Fed President Neel Kashkari yesterday “maybe our rate hikes are actually doing real harm to the economy.” The Fed has hiked 4 times over a nearly 2 year time frame and he truly believes that after 7 years of zero interest rates and multiple rounds of QE that resulted in more debt and malinvestment, bubbles in asset prices and pulled forward economic behavior. I’ll show him this chart of the Goldman Sachs Financial Conditions Index since late 2015 right before the first rate hike where the lower it goes, the easier the conditions.
GOLDMAN SACHS FINANCIAL CONDITIONS INDEX
We took note of Fed Governor Lael Brainard’s comments early yesterday when she said “My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target.” She of course is talking ONLY about consumer price inflation which she wants higher. In fact should said it is “more important than ever that we get to 2% inflation.” It’s another way of saying it’s crucial that we raise your cost of living by that amount. Why, I’m still not so sure. Anyway, she did seem worried about asset price inflation when she said “It is important to be vigilant to the signs that asset valuations appear to be elevated, especially in areas such as commercial real estate and corporate bonds.” So therein lies the tradeoff the Fed is stuck in. Either way, we know what the Fed will do in a few weeks in initiating QT and the December meeting is 3 months away and isn’t yet worth thinking about. On her worries about low consumer price inflation, Brainard should be happy that the CRB raw industrials index closed higher yesterday for the 12th day in the past 14 and is at a 3 year high.
A day before Mario Draghi and the ECB will hem and haw over when and how much to taper QE, the CEO of Deutsche Bank called them out by saying “We are seeing signs of bubbles in ever more areas of capital markets where we didn’t expect them…The era of cheap money in Europe should come to an end, despite the strong euro. I welcome the recent announcement by the Federal Reserve and now also from the ECB that they intend to gradually bring their loose monetary policy to an end.” On negative interest rates he said its resulting in “ever greater upheaval.” I’ll continue to refer to NIRP as a Weapon of Mass Confiscation. He also used this to said “US banks enjoy a competitive advantage due to the local interest rate environment” in that US banks have seen a greater rebound in profits while European bonds are getting taxed via NIRP. As banks are the transmission mechanism of monetary policy, we all have to wonder why central bankers think that damaging bank profitability is a good strategy. The Fed is guilty too. Wanting to flatten the yield curve via QE and Operation Twist doesn’t really lift the animal spirits of loan officers.
If you want wage growth in Japan, make sure to be a part time worker because it ain’t happening much for those full time employees. Regular pay for full time workers rose .5% y/o/y but was more than offset by a 2.2% y/o/y drop in bonus payments. The net result was a .3% drop in cash earnings. Part time workers that get paid by the hour saw wage growth of 2.9% y/o/y instead. The offset though is they are working less hours. Bottom line, the frustration continues for Japanese workers notwithstanding labor market squeezes and the BoJ should just give up its 2% inflation obsession. The yen, the Nikkei and the JGB market didn’t respond much as they are all about unchanged.
German factory orders in July disappointed with a .7% m/o/m drop instead of rising by .2% as forecasted. The weakness was driven by domestic and eurozone activity so we can’t blame the stronger euro. Orders to non eurozone countries grew by .6% m/o/m. While the Germany economy is certainly the rock of the region, the recent data has gotten to be more mixed. There was no worries on the part of the Economic Ministry as they said activity is back to pre recession levels and “Manufacturing turnover and sentiment gauges confirm this positive picture. Indicators signal a continuation of the solid recovery in manufacturing.” I’ll continue to give the German economy the benefit of the doubt. The German DAX though remains in correction mode as its 6% below its mid June high coincident with the stronger euro.
As mentioned above, John Cryan at Deutsche Bank talked about bubbles. Well, in German construction, obviously hugely sensitive to interest rates, Markit in its Construction PMI index for Germany said they saw the “fastest rise in new business since survey began in September 1999.” Employment rose to a 1 ½ yr high and “inflation of subcontractor rates remained close to June’s record high, while prices for construction inputs increased at the sharpest rate in nearly 5 ½ years.” QE and negative interest rates are appropriate policy?
Stock market sentiment was completely unchanged w/o/w with Bulls at 49.5, Bears at 19.1 and those expecting a Correction at 31.4. II said “There were new bullish shifts, generally noting the market’s rebound, but they were offset by increased caution among some former bulls. They mostly noted the historic weakness for Sept/Oct coinciding with some worrisome indicator signals and the current uncertain geopolitical conditions.” What’s clear this year is as Bulls got above 60, markets cooled off and then ramped again as it fell back to around 50. The Bear side remains microscopic as they’ve been beaten into submission.
After 3 straight weeks of declines that took the purchase component of the weekly MBA mortgage data to the weakest level since February, they rose a slight 1.4% w/o/w and the y/o/y gain has moderated to 4.7% from 7% last month. With the leg lower in mortgage rates to the lowest level since mid November, refi applications rose by 5.1% w/o/w but remain down by 39% y/o/y.