months, surpassing the 92 months of the 1982-1990 cycle, and is now the third longest in history. Should the cycle persist for another 27 months, or just under two and a half years, it would be the longest period of “economic growth” in history.

Next Week -Watch out :Week ahead: Greece, Fed minutes, Buffett letter

Don’t be fooled by the the holiday-shortened trading week in the US. Next week promises to give investors plenty to watch, including the Greek bailout, minutes of the Federal Reserve’s last meeting, Bank of England governor Mark Carney’s testimony, retail earnings and Warren Buffett’s annual letter.

Here’s what to look for in the coming days.

Greece

The meeting has also gained additional significance, as the last major one slated before European elections begin next month, starting with the Dutch.

“With the two largest eurozone economies facing elections this year, we believe it is in
their policymakers’ interests to contain any potential risks from Greek disruption,” said economists at Nomura. “We therefore expect some transitory agreement to be reached at least at the eurozone level, with the IMF decision on programme participation likely to be delayed even further”.

Carney testimony

Following Federal Reserve chair Janet Yellen’s semi-annual testimony to Congress, investors get to hear from her UK counterpart when Mark Carney testifies before the UK parliament’s Treasury Committee on Tuesday. Mr Carney’s testimony comes after the BoE upgraded its economic forecast, while leaving its inflation forecast and interest-rate policy on hold.

“Since the inflation report was published two weeks ago, we’ve seen downside surprises to wage growth, inflation, and retail sales,” said strategists at TD Securities. “So even after the IR was more dovish than markets expected, we may see a further dovish tone with the IR testimony given the soft tone of the recent data releases.”

Fed minutes

The Federal Reserve will release the minutes of its last monetary policy meeting on Wednesday, though they may seem dated since investors have just heard from Ms Yellen. In her testimony to Congress this week, she painted an upbeat view of the US economy and warned that it would be “unwise” to wait too long before raising interest rates.

Bank of America economists say they believe the minutes will reflect “a great deal of focus on both upside and downside risks,” even as Fed officials “become increasingly constructive on the outlook for the economy.”

Moreover, any discussion on the Fed’s balance sheet is likely to garner interest. “Yellen reiterated the view that the primary tool remains rates and that the balance sheet will only be addressed once the normalization of the fed funds rate is well under way,” said the folks at Bank of America. “We expect the minutes to reinforce this view, but there might be some discussion among members on the issue.”

BOJ on edge after Trump claims devaluation

While Bank of Japan officials see no grounds for Donald Trump’s accusation of currency devaluation, they still worry that the bank’s unique measure to control long-term rates could become the next target as the president continues his rhetorical battles.

“I have no idea what he is saying,” said one baffled BOJ official after learning about the criticism Trump leveled against the central bank. 

 Bond investors seem similarly perturbed. Yields on 10-year Japanese government bonds temporarily rose 0.025 percentage point Thursday, hitting 0.115% — the highest since the BOJ announcement of negative interest rates Jan. 29, 2016. The climb also reflects market anxiety over whether the central bank will continue buying up JGBs at the current pace.

BOJ Gov. Haruhiko Kuroda refuted Trump’s accusation in the Diet on Wednesday, saying Japan’s monetary policy is designed to defeat persistent deflation and not to keep the yen weak. “We discuss monetary policy every time Group of 20 finance ministers and central bankers meet,” he said. “It is understood among other central banks that [Japan] is pursuing monetary easing for price stability.”

In fact, U.S. monetary policy is chiefly responsible for the yen’s depreciation against the dollar. The Federal Reserve in 2015 switched to a tightening mode after keeping interest rates near zero for years, judging quantitative easing to have worked its expansionary magic on the economy. The gap between American and Japanese rates is now the widest it has been in around seven years, encouraging heavier buying of the dollar — the higher-yielding currency — than the yen.

Demonetisation double whammy for India Inc: Demand slows as input prices surge

Companies are going to face a potentially peculiar situation following demonetisation, if the recently released inflation data are any indication. While a demand slowdown following the cash crunch could force producers to either cut or hold prices, their input prices are tending to go up owing to rising global commodity rates.

Latest data revealed retail inflation touched a two-year low of 3.63% in November, while wholesale price inflation eased to 3.15% from 3.39% in October. However, the Thomson Reuters/CoreCommodity CRB Commodity Index, which tracks the movement of 19 major commodities, has advanced 11.1% in the past one year and 8.6% so far in 2016.

Pronab Sen, former chairman of the National Statistical Commission, told FE: “The demand slowdown following demonetisation should put a downward pressure on prices, while the increase in input prices due to rising global commodity rates will put an upward pressure on prices. And what the net effect will be is very difficult to predict now. But companies may have to recalibrate their (pricing) decisions accordingly.”

Key global oil-producing countries’ decision to cut back on output has already driven up crude oil prices. Also, although China’s appetite for raw materials has been strained since last year, a renewed focus on manufacturing (along with services) by the US under President-elect Donald Trump has only complicated outlook of global commodity demand. “As more firms shift from the informal to the formal sector following demonetisation, “there is also a risk that tax increases are passed to consumers,” Nomura’s Sonal Varma said.

5 things to watch in Janet Yellen’s testimony Thursday

In the Wall Street Journal, in their ‘5 things to watch’ format – Janet Yellen’s testimony coming up at 10 NY time Thursday

  1. All ears will be listening for Ms. Yellen to affirm recent statements from her colleagues that the Fed remains on track for a December rate increase.
  2. Yellen’s view of the market’s election result reaction – including a rise in government bond yields.
  3. The potential economic effects of Mr. Trump’s proposed fiscal policies
  4. Yellen to make the case against political interference in the Federal Reserve
  5. Yellen’s views on the risk of a sharp upturn in inflation

Bank of Japan Gov. Haruhiko Kuroda ‘disappointed’ at failure to hit 2% inflation in 2 years

Bank of Japan Gov. Haruhiko Kuroda admitted for the first time his disappointment at not being able to reach its target of 2% inflation within the two-year deadline originally set.

Kuroda entered office in March 2013, promising to reach 2% inflation at the earliest possible time, initially with “two years in mind.” Almost four years on, and despite throwing everything but the kitchen sink at Japan’s deflation problem, he has not been able to deliver on the promise.

 Kuroda did not stray from his usual tactic of blaming external factors on Tuesday after the BOJ’s two-day policy meeting. The governor cited the fall in oil prices, weak consumer spending after the consumption tax hike and the slowdown in emerging market economies as contributing factors. “The situation is similar with the central banks in the U.S. and Europe as well,” Kuroda said. But ultimately he was forced to admit he was “obviously disappointed that 2% inflation could not be achieved within 2 years.”

Odds of 2016 Federal Reserve rate rise climb to near 5-month high

Market expectations of a 2016 Federal Reserve rate rise have climbed to the highest level since early June amid growing anxiety among policymakers over the potential side-effects of historically low interest rates and easing tension about the US election.

The odds of at least one rate increase this year rose on Monday to 70 per cent, up from 67 per cent at the end of last week, according to Bloomberg data on federal funds futures.

Expectations have been slowly rising this month, from about 60 per cent at the end of September, as Fed policymakers have taken a slightly more hawkish tone, inflation has continued to heat-up and uncertainty stemming from the US election has cooled.

Several top Fed policymakers who have spoken this month have pointed to the rising risk of a potentially caustic overshoot in inflation as a key reason to add to the December 2015 rate increase sooner rather than later.