A few months ago I referred to monetary policy as entering a Jungleland where central bankers are essentially lost in the woods. After seeing Guns N Roses Saturday night, I’ll refer to this week as Welcome to the Jungle.
The week is all about the Fed and the BoJ. The key questions to be answered are will the former raise the possibility of a rate hike this year and will the latter amp up more of the same with the possible discussion of a perpetual bond. As for the Fed, let’s look at the June statement and how things have changed since:
What was said in June is bolded:
the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.
Since then, the BLS printed a job gain for June of 287k on one hand but only an average of 150k over the past 3 months on the other. Technically speaking, the pace of job growth does continue to slow. As for the economy, on June 15th when the last statement was released, the Atlanta Fed GDPNow forecast was 2.7% for Q2. Today it sits at 2.4%. And that’s with a 60 point increase in the US Citi Surprise index.
Although the unemployment rate has declined, job gains have diminished.
The June unemployment rose and see above for the pace of job gains.
Growth in household spending has strengthened.
Since then retail sales data from the government was good but auto sales printed the 2nd lowest level of sales since early 2015 and here are some anecdotal retail comments from last week: Howard Shultz at SBUX on weaker comps than expected, “No one should misinterpret or in any way look at the challenges that we and many, many other companies are facing as something that has been done before. This is quite unusual. It’s unsettling.” Dunkin Donuts CEO said “consumers had gone into a bit of a funk during the quarter.” The YUM CEO said the US was in a “malaise” and quarterly sales were soft. He cited a June survey by GenForward of 18-30 yr olds that said ¾ of them “said they believed the US was in decline… not particularly good news from what people are thinking.”
Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft.
Housing continues with its improvement, albeit bumpy still. Net exports are still a drag and business investment sucks to be perfectly blunt.
Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.
Headline inflation remains well below for sure but June core CPI printed 2.3% for freaking sake, an 8 year high. How about an acknowledgement on the part of the Fed. Yes, I acknowledge the pressure on goods prices but services inflation is widespread. The Atlanta Fed wage tracker printed up 3.6% on June 14th (this data point was most likely not in the Fed staff report for the statement on June 15th), the highest since December 2008.
Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
The 10 yr inflation breakeven at 1.51% is little changed with the June 15th closing print of 1.50%. This stat mostly follows commodity prices anyway.
In determining the timing and size of future adjustments to the target range for the federal funds rate” they will assess “labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
- Labor market conditions: Will they solely look at the June print or average the past 3 months together?
- Inflation: Does core CPI matter to them at all? Does Dennis Lockhart tell them about his bank’s wage data?
- Financial and international developments: The S&P 500 is at an all time high with valuation comparisons to 1929 and 2000. As for high yield bonds, Martin Fridson, the well known high yield analyst (I’m quoting WSJ here) said this week “Factoring in interest rates, economic conditions and the availability of credit, Mr. Fridson calculates that in only 9 months over the past 2 decades have yield bonds been more overpriced than today.” International developments cut both ways, China is perceived to be stabilized for the sole reason of massive credit growth and fiscal stimulus while Europe post referendum is one big question mark.
Bottom line: The Fed has every reason to wake the markets up to a possibility of a rate hike soon but then again, it depends on how they look at the data and/or the 3rd mandate, the markets.
As for the BoJ and the possibility of more QE, whatever form it might take and whatever Abe has up his sleeve, I only can leave you with this picture:
For those historians, the BoJ first tried QE in 2001.
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