You can’t turn a virtual corner this week without tripping over a discussion about the US minimum wage.
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Two recent notes emphasise that the impressive recent ISM manufacturing readings in the US are probably as much about expectations of future performance as about what has already happened.
Aichi Amemiya of Nomura notes that historical divergences between the ISM and the “hard data” have coincided with climbs in the equity market, suggesting that improved sentiment about the future is the common variable in both. Amemiya shows this by constructing a competing “hard-data based ISM manufacturing index” of five components that roughly mirror the five comprising the ISM. Read more
A passage from chapter 2 of Robot Futures, Illah Nourbakhsh’s excellent introduction to the near and distant future of robotics applications:
Smog is a portmanteau that combines the natural and the artificial; fog simply reduces visibility, but when smoke and haze mix together, then quality of life decreases: runners cough, tennis players’ lungs burn, and asthma cases in children bloom.
Should “circumstances matter” be the new “incentives matter”?
Think of poverty’s influences on decision-making as falling into two categories.
The first includes the combined psychological and brain-chemistry effects, all the ways in which poverty can affect the mind as it makes choices. The second is through the nature of the choices themselves, which differs from that of people with means. Read more
Because the history of evolution is that life escapes all barriers. Life breaks free. Life expands to new territories. Painfully, perhaps even dangerously. But life finds a way.
– Dr Ian Malcolm, “Jurassic Park” Read more
In response to the apparent enthusiasm in the latest FOMC minutes for cutting the interest paid on reserves, we noted last week that the Fed would likely wait for certain conditions to be met before taking this step, if it ever does.
Those conditions are: 1) The Fed’s proposed new reverse repo facility is up and running, 2) It’s clear that the new reverse repo facility has successfully established a floor under general-collateral overnight repo rates, and 3) At no point does it seem as if either secured (GC repo) or unsecured (effective federal funds) rates were threatening to turn negative and lead to the attendant disruption of money markets. Read more
An update from Credit Suisse on the testing of the Fed’s proposed fixed-rate full-allotment reverse repo facility:
The reverse repo facility “testing” that began at the end of September has seen the maximum allotment go from $500 million to $1 billion, and the rate has gone from 1bp to 5bp, with the last three increases coming in almost weekly intervals. So far, the biggest test came at quarter end, when there were 87 participants with a total operation size of $58.2bn. At this rate, the Fed seems serious about gearing up for a true large scale test in at the end of the year, by which point they could have further raised the rate and boosted the maximum allotment size. Read more
One of the key findings from the Jackson Hole paper by Arvind Krishnamurthy and Annette Vissing-Jorgensen is that the Fed’s US Treasury purchases “significantly raised Treasury bond prices, but have had limited spillover effects for private sector bond yields, and thus limited economic benefits”.
An interesting recent note from Jesse Edgerton of Goldman Sachs calls into question one part of the methodological approach used in the paper to arrive at this finding. Read more
Two charts and some commentary from Credit Suisse that caught our eye today:
The idea that increasingly obsolescent capital would push up the natural rate of interest and eventually drive an accelerating recovery isn’t new. It just keeps not happening. Read more
We’ve been paying attention to the various ways in which oncoming regulations are likely to crunch parts of the shadow banking system.
After the Fed released its notice of proposed rulemaking for its implementation of the Liquidity Coverage Ratio last week, the Citi rates team noted that the matched-book repo market would be unaffected by the LCR but nonetheless should expect future regulations of a different kind. Read more
A note from Capital Economics makes a series of points that have been covered in other places but are worth repeating. Read more
Brad DeLong asks (politely) why oh why can’t we have better QE weblogging, and then issues a challenge:
Toward the end of an otherwise very good think piece, the intelligent and thoughtful Cardiff Garcia mysteriously writes: “But the downsides to continued QE aren’t trivial either.”
Which makes me ask: what are the downsides to continued QE?
The chart from Goldman Sachs shows that the share of 18-34 year olds in the US who live with their parents has (possibly) peaked and started to decline.
This is the subject of much talk about the boomerang generation and Millennials and whatnot, but it also has great relevance for the recovery of the housing sector and overall economic growth. Read more
It’s wise to be cautious whenever Wall Street strategists play political prognosticators, but these points from Barclays about the recent deal to lift the debt ceiling and reopen the government seem sensible enough, if a bit more sanguine than is warranted:
One key lesson is that the debt limit is out of bounds. In August 2011 and in the latest stand-off, the two parties did come to an agreement to raise the debt limit before the Treasury’s stated deadline, even though the Treasury had enough cash to operate for days after that. Hence, the market and Fed are less likely to worry about a new debt limit crisis. Even if they do, the next deadline may be many months after February 7. Read more
Anyone fiending for economic data after the shutdown delays might be disappointed.
Here’s a guide from Capital Economics, based partly on the experience of the 1990s, about the anticipated return of certain indicators: Read more
A recent paper by Ricardo Caballero and Emmanuel Farhi challenges some of the assumptions underpinning the current stance of monetary policy in the developed world, arguing that both quantitative easing and forward guidance are unlikely to be very effective.
The authors also add new dimensions to the commonly accepted New Keynesian wisdom on liquidity traps and fiscal policy, which they only partly agree with. Read more