In a speech earlier this month, Federal Reserve Chairman Jerome Powell said he believed that inflation remained anchored and did not see any signs that it would spike despite the low unemployment rate, adding that he was not worried the Phillips curve ‘will soon exact revenge’. Talking at the National Association for Business Economics, Powell puts a strong emphasis on the anchored nature of inflation expectation in his thinking about the “dormancy” of the Phillips Curve.
It’s US consumer price inflation day again, and it seems forecasts were dead on, with the Core CPI up 1.8% YoY. This made for a relatively muted market reaction with 10-year US Treasury yields first falling 3 basis points but then returning to 2.86%. At around the same time President Trump tweeted CIA Director Mike Pompeo is to become his new Secretary of State, finally unseating a discordant Rex Tillerson; the White House confirmed Gina Haspel as nominee to replace Pompeo as CIA Director; and the expectation is that a replacement for Gary Cohn may also be announced imminently. Earlier Trump forenamed CNBC’s Larry Kudlow as having ‘a very good chance’ at becoming the new director of the White House National Economic Council.
The longer end of the US curve is composed ahead of tonight’s release of Fed minutes: with 10-years yields, around 2.88%, back to where they ended last week, after the spike to 2.94% when January’s inflation data came in slightly above forecast. The shorter-end yields continue to rise, however: with 2-year yields touching 2.28% - almost double the yield they offered 12 months ago and moving further into 9.5 year highs (contrastingly over a 12 month period 30-years yields have risen 10bp from 3.04% to 3.14%).
Extract from Bob Gay’s piece ‘Regime Change: Inflation’
One of the most striking yet unsung by-products of globalisation and technology has been the rise of monopolistic industries that has shifted bargaining power from workers to employers. Since the heyday of union power in the early 1970s, which coincided with the coming of age of the postwar baby boom generation, labor’s share has declined from highs around 58% to 53% today. The erosion in workers’ bargaining power has been even more noticeable since the onset of the Great Financial Crisis. Information and communications technology have enabled scale economies that were inconceivable just 25 years ago.
Wall Street stocks rose, the dollar (DXY Index) touched a two week low earlier today and US Treasury 10-year yields shaved a couple of basis points following the release of the Federal Reserve’s September meeting minutes. These further confirmed expectations that interest rates could still be increased once more this year despite the notable dovish tone.
Although “staff continued to project that inflation would edge higher in the next couple of years and that it would reach the Committee’s longer-run objective in 2019”… “The risks to the projection for inflation were also seen as balanced.”
The risks of a hard/soft landing in China have subsided as the strong economic data releases of January continue to support the country’s improving economic outlook. Exports, measured in US dollars jumped 16.7% yoy, from 3.1% in December and beat market calls for 10%, meanwhile imports remained robust at 7.9%, beating the market consensus once again. Inflation figures also surprised on the upside; PPI surged 6.9% to the highest level since March 2011 while CPI rose 2.5%, from 2.1% in December. ‘Seasonal factors’ could have contributed to the encouraging trade data; boosted by the timing of the week-long Lunar New Year beginning in January.
Happy St. Patrick’s Day! Once considered a strictly religious holiday in Ireland, with pubs closed nationwide, in 1970 the law was overturned and the stout was poured with pride!
As we had expected, the FOMC did not move to raise rates yesterday, and in fact surprised the market with its more dovish than expected stance; revising the dot plots down to two (and a quarter) rate hikes this year from four back in December, the median dot is now at 0.875%. The benchmark 10-yr UST climbed to 1.997% ahead of the meeting, falling ~10bps by the end of the session. On balance the US economy has shown signs of stability and in some sectors, i.e. the job market, further strength. What continues to remain of concern to the central bank members is the spillover from “global economic and financial developments” which have recovered somewhat off the lows seen earlier this year.
Gamers all around the world will be celebrating Nintendo's “Mario Day” today, with it being Mar10, meanwhile, markets have been focused on a different “Super Mario”, as what was expected to be the most challenging ECB meeting took place this morning.
A year ago yesterday, the ECB launched QE and has since spent EUR 700bn (or EUR 60bn per month) on bond purchases and has cut rates to boost inflation. Unfortunately neither policy has been effective enough; inflation actually slipped back into negative territory in February, on an annualised basis. Today the central bank announced: a cut to its benchmark interest rate to zero from 0.05% (a marginal ‘tax’ reduction for banks), the expansion of QE to EUR 80bn a month (more than the EUR10-15bn expected by the market), and a further slice to its deposit rate by 10bps to -0.4%, effective next week. Leading up to the meeting the futures market had already priced in a 100% probability of a rate cut. At Draghi’s press conference, he stated that although he does not anticipate further cuts “new facts could change this situation”.
So Super Thursday, the highly anticipated biggest UK monetary policy event of the year, wasn’t that super after all. As expected, the Monetary Policy Committee neither commenced its monetary tightening cycle, nor altered the GBP 375bn asset purchasing scheme, citing “greater persistence of low inflation” below 1% until the end of the year and the subsequent downward pressure on wage growth. The central bank did however revise its growth forecast to 2.2%, from 2.5%, with growth at 2.4% next year; not all bad though as the UK still remains one of the fastest growing developed economies.
Having effectively backed itself into a corner to pull the trigger in December, the Fed unsurprisingly left rates unchanged yesterday. Aside from a stronger job market, US economic activity remains mixed (for example, durable goods orders fell -5.1% in December versus market calls for -0.7%) and as we are all aware, inflation is tracking below their 2% target. Sounding relatively upbeat about the state of the domestic economy, the data dependant Fed added that any policy decisions will now also be tied to markets; stating it will be “closely monitoring” global economic and financial development.