Here are Peter’s three pieces for May 11. I’ll be back afterward with a few more thoughts.
Rosengren’s 180, Mark Carney Boxed In
United States
In case you missed his comments yesterday, Boston Fed President Eric Rosengren, a currently non voting member, has really done a 180. I always considered him a card carrying bleeding heart dove and now he is one of the most hawkish members of the Fed. It’s the reverse of ex member Narayana Kocherlakota who went the exact opposite route and embraced zero rates and was jealous of the Europeans who went negative.
Rosengren yesterday said he wants to hike rates three more times this year and start tapering after the June meeting. He fears the economy is overheating which is ironic after a 0.7% Q1 GDP print but his point is more on the labor side as he realizes the hole they are now in with the labor market continuing to tighten, the unemployment rate continuing to fall and the Fed is sitting there with its benchmark rate of just 0.875% at the same time their balance sheet is still at emergency levels. Also highlighting the tug of war I’ve talked about all year between hoped for fiscal reform and its tailwind vs the headwind of monetary tightening, Rosengren said the more fiscal stimulus we see, the more monetary tightening we will get as well.
Bottom line, of course this is just his opinion and he doesn’t vote and it only matters what the troika thinks but if his line of thinking, coming from an ex dove, starts to permeate, watch out. That said, I don’t expect Yellen to adopt Rosengren’s stance as it’s just not her nature. We’ll most likely get two more hikes and a December announcement on quantitative tightening. In fact, Bill Dudley today essentially told Rosengren to reign it in as he said “there is no great urgency for Fed to tighten aggressively” and he used that word ‘gradual’ again. He also said that they’ll look at QT later this year or in early 2018. Another noteworthy comment from Dudley was after taking its balance sheet from under $1T to $4.5T he said there is “a lot of uncertainty over how much QE depressed rates.” Funny.
The UK
After the BoE left policy unchanged they hinted at a possible rate hike and warned markets not to be so nonchalant about current policy staying the same. As it was sort of a lame warning, the pound is down and gilt yields are little changed. They also raised their 2017 CPI forecast to 2.7% from 2.4%. What’s keeping the BoE from at least taking away the emergency rate cut after Brexit? They said that their economic forecasts “rely on pickup in wages that had yet to materialize.” I argue they have it backwards. If they cared more about controlling inflation and the plunge in the pound, we’d by definition see a pick up in real wages. Mark Carney in his press conference said “it will be a more challenging time for households.” Well, he’s partly responsible for that with his emergency monetary policy that is crushing wage earners, savers and pensioners while inflation flares. With a straight face he also said that “BoE stimulus isn’t excessive, it’s appropriate.” Appropriate for what? Armageddon? Their balance sheet has never been bigger, they’ve partly nationalized the corporate bond market and their benchmark rate sits at .25% with 10 year inflation expectations at 3.10%, actual consumer price inflation approaching 3% and wholesale input prices seeing near 20% growth.
Evidence that Mark Carney is getting stuck in a stagflationary type environment, March industrial production in the UK fell .5% m/o/m after an .8% drop in February. The estimate was down .4% and the y/o/y gain slowed to 1.4% and was driven by a slowdown in manufacturing.
Continuing Claims/Inflation/Draghi Heckled
United States
Initial jobless claims totaled 236k, 9k less than expected and compares with 238k last week. As a 234k print dropped out, the 4 week average was little changed at 244k. Continuing claims, delayed by a week, fell another 61k to the lowest level since 1988. See chart. Based on this visual, we historically have had only one way to go from here and it also highlights how far behind the 8 ball the Fed is and how much they missed this rate hike cycle. Employers continue to be reluctant to fire employees as its tougher to find good ones and they have high hopes for a tax and regulatory driven acceleration in growth.
Producer prices rose more than expected at all levels. The headline gain was .5% m/o/m, more than double the estimate of up .2%. The core level was higher by .4%, twice the estimate and also taking out trade saw prices spike by .7% vs the .2% forecast. The y/o/y gains for all three was 2.5%, 1.9% and 2.1% respectively. It was mostly the services side of the equation that drove the upside as the BLS said it contributed to 2/3 of the rise. Within this they said that 25% was “attributable to prices for securities brokerage, dealing, investment advice and related services which increased 6.6%.” I thought those prices are falling but whatever. They also cited higher prices for “guestroom rental, loan services, machinery equipment, parts, and supplies wholesaling, portfolio management, and airline passenger services.” On the goods side, cigarette prices was a main driver as they rose 2.2% while prices for food, natural gas and pharma products rose as well.