The Times They Are a Changin’

I’ve continued to call out Mark Carney for the inflation problem he has on his hands and which he further facilitated with his panic easing after Brexit. For a 2^nd straight month retail sales ex fuel were very disappointing. They fell .2% m/o/m in January vs the estimate of up .7%. Also, December sales were revised to a 2.2% m/o/m decline from -2% and vs the initial forecast last month of down .4%.  The y/o/y rise in January of 2.6% is the slowest in 13 months. This week we saw inflation rising to the quickest pace in 2 ½ years and a slight miss in wages. While CPI is only at 1.8% y/o/y, it will most likely continue to move higher when input costs are rising at a 20% clip on the heels of the pound plunge since last summer.

Bottom line, if this is a legit beginning of a downtrend in consumer behavior, the BoE risks putting themselves into a negative feedback loop. If they remain easy because of their worry about an economic slowdown, they risk further gains in inflation (sounds like the 1970’s mentality of our central bank) or he can subscribe to the theory that actual price stability and low inflation is the precursor to better economic activity and quickly remove QE and take back the rate cut after Brexit but risk short term market and economic pain. The pound is having its worst day in 2 weeks in response to the sales data and gilt yields are falling.

On Tuesday we heard Janet Yellen finally realize that waiting too long before raising rates could result in faster hikes later on. FINALLY a revelation in the 8^th year of this expansion with just 2 hikes. In case you missed the story yesterday, BoJ Governor Haruhiko Kuroda is having a major revelation as well. Reuters reported that “BoJ Governor Kuroda said low profitability at financial institutions could sow the seeds of a new financial crisis, offering his strongest warning to date of the demerits of aggressive monetary easing pursued by major central banks.” Kuroda actually said “a new challenge has emerged in the form of low profitability at financial institutions.” Wow, he is finally realizing the damage that his own policy has done to the main transmission mechanism of his policy.

Bottom line, Yellen and Kuroda are both having a come to Jesus moment that the rest of us have known all along. This is hugely important in that it gets to the theme that 2017 will be the first year in this grand experiment of monetary extremism that all 4 major central banks may be walking back from easing. We know the Fed is most likely hiking more aggressively (everything is relative), the ECB is cutting QE by 25% as of April 1^st, the BoE is most likely ending QE and possibility raising rates and maybe the BoJ allows a further widening of the yield curve. While the 10 yr JGB yield did nothing in response to Kuroda’s comments (because of the threats of intervention at that point of the curve), the ultra long end yields continue their move higher. The 40 yr yield is up for the 5^th straight day to 1.085%, the most in a year. Market behavior this year will be dictated by much more than just Trumponomics, whatever it might look like.

“The line it is drawn, the curse it is cast. The slow one now, will later be fast. As the present now, will later be past. The order is rapidly fadin’. And the first one now, will later be last. For the times they are a changin’.”

Bob Dylan