In a continued concerted effort to make this go as smooth as possible, two Fed members are telling us to ‘Keep calm and Carry on’ about QT. James Bullard last night said “The runoff in the balance sheet will go very smoothly. It’s going to be managed, it’s going to be slow.” That latter is certainly obvious but the former is not. John Williams said yesterday that Fed tightening from here is “the most telegraphed monetary policy of our lifetimes.” I give them credit for the communication but a root canal still sucks no matter how much advance notice someone has before it.
In his obsessive desire for higher inflation, Mario Draghi yesterday said “Overall, we remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary.” The euro is weaker as a result and I have just have to dig deeper into this persistent belief on the part of central bankers that some inflation is good and ANY deflation is bad. Along with Draghi’s thinking, Dallas Fed President Kaplan said this on CNBC this morning, “I’m concerned with the recent weakness in inflation” and Bullard made similar comments last week.”
After Wal-Mart really exploited the concept of ‘everyday low prices’ decades ago to the joy of millions and as internet retailing has firmly taken the baton of discount shopping by everyone at the same time the cost of technology products are perpetually falling, what prices within goods and services do central bankers want to rise to offset this? They don’t want higher oil prices it seems but maybe they want higher food prices? Do they like 4-5% apartment and home rent increases and 5-6% home price gains? Do they like higher out of pocket medical costs? Should the cost of a baseball game to take a family of four with food and drink continue higher? Maybe tuition costs should rise even faster to offset the deflation of internet retail. I could of course go on and on. For another perspective on what is truly price stability and what is not, I need again to show this chart to remind many of where inflation has been and where it has gone. It’s a chart of the CPI index over the past 25 years and thus takes out the rate of change nonsense. I’ll end this rant by saying I would pay money to see Yellen (and Bernanke), Draghi, Kuroda and Carney walk into a Wal-Mart store and explain to the thousands of shoppers living paycheck to paycheck that higher inflation, aka 2%, is a good thing for them.
Tight as a drum but still meager wage hikes continues to be reflected in the Japanese labor data. The unemployment rate held at 2.8% as expected, the lowest since 1984. The jobs to applicant ratio rose to 1.48 from 1.45 and higher than the estimate of 1.46. This level was last seen in February 1974. Barbra Steisand’s “The Way We Were” was best song, The Sting won Best Picture and the Lotte Orions won the Japanese baseball Championship. As for the consumer that still is not seeing much of any wage benefit increases, overall household spending in April fell 1.4% y/o/y, more than the forecast of down .9%. It’s the 14th straight month of y/o/y declines. This is an inflation adjusted figure by the way and was dragged lower by a 15.1% decline in spending on education which I can’t explain. Actual retail sales in April actually improved by 1.4% m/o/m, well better than the estimate of down .2% and was helped by spending in supermarkets. Bottom line, the Japanese economy remains this one big conundrum. Exports are doing well but capital spending just chops around. The labor market is running out of workers but wage growth is punk and consumer spending is muted. And the BoJ remains on a path of nationalizing the country’s publicly traded securities. The Nikkei closed flat for the 2nd straight day while the yen is slightly higher and JGB’s were little changed. The 10 yr Japanese inflation breakeven stands at .45%, a long way from the 2% BoJ goal.
Economic confidence in the euro area cooled a bit in May as this index fell to 109.2 from 109.7. The estimate was for a modest increase to 110. Within this, industrial confidence rose a touch but was more than offset by a drop in services. Retail fell while construction rose. Consumer confidence was up slightly. For perspective, the 109.2 print is still the 2nd best since 2007 as the European economy is certainly in a cyclical upturn. French economic sentiment continued higher in the midst of the Macron optimism while Germany confidence fell a touch. Also of note, UK economic sentiment fell by 2.3 pts to a 4 month low.
As for the Draghi worry about low inflation, Spain reported its May CPI at up 1.9% y/o/y, a slowdown from the 2.6% pace in April and below the estimate of up 2.1%. German CPI in May was higher by 1.4% y/o/y, one tenth less than expected and well below the 2% print in April. Import prices still remain robust as they grew 6.1% y/o/y but that was slightly below the forecast of up 6.3%. We can now assume after hearing from Draghi yesterday and seeing this inflation data, that we likely won’t get much direction in June of when more tapering will occur this year even though September is a likely time frame. European sovereign bonds are moving much in response but Italian yields are higher for a 2nd day as the possibility of a Fall election is now growing instead of happening next year.