Passive vs Active, German Inflation, Japan Growth, Fed’s Fischer and more…

I’m not using this comment to give an opinion on the passive vs active thing but if there is ever a clear contrarian headline of a story to mark that this whole passive thing has gone way too far and things are about to change it was this passive investing piece in Marketwatch a few days ago. In case you missed it:

Here’s the story. I’ll leave it at that.

Fed Vice Chair Stanley Fischer’s speech on Saturday was heavy on the Fed’s reliance on econometric models (he’s all for it but acknowledges its limitations). It wasn’t until the Q&A that he gave us very little about what the Fed will do next in response to a question. He said “There is as you imply significant uncertainty about what’s actually going to happen.” He was referring to upcoming fiscal policy, “I don’t think anyone quite knows what’s going to come out of the process which involves both the administration and Congress in the deciding of fiscal policy and a variety of other things.” If only the stock and bond markets since November 8^th was uncertain as the Fed. Are there any quote machines in the Eccles building?

With respect to achieving the explicit Fed goals (aka, the two mandates as the implied 3^rd, higher asset prices, has wildly succeeded), he said “We’re very nearly there. There could be a further somewhat strengthening in the labor market and to get inflation to 2%.” So, they are almost there but the fed funds rate is only at .625% vs their goal of eventually getting it to 3%. These comments of course come ahead of Yellen’s testimony tomorrow and if Fischer’s comments are any indication, we’ll hear that ‘uncertainty’ word again which is another way of saying, the Fed will still drag their feet in raising rates. That said, we still believe Yellen will leave open the possibility for a March hike.

We can add another German January inflation stat to the list of concerns of the Germans with the ECB. Wholesale inflation which measures the costs for German food retailers rose 4% y/o/y, the fastest pace since October 2011. There wasn’t much of a market response because we know all about the cyclical rise in inflation. The 10 yr bund yield is up by 1 bp and the 5 yr 5 yr euro inflation swap is up by the same amount to 1.77%, just 3 bps from the most since December 2015. The Journal of Commerce index of 18 industrial materials such as crude, plywood, zinc, aluminum, lead, tin, copper, steel, cotton, red oak, rubber, etc… on Friday closed at a 26 month high. It’s up 36% y/o/y.

Japan’s economy grew a bit less than expected in Q4. GDP was higher by 1%, one tenth less than expected but Q3 was revised up by one tenth so combined it’s about in line. Exports and capital investment drove all of the rise as private consumption saw no growth. On seeing no increase in consumer spending begs the question of why the BoJ is so intent on raising inflation because it’s clear wages won’t be able to keep up. As for the reliance on exports, it points to the importance of PM Abe playing nice and playing golf with his largest trading partners. The yen is weaker which helped the Nikkei rise .4% overnight while JGB’s were little changed.