With Janet Yellen in her first long form (outside of some speeches) talk today and Q&A since the December 14th FOMC press conference, let’s go to the video tape (for all the old Warner Wolf fans) and see what’s changed since then. I’m not going to bother comparing today with the January FOMC meeting as they seem to have neutered meetings without a press conference in terms of not wanting to change policy.
- 5 yr inflation breakeven: 12/14 was 1.83% vs 1.97% today
- 10 yr inflation breakeven: 12/14 was 1.97% vs 2.02% today
- Headline CPI: November CPI (the one they saw at December meeting) 1.7% vs 2.4% expected tomorrow for January
- Core CPI: November CPI 2.1% vs 2.1% expected tomorrow January
- Headline PCE: November 1.4% vs 1.6% for December
- Core PCE: November 1.7% vs 1.7% for December
- NY Fed survey of inflation expectations: November 2.5% vs 3% in January
- UoM one yr inflation expectations: November 2.4% vs 2.8% in February
- CRB index: 12/14 192 vs 192 today
- Journal of Commerce index: 12/14 104.5 vs 108.7 today
- December/January monthly private sector job gains averaged 201k vs the previous 12 months average 176k
- Jobless claims 4 week average: mid December 264k vs 244k last week
- Average hourly earnings: November 2.7% y/o/y vs 2.5% in January
- Atlanta Fed wage tracker: November 3.8% vs 3.5% in December
- U6 unemployment rate: November 9.3% vs 9.4% in January
- NFIB Net compensation: November 21% vs 30% in January
- NFIB Net compensation future plans: November 15% vs 18% in January
- Since 12/13 (day before FOMC) S&P 500 up 2.5% to record high and up 9% since election (No uncertainty here)
- 10 yr yield on 12/13 2.47% vs 2.44% today and vs 1.85% on day of election
- 2 yr yield on 12/13 1.17% vs 1.21% today and vs .85% on day of election
Bottom line, as a prudent banker with the stats above and if she listens to the message of the market since the election she should lay the March meeting CLEARLY on the table for a rate hike.
The NFIB small business optimism index held its recent sturdy gains at 105.9 for January vs 105.8 in December. It’s at the best level since December 2004. Plans to Hire rose another 2 pts to 18, the most since before the recession. After spiking by 38 pts last month, those that Expect a Better Economy fell by 2 pts as did those that Expect Higher Sales (after jumping by 20 pts). Those that said it’s a Good Time to Expand rose to the highest since 2004. Compensation plans continued to improve with it matching the best level in 15 years. This is because Positions Not Able To Fill continues to rise to match 15 yr high. Earnings trends are still negative but less so. On inflation, Higher Selling Prices fell 1 pt but holding around 2 yr highs. The disappointment within was the capital spending plans which fell 2 pts to 27 and is back to where it was before the election. Hopefully tax policy will encourage an improvement there.
Bottom line, “Small business owners like what they see so far in Washington” said the NFIB CEO. Bill Dunkelberg added “The continued surge in optimism is a welcome sign that economic growth is coming. The very positive expectations that we see in our data have already begun translating into hiring and spending in the small business sector.” Some key components of this index has gone parabolic since the election and now the rubber meets the road in terms of what policy comes next and the extent taxes can be cut and regulatory relief can be had that would satisfy this optimism.
On corporate tax reform that is generating a lot of the business optimism, the battle lines are being drawn on how to pay for lower tax rates. In case you didn’t see, the front page of today’s FT: “Brussels gears up for high stakes challenge to US border tax plan”, “Lawyers for the EU and other trading partners have begun laying the groundwork for a legal challenge to a US border tax proposal that could trigger the biggest case in WTO history.” Reuters today is reporting that “Chief executives of some of America’s largest retailers, including Target and Best Buy, are headed to Washington this week to make their case that a controversial tax on imports would raise consumer prices and hurt their businesses, according to people familiar with the plan.” The group of 8 CEO’s will be meeting with Kevin Brady, a key architect of the Ryan Better Way Plan.
In China, aggregate financing growth further spirals out of control. In January it totaled 3.74T yuan, well above the estimate of 3T, up more than 2x from December and higher by 8% y/o/y. The one caveat though is because of the January holiday, a lot of lending is front loaded. Thus, it’s better to see February and combine with January to get the true picture. Bank loans made up 2.03T of this which was actually below the estimate of 2.44T and therefore non banks providing the balance. Bottom line, this data explains why the PBOC has recently raised repo rates and every night seems to be tinkering with some money market facility in order to tame this explosion in credit growth. Dangerous times.
German ZEW economic expectations index on their economy disappointed in February. It fell to 10.4 from 16.6 vs the estimate of 15 and that’s a 4 month low. Current conditions held in better and were little changed. The ZEW said, “The downturn in expectations is likely to be the result of the recently published unfavourable figures for industrial production, retail sales and exports. Political uncertainty regarding Brexit, the future US economic policy as well as the considerable number of upcoming elections in Europe further depresses expectations. Nevertheless, the economic environment in Germany has not significantly worsened.” We’ll see if this is followed up by actual business confidence within the IFO index next week.
Lastly in the UK, input price pressures continues to skyrocket but it is still only slowly filtering into consumer prices. January input prices rose 20.5% y/o/y, above the estimate of up 18.5%. Something last seen in 2008. Output prices were up just 3.5%. Hello margin squeeze. Headline CPI was up by 1.8% y/o/y with a core rise of 1.6% and both were one tenth less than expected. The headline gain is the most since June 2014 and the core rate holds at the most since August 2014. The market is focused on the CPI miss and its why inflation breakevens are down by 5 bps for both 5 yr and 10 yr maturities. The pound is back below $1.25.
With his retirement ahead in October, Jeffrey Lacker wants to cement his reputation as a hawk on the Fed even though he doesn’t vote in his last year. “With unemployment at or below levels corresponding to maximum sustainable employment and with inflation very close to our announced target of 2%, significantly higher rates are warranted.” The underline is mine. As to when to hike next, he recommends “sooner rather than later in order to reduce the risks associated with having to raise rates more rapidly later on.”
Dallas Fed member Kaplan also said something similar late yesterday on the timing. He’s a voting member. Lacker been a long time hawk anyway. But none of this may matter as Yellen, Fischer and Dudley still rule.