Posts tagged 'Inflation'

Why didn’t QE3 raise inflation expectations?

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

Shocking wages, up then down

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

Putting Draghi in his box, and getting him back out again

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

ECB policy meeting: tough questions for Mario Draghi

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

The widowmaker doesn’t care if this is nuts

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

Again, on Japanification

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 euroRead more

Steady state of the great rate wait

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

Inflation, reported [Update]

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:

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Inflated worries, part 1 — an overview of US inflation pressures

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

Where art thou inflation?

Bond vigilantes might want to turn away. The following analysis is not pretty for those who have bet everything on a taper-related spike in US yields.

As HSBC’s Steven Major notes on Friday, he is doubtful that the short-term path for US yields will be anything other than lower.

Key to his analysis is the fact that growth and inflation are disconnecting in an unusual way:

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Why rate-hike talk is premature in the UK

We know that living in a counterintuitive zero-rate world can lead to lay misunderstandings.

For example, there’s the paradox of thrift and the idea that saving can be bad. WHAAT? Then there’s asset nationalisation and government spending, and the idea these can be good for capitalism. WHAAT REALLY? Last and not least — after years of general indoctrination that inflation is always bad — there’s the fact that inflation can actually be a good thing.

This presumably explains why, when the ONS announced this week that UK CPI had slowed to 2 per cent, the story was almost universally covered in the UK press as a good thing and a sign of a wonderfully encouraging turnaround in the economy.

Indeed, UK chancellor, George Osborne, was immediately wheeled out across numerous networks to take credit for his fabulous economic work. Read more

We will see about the MPC

Who thinks UK base rates will go higher this year? We ask because Economics Editor Chris Giles made precisely that bold prediction in the FT’s collection of holiday prophesy.

Will the Bank of England raise interest rates in 2014?

Yes. It is fashionable to think this is an absurd question to which the answer is obviously no. But not for the first time, fashion sucks. The British economy is growing at an annualised rate of more than 3 per cent, unemployment is rapidly falling towards the Bank of England’s 7 per cent threshold when it considers rate rises and inflation has been above the central bank’s 2 per cent target for all of the past four years. The reason the BoE would keep rates on hold at 0.5 per cent amid a fast expansion is a rapid improvement in productivity, allowing recovery to coexist with an absence of inflationary pressure.

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The declining correlation between energy and non-energy inflation

The chart above is from a note by Credit Suisse economists, who write: Read more

Party like it’s 1999

As we’ve noted before it’s all feeling a little 1999 out there.

Lombard Street ‘s Dario Perkins agrees. He’s just released research entitled “Party like it’s 1999″, in he notes: Read more

We need to talk about deflation, again [Update]

Since September 2011, the Fed has succeeded in managing inflation expectations but not inflation itself. Has anybody noticed? What happens when they do? Will QE4 be as successful at changing even inflation expectations when QE1, QE2, Operation Twist and QE3 have failed to prevent recorded inflation from now falling to 1.1%?

Russell Napier, strategist for CLSA, warns that benign inflation (s0 far as stock market investors are concerned) is very close to becoming dangerous deflation once more. (H/T to Climateer.) Read more

War! Inflation! Bull markets!

Josh Brown, aka the Reformed Broker, is pleased to see his favourite of all the earth’s charts, updated by the Stock Trader’s Almanac.

Far be it from us to stand in the way of good chart, or the majestic sweep of history, but we’re going to admit to some confusion on this one (click to enlarge). Read more

Tips-ta-geddon

US 10-year Tips are feeling the full brunt of taper-talk. First there was an abrupt sell-off on Wednesday in the 30 year sector, with break-even rates moving lower across the whole Tips spectrum after the US consumer price index fell for the first time in six months. Then there was a swift recovery with strong auction demand on Thursday following the Philly Fed.

As TD Securities’ Richard Gilhooly observed:

Treasury will auction $13bn 10yr TIPs at 1pm, a second re-opening that will take the benchmark size to $41bn. The real yield is around 61bp after the market has bounced on weaker Philly Fed, with 30yr nominals steepening out to new highs on the 5-30s curve before some aggressive buying in the 30yr sector materialised in the past half hour. 10y Real yields have ranged from 32bp in late October to a high of around 90bp in early September and an absolute low of -75bp in April of this year.

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There goes the great Argentine BMW trade

Article 5 — In the event of operations involving amounts that meet or exceed THREE HUNDRED AND FIFTY THOUSAND PESOS, registration managers should define a user profile, which will be based on information and documentation relating to the economic, household, financial and tax situation, and will require supporting evidence or information which proves the origin of funds.

That’s FT Alphaville’s (very rough) translation of Disposición 446/2013 from the Argentine government. H/T Bloomberg. It’s about buying expensive cars. Read more

Greenspan’s dilemma revived

Deficit continues to be a dirty word in the US (despite *those* findings about the holier-than-thou Clinton surpluses not being all that great), whilst the idea that the US is an unsustainable deficit spender increasingly propagates in mainstream circles.

But, as Ethan Harris at Bank of America Merrill Lynch shows on Monday, nothing could be further from the truth. In reality the US deficit is contracting at a relatively speedy rate: Read more

Inflation in China: veg now, pork later

On the danger or not of China’s inflation rate:

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Argentina, going ex-Frontier?

The FTSE index people at the LSE on Tuesday published their annual review of country classifications. There were no actual movements between the categories — Developed, Advanced Emerging, Secondary Emerging and Frontier — although two countries have joined the FTSE watch list:

Ukraine has been thrown off the list completely and is no longer being considered as a possible Frontier entrant. Too many problems with regulatory oversight and capital controls, it seems. Read more

Rajan, onions, and the Fed

*Use interesting onion stat to highlight Indian inflation problem ahead of Rajan’s first rate decision where the expectation is for a hold, but language and liquidity steps are in the spotlight*

*Attempt weak onion+tears metaphor*

*Delete because too weak/awful* Read more

Peak-population investing

There’s an interesting debate going on between Steve Randy Waldman, Karl Smith, Scott Sumner, Evan Soltas, Mark Sadkowski (and more).

It started when Waldman proposed a simple but elegant argument that the 1970s great inflation period may have driven not so much by expansionary monetary policy but rather population demographics: namely the baby boom and the entrance of female workers into the economy. Read more

Chart du jour, Bernanke’s record on inflation edition

The great chart above comes via Mark Perry of AEI. Read more

It’s a Bank Rate Knockout

Well… is it?

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Inflationistas and the global supply shock

Here’s a funny thing.

There was an amusing altercation between self-declared Austrian Peter Schiff (of “I see inflation everywhere” fame) versus The Money Illusion‘s Scott Sumner on Monday. It happened on Larry Kudlow’s show on CNBCRead more

How low can gold go?

Gold descended through the key psychological level of $1,200 on Thursday:

This has now led a whole bunch of people getting excited about an upcoming bottom in gold, as well its prospective speedy revival.  Read more

The end of the end of the end of the commodities supercycle is nigh, in Asia

That’s from Deutsche Bank today.

+1

We joke, we joke. A little. Deutsche had of course already joined the commodities-supercycle-is-dead chorus, and this note is not from the commodities side but by Asia chief economists Taimur Baig and Jun Ma. Read more

Everyone’s scared of something

Nomura’s Richard Koo put out a note on Tuesday reacting to the rise in JGB yields since the Bank of Japan went into QE overdrive that seems worthy of some attention.

He thinks the Bank of Japan, in reaction to yields heading upwards, needs to declare that it will not tolerate overshooting of inflation. They’ll need to rein themselves in:

What can the BOJ do? To begin with, the Bank and the government could make it clear that they are targeting a 2% rate of inflation but at the same time, they will not under any condition tolerate a significant overshooting of that rate.

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Measure it however you like: inflation has been low and falling

The chart above is from Credit Suisse economists, who add: Read more