Today’s headlines not conducive of a rate cut.
And the only thing the ECB sees that’s keeping inflation from being a lot worse is the strong euro.
| ECB’s Liebscher Sees Risk of Wage-Price Spiral, Kurier Reports |
| German Output Unexpectedly Increases on Construction |
| French Trade Deficit Shrinks to 2.8 Billion Euros on Exports |
| Spanish House Prices Rising Slower Than Inflation |
| ECB’s Quaden Calls Belgian Inflation `Rather Bad’ |
| German BDB Banking Association Says Economy Is `Robust’ |
Looks like even at current prices and with a relatively weak economy demand is holding up.
Tells me they probably keep hiking prices and spending the proceeds.
| Survey | 5.0% |
| Actual | 5.1% |
| Prior | 4.8% |
| Revised | n/a |
From Karim:
Very weak report. Among the high(low)lights:
Unemployment rate rises from 4.8% to 5.1%
NFP -80k; net revisions -67k (Jan and Feb now down -76k in each month)
Household survey shows 434k rise in number of unemployed
Construction -51k; manufacturing -48k;retail -12k; professional and business services -35k; education +42k; government +12k
Index of aggregate hours up 0.2% but down -1.2% annualized in Q1; all but assuring negative Q1 growth
Diffusion index up from 43.6 to 47.6
| Survey | -50K |
| Actual | -80K |
| Prior | -63K |
| Revised | -76K |
| Survey | -35K |
| Actual | -48K |
| Prior | -52K |
| Revised | -46K |
Payrolls lower than expected, previous months revised down some, confirming Q1 GDP somewhere around zero, and a flattish start for Q2 as well.
Not much of a market response, as this kind of weakness is no longer seen to threaten ‘market functioning’.
The perception of tail risk to market functioning is greatly diminished due to market perceptions that the Fed/Tsy is standing by to ‘write the check’ and that the checks won’t bounce.
Yes, they can be inflationary, and make the USD go down, but govt checks will clear and nominal demand can be sustained as desired.
The balance of risks are slowly returning to the more traditional/mainstream inflation vs growth and the appropriate interest rate policy to sustain the output gap necessary for price stability.
New data points for the Fed:
flat growth at best,
5.1% unemployment,
and yet demand is high enough to keep crude over $105, food prices skyrocketing, inflation at 4%, and the dollar falling like a stone and driving other import prices up.
And for as long as they can remember their forecasting models for prices have been unreliable at best.
Weaker growth with higher inflation likely tips their models to requiring a higher output gap (higher unemployment) to bring inflation down over their two year horizon.
| Survey | 0.3% |
| Actual | 0.3% |
| Prior | 0.3% |
| Revised | n/a |
| Survey | 3.6% |
| Actual | 3.6% |
| Prior | 3.7% |
| Revised | n/a |
| Survey | 33.7 |
| Actual | 33.8 |
| Prior | 33.7 |
| Revised | n/a |
Never actually goes down.
| ECB’s Constancio Says Stronger Euro Helping to Curb Inflation |
So far, with inflation running well above target the ECB has decided it can’t afford to deliberately weaken the euro even with exporters screaming.
by Alister Bull
(Reuters) The full benefit of recent Federal Reserve interest rate cuts has not yet been felt, Fed Chairman Ben Bernanke said Thursday, nodding to a policy lag that may reduce the need for many more rate moves ahead.
CNBC.com
Ben Bernanke
“Further actions will have to depend on how the economy evolves and we are looking of course at both sides of our mandate, growth and inflation,” Bernanke told a U.S. Senate Banking Committee hearing on the rescue of troubled investment bank Bear Stearns.
“The effects of monetary policy are felt over a period of time and we expect to see further positive effects of these policies going forward,” he said.
“I believe we have helped to offset the credit crunch to some extent.” Bernanke acknowledged in testimony Wednesday that there was a risk U.S. growth could contract slightly in the first half of this year, before picking up in the next six months.
On the other hand, recent economic indicators have been mixed, with some signaling that conditions were not getting worse at an accelerating pace and may even be stabilizing.
First time he’s used this kind of language.
Bernanke also stressed Thursday that the Fed was uncomfortable with the current high levels of inflation, while arguing that these pressures should abate in the months ahead.
“The primary reason for the high inflation is rapid increases in the price of globally traded commodities, including crude oil and food,” he said.
Headline U.S. consumer prices rose 4.0 percent in February versus a year ago.
“It is our expectation, which is consistent with the prices seen in futures markets, that these prices will moderate in the coming year and that therefore, overall inflation will tend to slow,” Bernanke said.
“However, we are aware of the uncertainties involved with that and we are obviously going to be watching the situation very carefully,” he added.
| Survey | 366K |
| Actual | 407K |
| Prior | 366K |
| Revised | 369K |
| Survey | 2860K |
| Actual | 2937K |
| Prior | 2845K |
| Revised | 2840K |
This is now more in line with what’s looked like near zero growth for the first quarter, and not much more is expected for Q2.
While fear of systemic risk has been reduced with the realization that the Fed/Tsy can -and probably will- simply ‘write checks’ as needed, that doesn’t guarantee general weakness won’t continue.
As Karim has been indicating, we may be near the end of rate cuts, but continued weakness could mean rates stay down for a ‘considerable period.’
Also note markets aren’t (yet) moving much on this.
With reduced systemic risk fears, these types of numbers are more ‘rear view mirror’ events than forward looking regarding the future of GDP growth.
In other words, data can be forward looking for some purposes, like systemic risk, and rear view mirror for other purposes, like GDP growth.
Also, Bernanke pointed to differences between now and the 1930’s, leaving out the largest factor – the gold standard. With a fixed exchange rate policy the govt can’t ‘simply write checks’ as that tends to result in outflows of gold/spikes in interest rates that can quickly lead to default/devaluation.
(The US shut down in the payments system in 1934 and reopened with a domestically suspended gold standard and federal deposit insurance.)
From Karim:
| Survey | 48.5 |
| Actual | 49.6 |
| Prior | 49.3 |
| Revised | n/a |
Nice bounce off the bottom though longer term still drifting lower.
From Karim:
Consolidating at contraction levels; employment unch at 46.9;
Yes, bodes for flat Q1 and probably a slow start to Q2.
inventory
sentiment remains poor (inventories too high)
Yes, meaning they are running relatively lean for a recession.
Also, new orders up some export orders up very sharply to 55, indicating continuing weakness for domestic demand but exports picking up the slack and then some.
Prices paid up and too high as well.
Weakness and higher prices continues.
(Crude now up on the day.)
| Survey | n/a |
| Actual | 356.0 |
| Prior | 403.7 |
| Revised | n/a |
Down this week, maybe a holiday issue. Looks looks like Q1 was in a lower range than Q4, but not all that bad.
Also, mortgage bankers have less capacity than previously, and banks are said to be gaining market share.
| Survey | n/a |
| Actual | 2636.0 |
| Prior | 4255.2 |
| Revised | n/a |
Refi’s have been coming in spikes. Not sure why.
| Survey | n/a |
| Actual | 9.4% |
| Prior | -14.2% |
| Revised | n/a |
This hasn’t been a reliable indicator but nonetheless seems to indicate a recession isn’t in the cards.
| Survey | -45K |
| Actual | 8K |
| Prior | -23K |
| Revised | -18K |
ADP flattish, and last month revised up a bit.
Friday’s payroll number could be much the same: last month revised up some, and current month a bit higher than expected.
The overall trend is to less job creation, but the labor force participation rate has also been falling and keeping reported unemployment in check.
But it doesn’t matter anymore.
Employment is now going to be treated as a ‘rear view mirror’ issue and not ‘forward looking’
Same with losses to be reported by the financial sector.
Economics risks are now to the upside.
If housing doesn’t fall by another large chunk and further subtract from GDP, the Fed is left with an output gap not nearly large enough to forecast inflation coming back to target levels, without also including rate hikes in its internal forecasts (rate forecasts are not released). (The Fed’s long term inflation forecasts are necessarily at their target levels, as those forecasts include ‘appropriate monetary policy’ to hit those targets.)
Without a lot more weakness than current conditions indicate, markets will anticipate the Fed is unlikely to keep rates at current levels.
Meanwhile, current levels of demand for crude are more than sufficient for the Saudis to continue as swing producer/price setter.
And the foreign sector is still in the process of reducing their rate of accumulation of USD financial assets as evidenced by the falling trade gap, falling USD, and rising US exports.
| Survey | -0.8% |
| Actual | -1.3% |
| Prior | -2.5% |
| Revised | -2.3% |
| Survey | n/a |
| Actual | 6.0% |
| Prior | 7.9% |
| Revised | n/a |
Pretty good up trend in progress here.
(Keep in mind: exports are real costs; imports real benefits.)
Since January 2005 net exports (while still negative) have gone up by about 1.55% of GDP through 2007 year end, and so far have continued higher in Q1 2008.
In Q1 2005 the general environment was that of a 3% GDP growth rate while today it is at best about 1%.
That means for the economy as a whole, we ‘feel’ a total loss of ‘average domestic consumption/investment’ of over 3.5% of GDP.
That’s why to many economists it ‘feels’ like a recession even though real GDP remains somewhat positive.
We are experiencing a rapid deterioration of what’s called our ‘real terms of trade’.
That means even though we might work just as hard and produce just as much, we get to consume less while we export more.
How far can this go?
It is all a function of how many USD financial assets the rest of the world desires to accumulate.
If that number is zero (meaning they don’t want to add to their multiple trillions of USD financial assets they already have), US net exports will go to zero.
And we will feel worse by another 4% of GDP, all else equal.
And our policy makers think this is a good thing.
In the last round of Congressional hearings Bernanke testified that he’d like to see less domestic consumption and more exports and investment.
Looks good, feels bad.
| Survey | 47.5 |
| Actual | 48.6 |
| Prior | 48.3 |
| Revised | n/a |
Still soft, but better than expected and not at recession levels of 44 or less.
| Survey | 75.0 |
| Actual | 83.5 |
| Prior | 75.5 |
| Revised | n/a |
Prices paid up and employment up -inflation and a lower output gap- not the direction the Fed wants the economy to be going.
| Survey | -1.0% |
| Actual | -0.3% |
| Prior | -1.7% |
| Revised | -1.0% |
Better than expected, prior month revised up, and the chart still looks lower but not all that bad.
| Survey | -n/a |
| Actual | -33 |
| Prior | -31 |
| Revised | n/a |
Seems to have bottomed, and today’s stock market action should give it a boost.
| Survey | 15.2M |
| Actual | 15.1M |
| Prior | 15.3M |
| Revised | n/a |
| Survey | 11.6M |
| Actual | 11.1M |
| Prior | 11.7M |
| Revised | n/a |
Still working its way lower.
| Survey | 46.0 |
| Actual | 48.2 |
| Prior | 44.5 |
| Revised | n/a |
Small bounce, but still trending down.
Looks like a pretty good bounce back in key categories, and prices accelerating.
Production, employment, and prices paid all up – not a pleasant combination for the Fed.
| Survey | n/a |
| Actual | 47.0 |
| Prior | 53.0 |
| Revised | n/a |
Prices, production, and employment up – more of the same for Fed to ponder.
