This post is from Gerard MacDonell, an economist at Point72 Asset Management, formerly SAC, from 2004 through 2015…
With the risk of recession and a return to the zero bound now prominent, there is renewed discussion of the Fed and Treasury coordinating to deliver a helicopter drop of money.
This would not work in the US because the inflationary implications of it would be too dire and because the Fed would predictably renege on its side of the bargain. Here’s why, as I see it. Read more
A quick reminder that we’ll be hosting a special edition of Macro Live today at 1:55pm to cover the release of the FOMC statement and subsequent presser.
There’s only a 3.4 per cent chance the Federal Reserve will raise rates today, according to Bloomberg’s WIRP function and the prices of overnight index swaps.
As recently as the end of December 2015, market prices implied odds of at least one rate hike by tomorrow at more than 40 per cent:
Imagine someone told you about a country where real output per person is at an all-time high and growing at an increasingly rapid pace, its employment rate is at the highest level in decades, the country’s housing sector is on fire, and its current account surplus is about 6 per cent of GDP. In the absence of other information, would you say this country should be:
- Worried about the costs of a (slightly) higher exchange rate?
- Concerned by the slow rate of (headline) inflation?
- Cutting interest rates deeper into negative territory?
If you answered yes to the above questions, congratulations! You’ve just described the behaviour of the Sveriges Riksbank. From their policy announcement on Thursday (our emphasis): Read more
So charted by Citi.
As they say, the coolness of global inflation is not just an energy price story:
I don’t know what you want to call me. Santa Claus is what, eh, [journalist x] called me earlier. You want to call me a hawk.. I don’t know. I don’t go by these things. My name is Raghuram Rajan and I do what I do.
- The RBI governor, 29 September
And yes, that’s certainly A reason for why he cut the policy rate 50bps to 6.75 per cent on Tuesday, twice what had been expected.
Here’s another one, via Credit Suisse’s Neelkanth Mishra: Read more
Many economists think the government can help a weak economy by convincing people the rate of price increases is poised to accelerate. In theory, households will spend more whilst businesses will boost their hiring and investment.
New research presented at the Brookings Panel on Economic Activity, which we attended, suggests this is mostly nonsense. A detailed survey of business executives in New Zealand suggests inflation expectations have basically no direct impact on the way companies make decisions. (Inflation expectations could affect how banks and capital markets charge firms for funding, but that’s an indirect effect.)
When asked what they would do if they learned prices would increase more over the next year than they were currently expecting, 65 per cent of managers wouldn’t raise prices, 75 per cent wouldn’t raise wages, 73 per cent wouldn’t increase employment, and 71 per cent wouldn’t increase investment. Read more
The Central Bank of Nigeria MPC voted eight to four to leave the monetary policy rate unchanged at 13.00 per cent following the conclusion of its two-day meeting on July 24, note Barclays’ emerging market team.
But, in a further signal that the oil producing country, which transitioned to a new government in March after 16 years of rule by the People’s Democratic Party, may be prepping for a sustained period of low petroleum prices the Central Bank stressed the importance of diversifying the economy away from oil and expanding its base of FX receipts. Read more
There’s always a danger, when you question official statistics, that you come off sounding like a nutter.
But some forms of scepticism are more respectable than others. At one end of the spectrum, we’ve previously indulged the possibility that seasonal adjustment algorithms inadvertently distorted the GDP and employment figures. At the other, you have people who add fixed constants to the reported growth rate of consumer prices because they disagree with methodological changes from the 1980s and 1990s, but speak as if they are uncovering a conspiracy. Read more
Stocks are basically bonds where the coupons tend to grow faster than the level of consumer prices. That makes equities sound like a great thing to own if you’re worried about inflation, and, in fact, Mr Stocks-for-the-Long-Run made this case a few years ago. While the actual article is more nuanced than the headline and opening paragraph would suggest — he admits that stocks only become immune to inflation over multi-decade periods — it’s still a bit misleading. The last time the rich world had to deal with meaningful inflation, it was bonds that beat stocks.
We’re reminded of all this because of two striking charts from a new report from Goldman Sachs on the implications of negative, long-term real interest rates. Consider the following chart, which compares the returns you would have gotten from buying and holding US stocks versus US 10-year bonds over decade-long periods: Read more
Inflation indices that include interest payments are dangerous things, especially in countries where most debts have floating rates. An attempt to tighten temporarily causes headline inflation to accelerate, while rate cuts make it look as if inflation has slowed, irrespective of what else is going on in the economy. (This is separate from the intriguing Neo-Fisherian idea pondered by Professor Cochrane.)
These price indices are useful for measuring changes in real spending power, and arguably form a better basis for wage negotiations than ones that exclude debt service costs. But if you want to evaluate the performance of a central bank, or you work at one, you need to make sure you’re using a price index that doesn’t incorporate these swings. Read more
Remember how inflation in the UK hit zero in February and this is all part of the government’s plan, apparently?
Well, Bank of America Merrill Lynch would like to draw your attention to a chart of consumer price indices in the UK, US and Eurozone since February 2008 (rebased).
One of these things, the bank’s rates and currencies team suggests, is not like the other: Read more
Rightly or wrongly, falling consumer prices — or even plain old price stability — is often treated with alarm by monetary economists and policymakers alike. The common view is that deflation, in addition to exacerbating economic weakness, is an indicator of the economy’s failing vigour.
As Ben Bernanke put it back in 2002: Read more
It might not be polite to say it overtly, but concerns are growing that the Fed’s rate hiking promises may be nothing more than a big bluff.
The vogue for doubting Fed rhetoric started in earnest on March 11, when Ray Dalio, founder of hedge fund firm Bridgewater Associates, wrote to investors that there was a risk if the Fed raised rates too fast it could create a market rout similar to that of 1937. Read more
A guest post by Simon Cox, Asia-Pacific Investment Strategist, BNY Mellon Investment Management
China’s weak inflation numbers, updated on February 10, underscore why the People’s Bank of China (PBOC) is now easing policy wholesale, after a long sequence of targeted tweaks. (It cut reserve requirements on February 5 less than three months after cutting benchmark interest rates in November.) But does monetary easing work in China the way it works elsewhere? Does it, indeed, work at all? Read more
The fact that inflation is low is not, by itself, bad; with low inflation, you can buy more stuff.
– Mario Draghi, June 6, 2013 Read more
Conventional wisdom says that businesses adjust their investment spending according to changes to the cost of capital. Intuitively, that makes sense: more projects become worthwhile as funding costs go down, while few make the cut when capital is expensive. (In reality, it turns out that interest rates, spreads, and volatility are all irrelevant for capex decisions, but let’s put that aside for now.)
If central bankers want to boost investment to encourage economic activity, conventional theory suggests they should lower interest rates. However, there is a limit to this process because you can’t lower rates below zero without imposing tyrannical controls. Hence the appeal of boosting inflation, which effectively reduces the real cost of capital (assuming risk premia don’t rise) by stealth even when interest rates have hit the floor. Read more
For years, the UK has added more jobs than almost any other country in the rich world even as real incomes plunged thanks to underwhelming productivity growth. Now it seems that a new burden has been added: disinflation. Prices are just 0.5 per cent higher than a year ago.
The BBC’s Robert Peston worries that this “is not much of a buffer against deflation” and that “if we became accustomed to prices falling as the new norm, we would spend less – in that delaying would always make our money go further. And then the economy would sclerotic and stagnant, and desperately difficult to reinvigorate.” Given that UK household debt is already staggeringly high relative to income and projected to rise much further, that could pose serious problems down the road. Read more
The thing about the relationship between monetary stimulus and inflation in China is that — much like like a Wookie, an 8ft tall Wookie, living on the planet Endor with a bunch of 2ft tall Ewoks — it does not make sense. At least not if you approach it with a conventional eye.
So says China maven Michael Pettis, who emailed us over the last few days to say we must, at minimum, consider the possibility that there is a reason rapid credit growth in China has failed to do what it’s “supposed” to do. And, by extension, why deflationary pressures in China indicate the probable need for monetary tightening, not loosening. Read more
Here’s what 33 months of negative Producer Price Index inflation in China look like:
Of course, we’re now at 34 months, following December’s print. This clocked a 3.3 per cent year on year fall in the index — the biggest annual fall in more than two years.
Dramatic. But the question is, should we care? Read more
We don’t really understand why inflation-targeting central bankers closely monitor the job market.
For starters, there is something unseemly about connecting consumer price inflation to theories of labour market “slack”. The implication of ideas such as the “non-accelerating inflation rate of unemployment” is that innocent people should lose their jobs if the weighted-average nominal cost of goods and services rises a bit faster than an arbitrary target. Read more
The Fed’s balance sheet is no longer in expansion mode, which means it’s time for post-mortems of the most recent asset purchase programme. (Our colleague John Authers has a very good round-up of what did and didn’t happen since QE3 began.)
We want to focus on the fact that the most recent round of bond-buying seemed to have no inflationary impact. If anything, an observer of the data who had no preconceptions about monetary policy operations would conclude that QE3 was disinflationary. Alphaville writers have been exploring this possibility for years (though without firm conclusions).
Let’s start by looking at the changes in actual inflation since the start of 2010. Read more
An observation from Credit Suisse economists about wages, emphasis ours:
The 2008 negative shock on prices was so large and, more importantly, so unexpected that sticky nominal wages were unable to react timely to deflation, causing real labor costs to rise sharply. Read more
A week ago, Mario Draghi set euro policy-watchers all a-flutter, departing from his prepared remarks at Jackson Hole to issue a kind of blunt confession that he and his colleagues had run out of excuses for the ongoing depressed level of inflation across the eurozone, and that maybe some sort of reaction was required. Cue a quall of ECB QE speculation.
Then, on Wednesday this week, a story appeared on Reuters stating that, according to “ECB sources,” there was unlikely to be any new policy action from the ECB at its September meeting next week unless August inflation figures (published on Friday) showed the eurozone sinking significantly towards deflation.
The story remained exclusive to Reuters. But the message was clear: ECB officials are worried that market participants were reading too-much-too-soon into Draghi ad-libbing. Read more
Interest rates are very likely to remain unchanged at record lows and little is expected on the central bank’s plans to buy asset-backed securities or embark on full-scale quantitative easing.
The decision is out at 12.45pm UK time. Read more
Japan is the home of the “widowmaker” trade: the obviously mispriced Japanese government bonds (JGBs) which keep getting more and more mispriced until all the short-sellers have gone out of business.
JGBs claimed victims in 1993, 2003 and 2013, when yields plunged in the face of all the arguments presented by the bond vigilantes worried about the slow economy and government debt at levels unheard of elsewhere in the world.
This year was meant to be different. Frantic money-printing by the Bank of Japan last year weakened the yen and so pushed up the price of imported goods, particularly energy, while signs of consumer spending allowed shops to push through price increases. Read more
Following Izzy’s charts from Credit Suisse, here’s an update of my favourite measure of how Europe’s turning Japanese.
This chart shows eurozone inflation since the region’s crisis against Japanese inflation from the bursting of its bubble. The offset puts the peak of 1990 where the eurozone was in 2011, when the US near-default started a panic which threatened the survival of the euro. Read more
Rainbows are always just over the horizon, the recovery is around the corner, and interest rate hikes are always two years away.
That timescale tends toward the far enough that we won’t start to discount it just yet, but close enough that we can claim to be anticipating it. (Who cares what happens in three years time, anyway?) Read more
So just how fast will the the Bank of England raise interest rates? For clues and pointers on its latest thinking now that employment has rapidly approached the thresholds (markers, thumb rules?) of forward guidance , the Inflation Report is out. Click to get straight to it:
Here’s a rough sketch of the variables influencing US inflation, which has been remarkably low for two years running:
1) The remaining labour market slack, including a staggering and resilient long-term unemployment problem. The amount of slack remains tough to know given the difficulty of measuring the cyclical vs secular components of the fall in the labour force participation rate. Much more on this later.
2) The output gap. This isn’t a well-defined idea, we know, but few people would argue that the US economy is producing at potential. The US economic recovery does appear to have accelerated in the final two quarters of last year (the December jobs report notwithstanding), and the conditions for growth look better than they have in years. If the nascent acceleration proves sustainable, then the labour market may well tighten up and push wages higher. Obviously this is related to the first point about labour market slack, and plenty of caveats are needed given the head-fakes of the last four winters. Read more